How Wal-Mart's Affects the "Big Three"

Wal-Mart’s entry into one grocery market caused smaller stores to lower their prices by about 1.3 percent over three years, but it affected the prices at the Big Three grocery chains by less than half those amounts, said Emek Basker, assistant professor at the University of Missouri. Basker and Michael Noel, assistant professor at the University of California at San Diego, were able to analyze the effects of Wal-Mart’s entry by using store level data, Basker told the Quantitative Marketing and Economics Conference, sponsored by James M. Kilts Center for Marketing, October 12 at Gleacher Center.

Wal-Mart offered 24 grocery items at prices an average of 10 percent lower than other stores in the same market at the same time, she said. The price differences ranged from about 2.5 percent for milk to 20 percent for chicken, Basker said. “These are post-entry price differences obviously, so the pre-entry prices of the competitors may have been even higher,” she said.

Statistical analysis showed that Wal-Mart’s effect on the prices did not appear to be driven by any particular product or category of products, Basker said. The products whose prices were most statistically significant were margarine, lettuce, chicken, canned tomatoes, dish soap, and bananas, she said. Meanwhile, Wal-Mart did not cut prices as much for products regarded as “loss leaders” in the industry, such as milk, sugar, and soda, Basker said.

The Big Three grocery chains of Kroger, Safeway, and Albertson’s, which was acquired by SuperValu, Inc., after the study, sold the items at higher prices, on average, than other supermarkets in the study, she said. Wal-Mart’s effect on prices at the Big Three was about .6 percent, or 50 percent smaller and not statistically significant, Basker said.

“We don’t really understand what is going on with the Big Three, but one possible explanation is that the larger chains may use uniform pricing at the regional level; they’re not responding so much to having a Wal-Mart in their market because they’re responding to the average number of Wal-Marts in a larger area,” she said.

The Big Three may also be trying to create product differentiation by providing higher service levels, better selection, or shorter lines for higher prices, Basker said. “There’s also the possibility that some consumers may be willing to pay more for these differentiated service levels,” she said. “The incumbents may view customers who are going to switch to Wal-Mart as a lost cause and instead focus on the residual demand of the remaining customers, who may very well be less elastic.”

Because Wal-Mart’s entry into the market is differentiated, it causes a new sorting of consumers, said Yesim Orhun, assistant professor of marketing at Chicago GSB, discussant of Basker’s presentation. “If Wal-Mart’s entry takes away my lowest-price-sensitive people, now I’m left with rich people who don’t mind paying a certain price for milk,” Orhun said. “I’m going to reconsider two things. I’m going to change my prices and I’m going to probably change the products I carry. That’s why these ideas of fresh food centers and deli packages are coming up. These are all going to be there because my consumer population just changed.”

- Phil Rockrohr