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Working Paper

When Wal-Mart Enters: Retailer Reactions and Sales Outcomes

Kusum Ailawadi, Jie Zhang, Aradhna Krishna, and Michael W. Kruger, 2008 [08-122]

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Prior research into the impact that Wal-Mart’s entry has on incumbent retailers has focused mainly on the incumbent retailers’ sales and other outcome measures. Little is known, however, about how incumbent retailers adapt their marketing mix activities in reaction to the Wal-Mart entry. Here, authors Ailawadi, Zhang, Krishna, and Kruger conduct a systematic examination of retailers’ reactions to a Wal-Mart entry into their local market and the consequences of these reactions for the retailers’ sales outcomes.

Their analyses benefit from a unique large-scale data set. They ascertain the locations of seven first-time Wal-Mart entries, carefully identify incumbent supermarkets, drugstores, and mass merchant chains in the vicinity of these entries, and also identify control stores of the same chains not exposed to these entries. For these 91 experimental and control stores, they have weekly store movement data for 46 product categories for time periods both before and after Wal-Mart’s entry, which allows them to measure reactions and sales outcomes using a before-and-after-with-control-group analysis.

They find that a Wal-Mart entry has strong negative effects on incumbent retailers’ sales in general, with substantial variation across categories and retail formats both in retailer reactions and in their sales outcomes. Importantly, their analysis shows that a retailer’s sales outcomes are indeed affected by how it reacts to the entry, and the relationship between reactions and outcomes varies across retail formats. For example, cutting assortment is not an effective strategy for incumbent retailers in any format. However, supermarkets can mitigate sales losses by reducing their regular prices and by selling higher percentages of top-tier national brands and private labels—but that approach is not useful for drugstores or mass merchandisers. Broad promotions are a useful tactic for drugstores, while deep promotions help mass merchandisers. In general, incumbents benefit more by differentiating themselves from Wal-Mart rather than attempting to emulate Wal-Mart. These results have important implications for how retailers in different formats adjust their marketing mix activities to mitigate the negative impact of a powerful competitor’s entry.

About the authors
Kusum L. Ailawadi is the Charles Jordan 1911 TU’12 Professor of Marketing at the Tuck School of Business, Dartmouth College. Jie Zhang is Assistant Professor at the Robert H. Smith School of Business, University of Maryland. Aradhna Krishna is the Isadore and Leone Winkelman Professor of Marketing at the Ross School of Business, University of Michigan. Michael W. Kruger is Executive Vice President, Strategic Initiatives, at Information Resources, Inc.

Included in the following collections:
MSI Reports 2008
Executive Director's Letter 08-004

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