When Walmart turns one of its discount stores into a behemoth Supercentre, nearby grocers instantly face a more powerful rival. Their reactions can vary, from cutting prices, to diversifying selection, to doing nothing at all.
Which works best?
New research by marketing professors Minha Hwang, of McGill University, and Sungho Park, of Arizona State University, reveals what grocers should and shouldn’t do when Walmart comes their way.
Their study, “The Impact of Walmart Supercentre Conversion on Consumer Shopping Behaviours,“ is perhaps the first to analyze what happens at both incumbent grocers and at Walmart when the latter is converted to a Supercentre.
Previous studies were, as Hwang puts it, “constrained by the data.” They only showed the effect of Walmart on competing stores, not how sales and shopping patterns at Walmart changed when it became a Supercentre. The reason for this gaping hole in academic research is Walmart generally hasn’t shared store sales figures.
Hwang and Park got around the problem by using data from Nielsen’s U.S. Homescan consumer panel, in which participants scan the barcodes on their purchases from home. Thanks to this innovative research tool, Hwang and Park were able to see what people bought at a Walmart after it was converted to a Supercentre.
“We got access to very comprehensive individual level data, so we were able to study the effect of Walmart’s entry into the grocery market on consumer decisions,’’ Park says.
Hwang and Park’s most notable discovery was that Walmart’s sales rise following a conversion due to an increase in basket size. Post conversion, per-trip expenditures increased drastically, to $56.48, from $39.80.
The number of trips made to Walmart, however, went up only slightly, to 0.72, from 0.62 visits per week.
“There had been speculation that Walmart would gain revenue due to an increase in store visits,” Hwang says. “What I found was a little bit different from the suspicion in the industry.”
Competitors, meanwhile, saw a drop in sales, not due to decreased basket size, but because fewer customers walked through their doors.
The basket size at incumbent grocers went down only slightly, to $28.63, from $32.64. But the number of visits fell more, to 1.47, from 1.75 visits per week.
According to Hwang, if grocers want to stay competitive, they should worry less about increasing basket size and instead work harder to lure customers into their stores.
“Instead of doing a ‘buy-one, get-one-free,’ you could do something like, ‘If you come to the store one more time, you’ll get a $50 rebate,’” Hwang says.
One thing grocers shouldn’t do is go to war on price. According to research done last year by BMO Capital Markets on the impact of Supercentre conversions in Quebec, supermarkets that fought back on price eventually gave up, ceding market share to the American giant.
Eventually they put prices back up to where they were before the Supercentre opened.
Kusum Aliawadi, a marketing professor at Dartmouth College in New Hampshire, agrees that lowering prices should not be a grocery store’s main plan of counterattack.
She has studied the response of incumbent retailers to Walmart adding groceries, and says supermarkets that do best emphasize their own existing strengths rather than their low prices.
Walmart, Aliawadi says, carries a lot of categories, but generally stocks a small number of choices within each category. Supermarkets, therefore, should expand assortment, making sure they have a decent mix of top-tier national brands and private labels.
“The [additional] national brands help differentiate them from Walmart,” she says. “And the private labels keep that price-sensitive consumer who might otherwise go to Walmart.”