University of Southern California

The Battle Between Big-Box Retailers and Mom and Pop Shops
October 19, 2012

Location proves critical as shops closest to the big retailers surprisingly fare better

Conventional wisdom suggests that when a major low-cost retailer like Wal-Mart or Target moves into a territory, the local stores nearby will fare worse than retailers located farther away from their new competitors. However, according to new research from the USC Marshall School of Business, the opposite is true.

While all existing retailers suffer profit losses when a big-box competitor enters their market, the study showed that stores next to the new giant retailers actually perform better than those located a few miles away.

"Local Competition, Entry and Agglomeration," co-authored by Anthony Dukes, associate professor of marketing at USC Marshall, and recently published in the journal Quantitative Marketing & Economics, examined how traditional retailers responded to new forms of low-cost retailing. Results of the multi-layered study uncovered some surprising facts. For instance, in addition to faring better than farther away stores, existing stores located near new mass market retailers actually experienced sales growth for items unique to their stores. These stores could make up for sales losses on duplicate items by raising prices on these distinctive offerings. Dukes co-wrote the paper with Ting Zhu, assistant professor of marketing at the University of Chicago Booth School of Business, and Vishal Singh, associate professor of marketing at New York University's Stern School of Business.

The researchers tested several theories by analyzing the impact of the entry of low-cost discounters on grocery store competition in two markets. The researchers examined entry by two Wal-Marts in suburban Chicago. In one case, Wal-Mart was in the same shopping center as a Dominick's Fine Foods and in the second case Wal-Mart entered two miles away from a Dominick's. After analyzing more than two years of daily sales both pre- and post- Wal-Mart's entry in the market, they found that for the Dominick's store located farther away, sales in all categories and departments decreased after Wal-Mart came to town – with aggregate store sales plummeting 16 percent. The more distant branch also saw a significant loss in store traffic, which decreased by 11 percent.

In contrast, while the Dominick's store located next to the Wal-Mart experienced a similar decline in product sales for items also offered at the discounter, it enjoyed substantial gains in sales for several other products — namely those not carried by the discounter – and only suffered an overall sales downturn of 4 percent and even saw a marginal increase in store traffic.

"There has been a lot of research looking at the impact of Wal-Mart on employment and on prices. When Wal-Mart enters, you can say prices increase overall or prices decrease overall, but it's usually more complicated than that. It depends on the product itself. It depends on what people need and what people are buying at the different stores," said Dukes.

In particular, the Dominick's located closer to Wal-Mart saw sales increases for most food products, both at the aggregate department level and for individual sales categories. The more closely located incumbent store would also be able to capture a segment of shoppers motivated by convenience rather than value. Such shoppers were more likely to stop in to buy items Wal-Mart didn't carry. Because of the ability to capture such shoppers, existing stores located near the discounter would have an incentive to raise prices on unique items to make up for potential sales losses on items the mass discounter offered.

In contrast, the store branch located farther away, the researchers concluded, would likely lower prices to attract consumers driven by value to try and make up for their loss in store traffic.

Dukes and his fellow researchers also examined the impact on sales of 25 particular products after a new Target moved in next to an existing supermarket and another grocer located more than two miles away in San Diego, Calif. Once again, they found that sales for most of the non-food products (that were also sold at the discounter) declined substantially, while sales for most of the food products — that represented unique supermarket offerings — showed substantially lower decline or, in many cases, a statistically significant increase in sales post-discount store entry. But the benefits of increased sales for such unique offerings were conferred only on the nearby store and not the store located farther away.

The research indicates location is critical —stores facing the entry of mass-market discounters would do better to be closer to the new competition. One caveat the researchers offered, however, was that if the new entrant is a super center – a discount store combined with a full supermarket — the nearby store would likely be worse off as it would lack differentiated products to make up for sales losses in other categories. If so, the research suggests, existing stores would do better by distinguishing themselves by offering and promoting unique offerings, such as ethnic and organic foods or home meal replacements, deli and other items not found at such super centers.