When Walmart Comes to Town, Other Retailers Self Destruct

Walmart really didn’t need a study coming out that says it hurts local businesses when it enters a market but what the retailer might not have needed is something it might be able to use.

Walmart (WMT) scrutiny has been raised a notch because of last year’s Black Friday incident when one of its stores on New York’s Long Island suffered a death among its staff when customers anxious to take advantage of doorbuster specials literally burst through the entrance and trampled a worker. The incident was widely covered and widely commented on in the media as evidence of all sorts of Walmart- and holiday-related ills. Walmart later settled a lawsuit with relatives of the man who died.

Now, a study emerging from Dartmouth’s Tuck School of Business concludes that Walmart significantly impacts sales at other local stores when it enters a market, driving down sales at established mass merchandisers by 40 percent and at area supermarkets by 17 percent.

Yet, Kusum Ailawadi, a professor of marketing who led the study, noted that how other retailers react to a Walmart market entrance has a big impact on their prospects thereafter. Most often, the competing retailers cut prices, which is the least effective thing they can do. They simply won’t beat Walmart on price, so the move is essentially ineffective. For some consumers, price cutting is likely to reinforce Walmart’s price superiority. If a store that they’ve patronized slashes prices and comes up short anyway, the move is an argument to shift spending to Walmart.

Competing retailers also reduced the number of brands that they carried, which Ailawadi again found was a mistaken strategy. What they should do is change their product mix to establish clear differences in selection from Walmart.

In fact, small businesses – the ones Walmart critics like to weep over when trying to generate antipathy for the company – have an advantage in making effective adjustments in selection because they can fine tune inventory to avoid competing with Walmart. They can do that without generating a negative reaction from consumers who are used to shopping them for a wide variety of items, as can be the case with larger retailers.

By the way, while the new study provides more evidence, the conclusions aren’t new. For years, analysis has demonstrated that retailers can readily survive Walmart’s market entrance if they adopt a mix of products that is different and if they are among the more financially sound in the marketplace. A professor from the University of Iowa even taught a seminar on the subject. Research by David Rogers indicates that retailers can withstand Walmart’s entrance into the market if they have deeper pockets than their traditional competitors. The access to cash permits retailers to withstand the self-defeating discounting that those long-term rivals are likely to unleash when Walmart comes to town. Resulting business failures, by that reasoning, can’t be entirely blamed on Walmart.