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Vanessa G. Perry [b]
Paul N. Bloom [a,*]
Whether retailers have become more powerful than manufacturers in recent years continues to be a burning question in the trade press and academic literature. Our research adds fresh fuel to the fire by looking at whether Wal-Mart, the largest retailer in the United States, has exerted power over its suppliers and squeezed them financially. Previous academic research on retailer power has looked largely at food stores, but we extend this perspective into nonfoods by using Compustat data as a source. Our analysis of these data indicates that the answer may be more complex than a simple yes or no. We find that Wal-Mart suppliers holding a small share of their respective markets do not perform relatively as well financially when they have Wal-Mart as one of their primary customers. However, large-share suppliers to Wal-Mart perform better than their large-share counterparts reporting retailers other than Wal-Mart as their primary customers. This indicates that suppliers who seek Wal-Mart's wide market reach may d erive benefits from using this association if it can be used to strengthen their market positions. Those that fail in this goal, however, may find their profits squeezed and do better by shifting their retail channel focus elsewhere. (c) 2001 by New York University. All rights reserved.
There has been considerable debate in the trade press and academic literature over whether a significant shift has taken place in the relative power of retailers and manufacturers of consumer products. In general, the trade press has suggested that retailers are increasing their relative power, using it to extract concessions from manufacturers such as merchandising support, trade deals, and slotting allowances (Johnson, 1988; Elman & Hughes, 1988; Buzzell, Quelch & Salmon, 1990; Bowman, 1997). The academic literature, however, has yet to provide conclusive evidence that such a shift has occurred. Several researchers have posed theoretical challenges to the existence of such a shift (Kim & Staelin, 1998; Lariviere & Padmanabhan, 1997; Sullivan, 1997).
Moreover, empirical academic work has not shown any significant or consistent improvement in retailer financial performance relative to manufacturers in recent times, which one would expect as a result of a power shift (Farris & Ailawadi, 1992; Messinger & Narasimhan, 1995; Ailawadi, Borin & Farris, 1995). In her review of the work on retailer power, appearing concurrently in this journal, Ailawadi (2001) concludes that: "The conventional wisdom that retailers have grown more powerful relative to packaged goods manufacturers in the packaged goods industry has not been supported by empirical analyses of the relative profitability of retailers and manufacturers."
The empirical studies that have examined this issue have primarily focused on grocery retailers and manufacturers rather than on participants in channels that distribute other types of consumer products. Indeed, the authors of one empirical study addressing this issue stress that nongrocery channels may be different, particularly those where a giant retailer such as Wal-Mart or Toys 'R' Us might be present (Ailawadi, Borin & Farris, 1995). In fact, they found evidence that Wal-Mart seems to have become more profitable - and by implication more powerful - in recent years. Unfortunately, their study does not present any evidence about Wal-Mart' s impact on its suppliers.
The title of a recent trade press article poses the question: "Should you just say no to Wal-Mart?" (Bowman, 1997) According to this article, many suppliers are reportedly feeling squeezed and pressured by giant retailers into taking expensive actions such as lowering prices, accelerating delivery times, offering special allowances, or carrying extra inventory. Our research seeks to help consumer goods suppliers find an answer to the article's title question.
Specifically, the present study tests for empirical evidence that Wal-Mart is wielding power in ways that hurt or help the financial fortunes of its suppliers. In other words, we ask whether Wal-Mart has squeezed its suppliers into making concessions that have hurt their financial performance? Or, have these suppliers benefited from their association with Wal-Mart, achieving financial results that they might not have achieved by collaborating with other less-powerful retailers?
Research on the impact of retailer power could also be helpful to public policy makers. The antitrust enforcement agencies need guidance on whether to pursue more cases like the one the Federal Trade Commission recently decided against Toys 'R' Us, where they ruled that the company illegally used its market power to restrict the opportunities of manufacturers to sell to competing retailers (FTC, 1998). The FTC determined that the giant retailer "used its dominant position as a toy distributor to extract agreements from and among toy manufacturers to stop selling to warehouse clubs the same toys that they sold to other toy distributors."
While the Toys 'R' Us case was primarily concerned with the impact of retailer power on competition among retailers, the FTC has more recently shown concern about how to treat situations where retailer power might be impacting competition among manufacturers. At a recent FTC conference, staff members of the FTC displayed great interest in whether agreements between powerful retailers and manufacturers (e.g., slotting allowances, category management programs) could be exclusionary, foreclosing opportunities for many manufacturers to compete for customers at the retail level (Weir, 2000).
Thus, we seek a broader understanding of how the marketing and business practices of this giant retailer affect its suppliers and society. We begin with a brief review of previous research on retailer power and its effects on manufacturers. This is followed by a presentation of the hypotheses examined in our study. The methodologies employed to test the hypotheses are then explained, followed by a report on the results. We conclude with a discussion of the implications of our findings for future marketing practice, academic research, and public policy.
A number of streams of research are relevant to our study. These streams explain why squeezing by a retailer may or may not occur plus some relevant empirical evidence. These research streams are labeled and reviewed in the following four subsections.
2.1. Power in channels literature
The seminal work on power in channels of distribution by Stern and his colleagues (Stern, 1969; El-Ansary & Stern, 1972; Stern & El-Ansary, 1977; Cadotte & Stern, 1979; Stern & Reve, 1980) and others (Hunt & Nevin, 1974; Lusch, 1976; Frazier, 1983; Gaski, 1984) suggests that one channel member can gain power over another channel member by creating a dependency relationship. To the extent that Wal-Mart's suppliers have grown dependent on Wal-Mart to keep their sales volumes at certain levels, they could be in an inferior power position to Wal-Mart and subject to being squeezed for financially-damaging concessions. Only if a supplier had some ability to exert "countervailing power" against Wal-Mart --through leveraging a well-known brand name or capitalizing on consumer loyalty --would the power relationship become more balanced (Etgar, 1976; Gaski, 1984).