Duke Research Advantage

The following analysis by Fuqua Marketing Professor Andres Musalem and Professor Ricardo Montoya of the University of Chile was recently published in the Chilean newspaper La Tercera.

With annual sales of 324 billion dollars, Wal-Mart is within a select group of companies that has successfully weathered the economic crisis. In Chile, the arrival of the largest retail chain in the world raises alarms among their local rivals and also among the workers of D&S, the Chilean supermarket chain just acquired by Wal-Mart. Nevertheless and beyond any controversy, consumers’ interest in Wal-Mart’s entry is built upon expectations of more competitive prices.

In this regard, the question that many would like to answer is how much prices will drop once Wal-Mart lands on Chilean soil. The arguments of those who argue that prices will actually fall are based on Wal-Mart’s increased efficiency, which might lead to lower operation costs as suggested by Máximo Bosch and Claudio Pizarro from the Retail Center at the University of Chile. Furthermore, its substantial bargaining power would help the retailer obtain lower wholesale prices when purchasing merchandise from its vendors. Part of these savings would be transferred directly to consumers through lower prices. Indeed, a study published in 2005 in the Journal of Applied Econometrics notes that Wal-Mart prices are on average between 5% and 25% cheaper than other supermarkets in the United States.

Another related argument is that Wal-Mart’s low prices might force local competitors to adjust their own prices to remain competitive. However, there are multiple studies showing that the real impact of the arrival of Wal-Mart in various U.S. markets does not generate large changes in the prices charged by its competitors. Therefore, when considering Wal-Mart’s effect on competitors, the results are in fact counterintuitive.

This evidence begs the question of why the local competition does not lower prices after Wal-Mart’s entry. At least two factors must be considered to answer this factor. First, low prices are not the only strategy that a retailer can take to differentiate itself from other competitors. Consumers also value the variety of products and services offered by a retailer and incorporate these issues when deciding where to buy. Second, given that margins in this industry are limited, there is little room for Chilean supermarkets to lower prices, which leads them to favor other strategies that do not greatly sacrifice their operational margins, such as implementing more selective promotional discounts.

In sum, Wal-Mart’s arrival generates a wide set of expectations, not only because of its anticipated effect on prices but also in terms of retailer-supplier relationships and its impact on competitors. The evidence obtained so far, however, shows that the effects on competitors’ prices can be quite limited. Of course, the Chilean and U.S. markets are very different in terms of size, buying power, geography and consumer preferences. Therefore, more interesting and challenging times await the Chilean supermarket industry in the years to come.