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Contents lists available at ScienceDirect

Journal of Business Research

Wal-Mart: Supplier performance and market power

Sandra Mottner , Steve Smith 1
College of Business and Economics, Western Washington University, 516 High Street MS 9073, Bellingham, WA 98225, United States

a r t i c l e

i n f o

Article history:
Received 1 November 2007
Received in revised form 1 June 2008
Accepted 1 June 2008
Keywords:
Retail
Financial performance retail strategy
Suppliers
Wal-Mart
Strategic prot model

a b s t r a c t
This research seeks to further the understanding of the relationship between Wal-Mart and its suppliers. 1988
1994 demonstrates Wal-Mart's market power in relation to manufacturers [Bloom PN, Perry, VG. Retailer power
and supplier welfare: the case of Wal-Mart. Journal of Retailing 2001; 77( 3): 379-396.]. Wal-Mart suppliers for
that period had lower prots than non-suppliers, which indicate a dependency model of market power when
suppliers give concessions to a stronger retailer in order to obtain or maintain the relationship. Wal-Mart's
dramatic growth and increasing marketing power since the 19881994 period offer an opportunity to retest
previous ndings and further the understanding of a major retailer's strategy for managing suppliers through the
use of the strategic prot model. Initial results indicate that gross margin is signicantly less for Wal-Mart
suppliers than non-suppliers indicating pricing concessions and a dependency model of market power. However,
a xed-effects model controlling for unobservable rm characteristics such as strategic choice suggest that WalMart suppliers are self-selecting or are implicitly pre-screened such that Wal-Mart suppliers have a low-cost
strategy and choose lower returns as a market strategy. Findings indicate that small rms do experience a
dependency model in that they have lower gross margin, lower operating income, and higher turnover. However,
considering xed-effects for these rms, small manufacturers experience only higher turnover as a result of doing
business with Wal-Mart, thus indicating more of a partner-type model of market power.
2008 Elsevier Inc. All rights reserved.

1. Introduction
Numerous newspaper articles, television news stories, books, and
documentaries focus on Wal-Mart over the past few years. Documentaries such as Wal-Mart: The High Cost of Low Prices and Is WalMart Good for America? serve to reinforce perceptions of Wal-Mart's
size and power. In addition, a barrage of news and information partially based on anecdotal evidence has fueled public perceptions of
Wal-Mart's power over suppliers. Without a doubt, Wal-Mart is a
dominant retailer. Only Exxon surpassed Wal-Mart's 2006 sales revenues of $312 billion (Wal-Mart 10-K, 2006) as a result of revenue
gains from soaring oil prices. Analysts expect Wal-Mart's growth and
high prole to continue well into the future (Evans, 2005).
Given Wal-Mart's nancial success, strong growth, and dominance in
retailing, academics and business practitioners alike will benet from
understanding the broader impact of Wal-Mart's business strategies.
This research seeks to understand the wealth transferif anybetween
Wal-Mart and its supplying manufacturers. Documentaries and popular
literature (Useem, 2003) depict Wal-Mart extracting the lowest possible
price from suppliers and refusing to accept a supplier price increase.
Indeed, Bloom and Perry (2001) nd that manufacturers with Wal-Mart
as a major customer from 1988 to 1994 had lower overall prot margins
Corresponding author. Tel.: +1 360 650 2403.
E-mail addresses: sandra.mottner@wwu.edu (S. Mottner), steve.smith@wwu.edu
(S. Smith).
1
Tel.: +1 360 650 2010.
0148-2963/$ see front matter 2008 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusres.2008.06.012

than rms who did not have Wal-Mart as a major customer; this was
particularly true for smaller suppliers.
This research examines whether low protability for Wal-Mart
suppliers currently continues and also examines Wal-Mart suppliers'
protability using a strategic prot model (Bettis, 1981; Cronin and
Skinner, 1984; Evans, 2005). Further understanding of the relationship
between Wal-Mart and suppliers through quantitative analysis sheds
factual rather than anecdotal light on the impact of Wal-Mart on small
and large suppliers. The article begins with a review of the prior
ndings and literature on the nature of the retailersupplier relationship in terms of market power. The article examines the dimensions of
the strategic expanded prot model and discusses the model's explanatory value in examining market power relationships and market
strategies. It also discusses empirical ndings and offers managerial
implications.
1.1. Market power
The relative market power that exists between retailers and
suppliers denes the nature of their relationship. A retailer or supplier
with comparably high market power is able to extract nancial
benets from the other party. As Bloom and Perry (2001) note, the
nancial benets extracted are based on two types of relationships:
(1) a dependency relationship or (2) a partner relationship. The dependency model argues that when suppliers become dependent upon a
more powerful retailer, the suppliers will give nancial concessions to
maintain their position. The partner relationship model argues that

536

S. Mottner, S. Smith / Journal of Business Research 62 (2009) 535541

long-term relationships lead to better nancial performance for both

the supplier and the retailer.
Bloom and Perry's (2001) ndings support the dependency relationship. They nd that Wal-Mart suppliers with a small market share
have nancial impacts and display lower prots as compared to WalMart suppliers with a large market share. Their ndings are based on
supplier data from 1988 to 1994 and identify rms as Wal-Mart
suppliers when Wal-Mart appears in the primary customer eld in
Compustat. However, they do not quantify the magnitude of sales to
Wal-Mart and, instead, code rms as Wal-Mart supplier or not.
Gosman and Kohlbeck (2006) investigate the dependency relationship between Wal-Mart and 150 suppliers during the period of
1993 to 2004 based on Compustat and market value data. Financial
performance in Gosman and Kohlbeck (2006) is measured using gross
margin, cash cycle (including inventory, accounts receivable, and
accounts payable turnover), and return on assets (ROA). They nd that
nancial performance is negatively impacted as sales to Wal-Mart
increase, (Gosman and Kohlbeck, 2006; p. 21). Specically, they nd
that, while gross margins increase as sales to Wal-Mart increase,
increases in other expenses more than offset the gross margin
increases.
In summary, while Bloom and Perry (2001) nd that doing
business with Wal-Mart negatively affects small rms (in terms of
market share), Gosman and Kohlbeck (2006) nd that larger rms (in
terms of the natural log of sales) have greater negative nancial results
overall than smaller rms. The differences in ndings may be
attributed to the method of measuring supplier size as well as the
dependent measure in each study. Bloom and Perry (2001) measure
prot in terms of standard deviations above or below the mean for the
suppliers industry, while Gosman and Kohlbeck (2006) use gross
margin percent, ROA, cash cycle, and market value to dene performance. Overall, the results of these two studies imply that WalMart uses its market power to extract nancial benets from
suppliers, which suggests a dependency market power relationship.
Given the different ndings for small and large rms and measures of
rm performance, researchers need to further examine Wal-Mart's
market power over its suppliers.
S. Robson Walton (2005), Chairman of the Board of Wal-Mart and
son of the founder, refers to supplierpartners (p. 509) to describe
Wal-Mart's relationship with its suppliers. Walton (2005) describes
how Wal-Mart wants to offer good value to its customers through low
pricing and does not accept slotting fees, display allowances, or deal
money from its suppliers. He contends that a long-term sustainable
relationship with suppliers is a Wal-Mart practice and benets smalland medium-sized Wal-Mart suppliers. Walton (2005) explains that
Wal-Mart seeks to not only be extremely cost-conscious and efciencyminded in its own operations, but collaborates with suppliers in forecasting demand, negotiating price without special deals, and nds ways
to minimize supplier inefciencies. Indeed, Wal-Mart has historically
shared efciency savings with its suppliers and customers (Fishman,
2006).
The ndings of Bloom and Perry (2001) and Gosman and Kohlbeck
(2006) support the overriding perception that market power has
shifted from manufacturers to retailers (Kelly and Gosman, 2000).
However, research does not overwhelmingly support a market power
shift from manufacturers to the retail industry (Ailawadi, 2001;
Ailawadi et al., 1995; Farris and Ailawadi, 1992), except for Wal-Mart
(Evans, 2005). Indeed, the rapid growth of Wal-Mart's market dominance is one of the likely causes for the perceived shift in market
power. Wal-Mart is an ideal subject for a study of market power
relationships between a dominant retailer and its suppliers, especially
considering Wal-Mart's purported supplierpartner model (Walton,
2005).
The nancial performance of its suppliers, particularly if a dependency relationship exists, should reect the market power relationship between Wal-Mart and its suppliers. This study expects that with

its dominant market power, Wal-Mart extracts nancial benets from

weaker, principally smaller suppliers. Past research measures this
primarily in terms of prot (Bloom and Perry, 2001) or market valuation (Gosman and Kohlbeck, 2006). The expectation is that a negative
affect on prot occurs for smaller suppliers who are at a particular
disadvantage with Wal-Mart. A partner relationship exists between
Wal-Mart and its suppliers should enhance nancial performance.
Indeed, based on Walton's (2005) description, Wal-Mart suppliers may
experience improving nancial performance as inefciencies in the
suppliers operations are minimized and as Wal-Mart shares the nancial
improvements with its suppliers. In a partner model, Wal-Mart and its
suppliers are likely to be strategically aligned, and just as Wal-Mart's
strategy is low margins and high turnover, the same might be true of its
suppliers.
Wal-Mart has continued to grow in size since Bloom and Perry's
(2001) study, and the reexamination of the relationship between WalMart and its suppliers using more recent data will shed light on any
subsequent developments. The strategic prot model provides a
robust framework from which to examine the Wal-Mart supplier
relationship performance and the factors that lead to higher or lower
performance. In addition, using the actual percentage of Wal-Mart
sales, rather than classifying rms as Wal-Mart suppliers or not, renes the measure of power that Wal-Mart may have over its suppliers.
Finally, comparing small and large Wal-Mart suppliers with newer
data in a more robust model helps to further the understanding of the
nature of market power between a dominant retailer and differing
sizes of suppliers.
1.2. Measuring rm performance the strategic prot model
Fig. 1 displays the components of the strategic prot model (Return
on Assets = Prot Margin Asset Turnover), which allows for comparisons of different sized rms with varying strategies to better gauge
performance (Bettis, 1981; Cronin and Skinner, 1984). The elements of
return on assets are net prot margin and asset turnover, allowing for
an examination of rms' prot per sales dollar and efciency in using
assets to generate sales. Net prot margin and asset turnover divides
into ner ratios such as gross margin and inventory turnover for a
closer investigation of the rms' pricing power and efciency in managing inventory. As Evans (2005) notes, a variety of component
measures from the strategic prot model shed light on the rm's
strategies.
Researchers analyze various components of the strategic prot
model depending upon their focus on specic strategies to examine

Fig. 1. Strategic prot model selected component measures.

S. Mottner, S. Smith / Journal of Business Research 62 (2009) 535541

537

and the research objective. For example, Bettis (1981) looks at the
rm's investments in advertising (advertising expense/sales) and research and development (R&D expenditures/sales) to examine the
effect on return on assets (ROA) across related and unrelated rms.
Fairchild and Yohn (2001) use the changes in the components of ROA
(prot margin and asset turnover) to predict manufacturers' future
protability. Stapleton Hanna, Yagla, Johnson, and Markussen (2002)
use the strategic prot model to compare the supply chain strategy
and rm performance of footwear manufacturers. Evans (2005) uses a
wide variety of components of the strategic prot model to diagnose
market power in a longitudinal study of major retailers in the U.S. from
1982 to 2001.
The strategic prot model is particularly suitable for studying the
relationship between Wal-Mart suppliers and non-Wal-Mart suppliers
because the different components capture differences in rms'
operating focus and strategy. Indeed, Gosman and Kohlbeck (2006)
exclusively examine Wal-Mart suppliers to determine whether increased sales to Wal-Mart affects gross margins, return on assets, cash
conversion, and market value. Their limited focus does not fully explore various trade-offs in rms' strategic performance as examined by
Bettis (1981), Fairchild and Yohn (2001), and Stapleton et al. (2002).
This research begins by reexamining Bloom and Perry's (2001)
model with more current data. Using components of the strategic
prot model, the research analyzes the nancial performance of WalMart suppliers for gross margin, inventory turnover, and returns to
operations to determine the effect, if any, of increasing sales to WalMart. While Wal-Mart's primary strategy appears to focus on low
prices through market dominance, logistical efciencies and information technologies also form a signicant part of Wal-Mart's competitive advantage (Walton, 2005). Therefore, the dependency model of
market power would imply that gross margin and operating performance for Wal-Mart suppliers will be lower than for non-Wal-Mart
suppliers. Additionally, Wal-Mart may push inventory holding costs
down to its suppliers, thus maximizing its own efciencies at the
expense of its suppliers.
Large and small suppliers (in terms of sales) will differ in gross
margin, inventory turnover, and overall prot if the dependency market power relationship exists in contrast to Walton's (2005) claims.
The dependency relationship suggests that Wal-Mart is able to extract
more concessions from smaller rms than from larger rms. WalMart's claims of increasing use of smaller manufacturers (Walton,
2005) and the nature of its relationship (dependent or partner) with
small suppliers will aid in understanding Wal-Mart's supplier strategy
and its use of market power.

included in the sample. The data set includes 992 rmyear observations, which is merged with Compustat data for each rm. Data
was gathered by a graduate accounting student and veried by the
authors.
Several inuential outliers are identied in the sample using DFBETA
and DFFITS diagnostic cutoffs, as suggested by Neter, Wasserman, and
Kutner (1990). DFBETA measures how much each regression coefcient
() changes by removing a single observation from the regression
computation. DFFITS measures how much the predicted value of an
observation, a measure of model t, changes when the observation is
removed from the regression calculation. To limit the effect of inuential
outliers on the regression coefcients, the data are winsorized at three
standard deviations. Variance ination factors do not indicate issues
of signicant multicollinearity that would affect interpretation of the
results.
Table 1 presents descriptive statistics for the sample. They include
the mean, standard deviation, and median for all the variables specied in the regression models, and are presented in total and separately for both Wal-Mart suppliers and non-Wal-Mart suppliers. Simple
univariate tests indicate that Wal-Mart suppliers have signicantly
lower gross prot margins (t = 3.20, p b .01) and signicantly lower xed
asset turnover (t = 3.02, p b .01) than non-Wal-Mart suppliers. Wal-Mart

2. Method

SG&A expense percent

SGA%

2.1. Sample data

The authors selected sample rms from the Mergent Online
database, which includes 10,000 publicly traded U.S. companies. The
initial search identied rms that named Wal-Mart in the nancial
statement footnotes for the years 1998 to 2005. Statement of Financial
Accounting Standard 131 (SFAS 131), issued in 1997, requires companies to disclose signicant customers whose net sales exceed 10%. The
data set includes rms from 17 different two-digit Standard Industry
Classication (SIC) codes, and includes 97 rms that represent the
major SIC code categories sold by Wal-Mart, which encompasses nondurable consumer goods, durable consumer goods, electronics, sporting goods, and toys. The industries in the sample comprise more than
80% of the product categories sold by Wal-Mart. The percentage of
Wal-Mart sales by each rm was then hand-collected from nancial
statements available on the Security and Exchange Commissions'
online electronic ling system. In addition, 79 rms that do not report
sales to Wal-Mart (non-Wal-Mart suppliers) were matched to the
Wal-Mart suppliers based on two-digit SIC codes and total assets are

Table 1
Descriptive statistics
Descriptiona
(Variable name & setting)
Gross margin percentage (DV)
GM%
Inventory turnover (DV)
InvTurn
Return on asset (DV)
ROA
Log of total net sales
lnSale
Industry market share
Mktshare
Percentage sales to Wal-Mart
WM%

Advertising percentage
Advert
Fixed asset turnover
FAT
Log of total assets
lnTAsst

Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median
Mean
(S.D.)
Median

Total
sample

Wal-Mart
suppliers

Non-Wal-Mart
suppliers

N = 992

N = 529

N = 463

0.405
(0.139)
0.396
4.818
(2.647)
4.200
0.099
(0.125)
0.103
12.972
(2.051)
12.844
0.019
(0.050)
0.004

0.392
(0.140)
0.377
4.806
(2.538)
4.220
0.093
(0.122)
0.102
13.402
(2.190)
13.275
0.028
(0.065)
0.004
7.948
(9.008)
5.00
0.254
(0.179)
0.227
0.189
(0.144)
0.150
12.005
(16.230)
6.800
13.181
(2.369)
13.043

0.420
(0.138)
0.408
4.832
(2.770)
4.165
0.105
(0.128)
0.106
12.478
(1.755)
12.397
0.010
(0.015)
0.003
NA
NA

0.280
(0.196)
0.248
0.156
(0.139)
0.118
13.823
(18.439)
7.245
12.727
(2.204)
12.580

0.310
(0.211)
0.268
0.119
(0.122)
0.077
15.908
(20.505)
7.590
12.207
(1.869)
12.032

Signicant at the .10 level (two-tailed); Signicant at the .05 level (two-tailed);
Signicant at the .01 level (two-tailed).
a
Gross margin percentage (GM%) is gross margin to total sales. Inventory turnover
(InvTurn) is cost of goods sold divided by the average of the current year's and prior
year's total inventories. Return on assets (ROA) is income before interest, taxes and
extraordinary items divided by the average of the current year's and prior year's total
assets. LNetSale is the natural logarithm of a rm's net sales. Mktshare is a rm's net
sales divided by the net sales of all rms in its same two-digit SIC as reported on
Compustat. WM% is the percentage of sales made to Wal-Mart. Advert is the percentage
of a rm's advertising to total sales general and administrative costs. SGA% is sales
general and administrative (SG&A) less advertising expenses scaled by prior years net
sales. FAT is net sales divided by current year net property, plant and equipment. lnTAsst
is the natural log of rm's total assets and controls for rm size.

538

S. Mottner, S. Smith / Journal of Business Research 62 (2009) 535541

suppliers are signicantly larger than non-Wal-Mart suppliers based on

sales (t = 7.36, p b .01), market share (t = 6.21, p b .01), and total assets
(t = 7.22, p b .01). Other results indicate that Wal-Mart suppliers pay
signicantly more in advertising (t = 8.34, p b .01), but have signicantly
lower sales, general, and administrative costs (other than advertising)
(t = 4.51, p b .01) than non-Wal-Mart suppliers.
2.2. Model 1: Bloom and Perry (2001)
To provide a limited comparison of prior research, an examination
of the current data utilizes Bloom and Perry's (2001) model to analyze
the impact of being a Wal-Mart supplier on gross margin, inventory
turnover, and operating returns.

Gross margin, inventory turnover, and return on assets are the key
components of the strategic prot model (Fig. 1) that are specied in
the following models.
2.3. Model 2A: gross margin
Gross margin percentage (GM%) measures a rm's ability to extract
prot from each sale. It is affected by both a rm's ability to command
higher prices and its ability to reduce cost of goods sold through efcient
production. To examine Wal-Mart's impact on suppliers' gross margins,
the following model is specied:
GMk = 0 + 1 lnSale + 2MktShare + 3WM + 4WMk
+ B5WMk4 lnSale + B6SGAp + 7 lnTAsst + 8Advert

ZProfit = 0 + 1WM + 2MktShare + 3WM4MktShare

+ 9FAT + 10SIC + ei

+ 4 lnSale + ei
Zprot is the z-score for a rm's net prots, and is a rm's core
operating income (earnings before interest and taxes) less the mean
net income of the sample in the same two-digit SIC, divided by the
standard deviation. WM is a dummy variable equal to 1 when the
rm's Wal-Mart sales are 10% or greater, and 0 otherwise. Market
share (MktShare) is the ratio of a rm's net sales divided by the net
sales of the two-digit SIC afliation for all public rms reported in
Compustat. Finally, to control for size, lnSale is the natural logarithm
of a rm's net sales. The results for Model 1, presented in Table 2, differ
from those found by Bloom and Perry (2001) only on the Wal-Mart
dummy variable (WM), which is signicantly positive (t = 2.98,
p b 0.01) rather than negative as found by Bloom and Perry.
One limitation of Bloom and Perry's (2001) model is that the
dependent measure is standardized net income (Zprot), which
merely indicates how far and in what direction the item deviates from
the mean (expressed in units of the sample standard deviation).
However, even after normalizing the data, ceteris paribus, larger rms
will have larger net incomes and larger standardized net incomes
(Zprot). Therefore an alternative and more illustrative specication is
to dene rm performance based on the strategic prot model and
analyze those components that lead to overall rm returns. Thus,
while Wal-Mart suppliers may have lower net prots, use of a
strategic prot model allows us to determine whether these same
rms have a higher asset turnover to compensate.

lnSale is the natural logarithm of a rm's net sales. Firms are

required to disclose customers that comprise more than 10% of net
sales, and WM% is percentage of sales to Wal-Mart. The WM% lnSale
interaction captures whether the gross margins of larger rms selling
to Wal-Mart differs from small rms. SGAp is a rm's sales, general,
and administrative (SG&A) expenses less advertising expenses, scaled
by prior year's net sales. SGAp is included to control for customer
support that results in higher sales prices and higher gross margins.
Advert is the percentage of a rm's advertising to total SG&A expenses
and controls for advertising increasing product demand and sales
price. lnTAsst is the natural logarithm of a rm's total assets and
controls for rm size. FAT is net sales divided by net property, plant,
and equipment and captures a rm's efciency in using xed assets in
manufacturing, which may reduce cost per unit produced. SIC is a
vector of dummy variables for a rm's two-digit SIC code and controls
for rm industry. The regression results for SIC are suppressed from
the results for brevity.
Table 2 provides the results, indicating that Wal-Mart suppliers (WM)
have lower gross margins than non-Wal-Mart suppliers (t=3.89,
pb 01). The WM% results indicate that for rms selling to Wal-Mart, a
higher percentage of Wal-Mart sales is associated with lower gross
margins (t=2.59, pb .01); however, this effect mitigates for larger rms
as evidenced by the signicantly positive coefcient (t=2.29, pb .05) on
the interaction term (WM% lnSale).

Table 2
OLS regression results
Model 1 Bloom and Perry
(2001) DV = Zprot

Model 2A Gross Margin

DV = GM%

Model 2B Inventory Turnover

DV = InvTurn

Model 2C Strategic Prot

model DV = ROA

Explanatory variablesa

Coeff. est.

t-stat

Coeff. est.

t-test

Coeff. est.

t-stat

Coeff. est.

t-stat

Intercept
lnSale
MktShare
WM
WM Mktshare
WM%
WM% lnSale
SGAp
lnTAsst
Advert
FAT
WM%FAT
GM%
WM%GM%
N
Adj R2
F-stat
Prob N F

2.57
0.183
2.416
0.156
0.924

14.30
12.78
3.52
2.98
7.51

0.252
0.030
0.036
0.037

4.67
3.14
0.31
3.89

3.649
2.462
3.128
0.108

3.61
13.43
1.38
0.59

0.414
0.081
0.308
0.008

8.55
9.42
2.97
0.93

0.009
0.001
0.248
0.037
0.219
0.001

2.59
2.29
11.79
4.19
6.99
3.00

0.165
0.013
1.369
2.322
4.093

2.27
2.30
3.35
13.97
6.75

0.006
0.001

1.78
2.30

0.058

7.28

0.001
0.000
0.386
0.003

4.60
1.44
13.00
0.81
992
0.346
21.14
0.0001

992
0.378
151.75
0.0001

992
0.354
22.72
0.0001

992
0.322
20.67
0.0001

Signicant at the .10 level (two-tailed); Signicant at the .05 level (two-tailed); Signicant at the .01 level (two-tailed).
a
See Table 2 for variable denitions except for: WG, which is a dummy variable for rms that report Wal-Mart as a signicant customer but whose sales do not exceed 10% in a year
and thus no percentage of sales to Wal-Mart is reported; and Industry (Ind) which is a vector of dummy variables for a rm's two-digit SIC and is not reported for brevity.

S. Mottner, S. Smith / Journal of Business Research 62 (2009) 535541

2.4. Model 2B: inventory turnover

The following inventory turnover model examines whether WalMart optimizes its supply chain by pushing inventory holding costs
down to its suppliers, or whether Wal-Mart suppliers also have increased operational efciencies.
InvTurn = 0 + 1 lnSale + 2MktShare + 3WM + 4WMk
+ B5WMk4 lnSale + B6SGAp + 7 lnTAsst + 8Advert
+ 9SIC + ei
Inventory turnover (InvTurn) is cost of goods sold divided by the
average of the current and prior year's total inventories. The results, as
reported in Table 2, indicate that Wal-Mart suppliers (WM) do not have
signicantly less or more inventory turnover than do non-Wal-Mart
suppliers (t = 0.59, p b .60). However, within the Wal-Mart supplier rms
(WM%), suppliers with a larger percentage of sales to Wal-Mart have
signicantly less inventory turnover (t= 2.27, p b .05). Similar to the
nding for gross margins, however, the reduction in inventory turnover
for Wal-Mart suppliers is mitigated (t = 2.30, p b .05) as supplier size
increases (WM% lnSale).
2.5. Model 2C: strategic prot model
ROA = 0 + 1 lnSale + 2MktShare + 3WM + 4WMk
+ B5WMk4 lnSale + B6 lnTAsst + 7FAT + 8FAT4 lnSale
+ 9GMk + 10GMk4 lnSale + B11SIC + ei
Return on assets (ROA) is a rm's core operating income before
interest, taxes, and extraordinary items divided by the average of
the current and prior year's total assets. The results, reported in the
last column of Table 2, indicate that Wal-Mart suppliers (WM) do
not have lower ROA than non-Wal-Mart suppliers (t = 0.93, p b .40).
Within the Wal-Mart group of rms, a higher percentage of sales to
Wal-Mart (WM%) is marginally associated with lower ROA (t = 1.78,
p b .10). Once again, however, this result is attenuated (t = 2.30,
p b .05) for larger Wal-Mart suppliers (WM% lnSale). The other results worth noting are that the percentage of sales to Wal-Mart
neither interacts with xed asset turnover (t = 1.44, p b .15) nor
with gross margin (t = 0.81, p b .45) to have a signicant impact on
ROA.

its interaction with sales (WM% lnSales), is signicant in any of the

other xed-effects models. This indicates that, by itself, rms with a
higher percentage of sales to Wal-Mart do not have lower gross margins or lower returns to operations. In fact, Model 3C indicates that an
increasing percentage of sales to Wal-Mart interacts with gross margin (WM%GM%) and is positively associated with higher overall ROA
(t = 1.85, p b .10). This result implies that Wal-Mart suppliers with
higher gross margins have higher returns to operations. However, a
higher percentage of sales to Wal-Mart also negatively interacts with
xed asset turnover (WM%FAT) and is associated with lower operating performance (t = 2.32, p b .05). These results imply that, while
higher xed asset turnover and higher operating efciencies lead to
higher operating returns, rms with higher percentages of sales to
Wal-Mart and with higher operating efciencies are negatively impacted by the strain of meeting client demands.
Overall, the initial results suggest that Wal-Mart suppliers do have
lower gross margins than non-Wal-Mart suppliers. These results are
not necessarily the result of Wal-Mart negotiating lower margins, but
result from the supplier's strategic choice to be a low-cost provider of
goods. The results for Model 2A in Table 2 indicate that rms selling to
Wal-Mart (WM) have signicantly lower gross margins (t = 3.89,
p b .01) than non-Wal-Mart suppliers. Within just the Wal-Mart
supplier rms, rms with a higher percentage of sales to Wal-Mart
(WM%) have signicantly lower gross margins (t = 2.59, p b .01).
However, after controlling for xed-effects, a larger percentage of
sales to Wal-Mart is not associated with lower gross margins (t = 0.91,
p b .40). Thus, the results imply that the relationship between WalMart and suppliers is not one of dependency but rather one of
partnering such that Wal-Mart provides a strategically aligned selling
venue for manufacturers of low-cost goods.
Wal-Mart may also extract more concessions from small suppliers
than large suppliers. The percentage of sales to Wal-Mart and total
sales interaction term (WM% lnSale) isolates these differences. The
OLS results indicate that larger rms that have higher sales to WalMart have higher gross margins (t = 2.29, p b .05), higher inventory
turnover (t = 2.30, p b .05), and higher operating returns (t = 2.30,
p b .05) than do smaller rms. These results suggest that larger rms
receive more benet from selling to Wal-Mart than do smaller rms.
However, when controlling for xed-effects, the interaction is only
signicant in the inventory turnover model (t = 4.49, p b .05), and is no
Table 3
Fixed-effects regression results

3. Results and discussion

Researchers do not know whether Wal-Mart suppliers experience
pressure to take lower margins in exchange for doing business with
Wal-Mart or whether low-margin suppliers self-select to supply WalMart (e.g. similar to Wal-Mart's strategy as a low-cost provider, WalMart suppliers may have a similar strategy). While the data are not
sufcient to examine non-supplier to supplier changes, or vice-versa,
a xed-effects model can control for unobservable rm characteristics. A data set that includes multiple time period observations
across multiple rms can be pooled and examined using ordinary
least squares (OLS), but the coefcient estimates may be subject to
omitted variables bias. A xed-effects model controls for omitted
unobservable or unmeasurable variables that differ between rms
but are stable over time, such as rm strategy (Hsiao, 2003). Regression Models 2A, 2B, and 2C are reexamined using a xed-effects
model, the results of which are reported in Table 3 as Models 3A, 3B,
and 3C.
Consistent with the OLS results, the xed-effects models indicate
that rms with a higher percentage of sales to Wal-Mart (WM%) have
signicantly lower inventory turnovers (t = 3.93, p b .01); however,
this result is attenuated for larger rms (t = 4.49, p b .01). Unlike the
OLS models, neither the percentage of sales to Wal-Mart (WM%), nor

539

Explanatory
variablesa
Interceptb
lnSale
MktShare
WM%
WM% lnSale
SGAp
lnTAsst
Advert
FAT
WM% FAT
GM%
WM% GM%
N
R2
F-stat
Prob N F

Model 3A gross
margin DV = GM%

Model 3B
inventory turnover
DV = InvTurn

Model 3C
strategic prot
model DV = ROA

Coeff.
est.

t-test

Coeff.
est.

t-stat

Coeff.
est.

t-stat

0.081
0.127
0.003
0.001
0.041
0.052
0.172
0.001

7.63
0.31
0.91
1.34
2.36
6.09
5.54
2.95

2.718
7.259
0.246
0.023
1.109
2.190
1.172

13.45
0.90
3.93
4.49
3.22
13.73
1.88

0.149
0.661
0.000
0.000

10.40
1.27
0.16
0.64

0.088

7.73

0.002
0.001
0.722
0.008

6.93
2.32
14.83
1.85
992
0.753
13.35
0.0001

992
0.883
32.71
0.001

992
0.867
29.05
0.0001

Signicant at the .10 level (two-tailed); Signicant at the .05 level (two-tailed);
Signicant at the .01 level (two-tailed).
a
See Table 1 for variable denitions.
b
A xed-effects model controls for unobservable rm characteristics, which is
captured in an intercept for each rm in the sample.

540

S. Mottner, S. Smith / Journal of Business Research 62 (2009) 535541

longer signicant in either the gross margin (t = 1.31, p b .15) or the

operating returns model (t = 0.64, p b 60) (Table 3). Taken together,
these results imply that, while larger rms selling to Wal-Mart have
higher gross margins and operating returns, this does not occur because Wal-Mart extracts more benets from smaller rms than from
larger rms.
One consistent nding between the OLS and xed-effects models
is that as percentages of sales to Wal-Mart increases, inventory turnover decreases (t = 2.27, p b .05 and t = 3.93, p b .01), respectively.
These results suggest that Wal-Mart's strict inventory management
system does not eliminate inventory holding costs, but instead shifts it
further down the supply chain, resulting in Wal-Mart suppliers bearing the burden of greater inventory holding costs.
4. Limitations, future research, and implications
While this research provides new insight into the relationship
between Wal-Mart and suppliers, the results do not imply causality.
Future research examining year-to-year changes in sales to Wal-Mart
can provide additional insight into how changes in sales to Wal-Mart
affect nancial performance and into the self-selection issue. Another
limitation of the data is that rms are only required to disclose
customers that exceed 10% of sales. Thus, a rm could consistently have
up to 9.9% of annual sales to Wal-Mart and not disclose. The effect of this
limitation in data analysis is the possible misclassication of rms as
non-Wal-Mart suppliers, which increases the variability of the data and
increases the probability of a type II error. Finally, one of Wal-Mart's
stated strategies (Walton, 2005) is to work with smaller suppliers that
may not be publicly traded and, therefore, are not included in the data
analysis. Implications of this study between large and small Wal-Mart
suppliers only include those rms that are publicly traded.
The results of this research imply changes from the earlier research
of Bloom and Perry (2001). In particular, the ndings from testing the
model Bloom and Perry (2001) use with more current data do not
support the nding that suppliers have lower prots. A possible
explanation for this nding is found in the xed-effects model used in
this research. Suppliers of Wal-Mart appear to self-select to supply
Wal-Mart because it ts with their overall business strategy. Of course,
Wal-Mart chooses its suppliers, but the implication of this research is
that the pool from which Wal-Mart selects is limited to those rms
whose business models t with Wal-Mart's strategy. Suppliers may
have learned through time and experience what to expect from WalMart and have either adapted their business models to align with
these expectations or abandoned the effort completely. Conversely,
Wal-Mart may implicitly screen suppliers for their ability to conform
to its low pricing and inventory management needs.
Findings by Gosman and Kohlbeck (2006) with respect to gross
margin increases for rms with major sales to Wal-Mart differ from
the ndings of the present study. Higher gross margin appears to
occur only for major suppliers that are of a larger size. The implications of these ndings include: (1) rm size is important in evaluating the nancial impact of supplying Wal-Mart; (2) suppliers with
large sales have greater market power. Inventory turnover ndings
imply a dependency relationship in market power as Wal-Mart pushes
the holding of inventory onto its suppliers either overtly or inadvertently. When xed-effects are taken into account, the only factor that
indicates a dependency relationship is inventory turnover.
The implications of this research apply to Wal-Mart suppliers or
potential suppliers. For example, knowing the nancial prole of WalMart suppliers as provided in Table 1 aids in anticipating the type of
nancial model that ts well with Wal-Mart's overall strategy. Large
manufacturers (those with large sales), for example, may surmise that
a presence in Wal-Mart stores is essential for brand positioning and
may decide to shift costs to other customers or products to maintain
overall gross margin and prot. Manufacturers of any size need to be
conscious that doing business with Wal-Mart may increase inventory

holding costs without sufcient diligence. Contracts negotiated with

Wal-Mart are not likely to become more nancially rewarding over
time and, therefore, making concessions with the hope of recouping
the loss later is not a proven idea. Suppliers need to prevent negotiating themselves into a dependency relationship; rather, they should
carefully consider whether they can conform to Wal-Mart's terms and
whether their business model strategically aligns with Wal-Mart's
business model.
Wal-Mart's reputation for developing and working with small
manufacturers appears to be well deserved. Small manufacturers gain
access to a vast array of markets that would be very hard for them to
reach otherwise. Small manufacturers do not pay slotting fees to WalMart and, therefore, contract negotiation is not ambiguous or prohibitively expensive. However, the small manufacturer supplying WalMart is likely selling more than 10% of its production to Wal-Mart. The
larger the percentage of sales to Wal-Mart, the higher risk for a small
supplier to be dependent on one major customer. Additionally, the
small manufacturer must be prepared for additional costs of managing
and stocking inventory. A small manufacturer would be wise to diversify its client base to avoid dependency in the market power
relationship. Finally, small manufacturers have the opportunity to
learn a great deal through aligning themselves with Wal-Mart.
Suppliers appear to self-select to supply Wal-Mart. With thousands of stores, Wal-Mart is a signicant source of potential revenue;
however, Wal-Mart is not the right retail outlet for every manufacturer or even every brand. Although walking away from a contract
with Wal-Mart is not always a good option, it is an option that some
suppliers should consider based on their long-term strategies. Similarly, Wal-Mart should look for suppliers that are a good strategic t
with its low price strategy.
This research also has implications for a dominant retailer such as
Wal-Mart. Managing relationships with suppliers is a key element in
retailing because, without suppliers, the retailer has no product to sell.
While this is a very basic and obvious point, a dominant retailer needs
to be very aware of the importance of the retailersupplier relationship. Walton's (2005) model of a partnership between suppliers and
Wal-Mart honors the idea that the buying and selling of products is a
long-term relationship that implies performance expectations for
both parties. However, a stated commitment to a partner model can
differ from actions. When a supplier perceives that it is receiving
reduced nancial benets from a key client, then evaluation and a
decision as to whether or not to continue a supply relationship is
called for. A retailer in a dominant position may not perceive a gradual
erosion of nancial benets to the supplier as a serious problem,
especially if other suppliers are available. The consequences could
include sudden loss of a supplier, or more likely, public grumbling
about how tough Wal-Mart is on their suppliers. In the ongoing public
relations arena for a major retailer such as Wal-Mart, the image of
being tough on suppliers is not helpful. Just as the partner model of
market power makes the supplier a partner with Wal-Mart in delivering value to the customer through good products at low prices, so,
too, does the partner model work in that Wal-Mart is working with
suppliers to create efciencies and help the supplier improve performance. While this type of relationship appears to be Wal-Mart's
intent, the perception of the public and its suppliers may differ. WalMart can and should help to manage this perception.

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