The impact of Wal-Mart Supercenters’ entry on incumbent supermarkets’ profit margins

Purpose - The purpose of this paper is to quantify the impact of Wal-Mart Supercenters (WMSs) on supermarkets’ profit margins using fluid milk in the Dallas/Fort Worth metropolitan area in the USA as a case study. Design/methodology/approach - The authors develop a two-stage dynamic entry game to model market competition in the pre- and post-WMS stages, and test the theoretical model using the method of simulated moments and milk scanner data from Dallas/Fort Worth supermarkets. Findings - The empirical findings show that the entry of WMSs accounts for an average of about 16.29-25.69 percent decline in milk profit margins of nearby, or incumbent, supermarkets. Economies of scale and chain synergies are found to be five times more significant for WMSs than for incumbent supermarkets, granting Wal-Mart a significant competitive edge. Originality/value - This paper quantifies the impact of WMS’s entry on incumbent supermarkets’ profit margins through a structural model of entry. In addition, this paper assesses the effect economies of scale stemming from the ability to provide shopping convenience to consumers as well as chain economies from operating stores near each other.