Retailer Power and Supplier Welfare: The Case of Wal-Mart
Paul N. Bloom and Vanessa G. Perry
There has been considerable debate in the trade press and academic literature about whether retailers have recently increased their power relative to manufacturers of consumer products. This research examines empirical evidence to determine if the world's largest retailer, Wal-Mart, is wielding power in ways that hurt or help the financial fortunes of its suppliers. Have suppliers to Wal-Mart been squeezed by the powerful retailer into making financially harmful concessions? Or have these suppliers benefited from their association with Wal-Mart, achieving efficiencies and financial results that they might not have achieved by collaborating with other less-powerful retailers?
Previous theoretical and empirical research does not supply clear direction about what the financial consequences of becoming a significant supplier to Wal-Mart might be. Arguments drawing from the literature on power in distribution channels can be constructed explaining why Wal-Mart suppliers should perform less profitably than their competitors. At the same time, arguments drawing from the literature on relationship marketing can be constructed explaining why Wal-Mart suppliers should earn superior returns. Empirical data is clearly needed to evaluate these arguments.
Data from the 1988 through 1994 Compustat database were employed to assess the financial performance of Wal-Mart suppliers. A key component of these data was the response that firms entered that identified the names of up to four firms they identified as "Primary Customers." These were customers from whom a firm obtained at least 10 percent of its annual sales revenue. Only industries in which at least one supplier reported Wal-Mart as a primary customer in the year 1994 were included in the study. The sample was restricted in this way so that the financial performance of Wal-Mart suppliers would only be compared to the performance of non-Wal-Mart suppliers from similar industries.
To examine Wal-Mart's impact on its suppliers, we compared the profits of the Wal-Mart suppliers to the profits earned by ( I) competing suppliers that did not identify any firms as primary customers or (2) competing suppliers that identified faros other than Wal-Mart as primary customers. In making these comparisons, we controlled far the effects of both a supplier's market share and its scale.
The results show that Wal-Mart suppliers that hold a small share of their respective markets do not perform as well financially as small-share suppliers not identifying Wal-Mart as a primary customer. On the other hand, large-share suppliers to Wal-Mart perform better than their large-share counterparts. This indicates that there are opportunities for suppliers to become beneficiaries of Wal-Mart's power, not just be victim of this power. Indeed, small-share suppliers may find it an attractive strategy to partner with Wal-Mart, to trade off initial financial suffering for the enjoyment of the fruits of the partnership later.
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