Analyzing the impact of Wal-Mart Supercenters on local food store sales.

The entry of discount mass merchandisers into the grocery business is part of a rapid consolidation occurring in the grocery industry in recent years. Supermarket News estimates that the top five retail grocery chains now account for nearly 40% of U.S. sales. At the top of this list is Wal-Mart. Operating 1,980 Supercenters as of January 31, 2006, Wal-Mart's 2005 share of the nation's retail grocery market was estimated to range from 15% to 20%.

Supercenters are Wal-Mart's fastest growing store format. With more than fifty departments including a full-line grocery section and average size of 187,000 square feet, these stores compete with a wide range of existing retailers in the markets they enter. The greatest competitive pressures from the expansion of Supercenters occur to existing grocery stores. (1) Nearly 500 of these stores are located in counties with an urban population of fewer than 20,000 people. These are primarily rural trade centers in which retail trade is akin to a zero-sum game. Unless population or incomes are growing substantially, there is a relatively fixed amount of money to be spent in the retail sector.

A new large store will capture considerable trade, which must come at the expense of other merchants in the trade area (Blair and Kumar 1997). This article examines the impact of Wal-Mart Supercenters on grocery stores sales in local markets in Mississippi. The findings suggest that Wal-Mart Supercenters located in nonmetropolitan counties capture, on average, 17% of the existing grocery market within the first two years of operation. In metropolitan counties, Supercenters capture about 4% of existing grocery stores' sales one year after entry.

There has been a recent surge in academic research evaluating impacts of the growth of Wal-Mart stores at both the local and national level. This research shows both costs and benefits associated with Wal-Mart's growth, which are distributed across consumers, workers, business owners, and taxpayers in unequal ways. Several recent studies analyzing the impacts on employment and wages in the retail sector after Wal-Mart's entry find that retail employment and earnings decline as a result of Wal-Mart (Basker 2005a: Dube, Eidlin, and Lester 2005: Neumark, Zhang, and Cicarella 2005). Consumers, in contrast, appear to benefit from Wal-Mart's entry in the form of lower prices. Studies focusing on consumer impacts have found that a Supercenter's entry reduces grocery prices. Not only do Supercenters offer lower prices, but their entry may have the indirect effect of lowering prices at competing stores. Estimates of this indirect effect range from 3% overall to as high as 13% for specific items (Basker 2005b; Hausmann and Leibtag 2005).

In general, Wal-Mart's effect on existing local retailers is negative, although some complementary businesses may benefit from Wal-Mart's presence (Irwin and Clark 2006). For grocery stores, competition from Wal-Mart discount stores (not Supercenters) is relatively limited (Gruidl and Kline 1992; Stone 1995; Artz 1999). Most impacted are sales of product lines that compete directly with the discount store such as paper products, health and beauty aids, and cleaning supplies. These products typically account for approximately 25% to 30% of grocery store sales. Supercenters, however, pose a more serious competitive threat since they offer a full line of grocery items.

To date, there has been little research on Supercenters' impact on existing grocers due to their newness and a lack of reliable data on grocery sales. Previous studies that have relied on sales tax receipts for data on retail sales have not fully measured changes in grocery sales occurring after Wal-Mart entry because in most states, food items are not taxable. Therefore, changes in sales of grocery stores, in which generally more than 70% of the items are not subject to sales tax, are not fully reflected in these data. The research that does exist focuses on metropolitan areas for which data are more likely available and finds little evidence that Supercenters affect the grocery retail concentration in larger metropolitan areas (Franklin 2001).

This article analyzes changes in food store sales following the opening of one or more Wal-Mart Supercenters in local markets in Mississippi. Unlike most states, all food items are subject to the sales tax in Mississippi; therefore these data allow us to account fully for food sales. While overall retail sales might rise with the entry of Supercenters, without corresponding population and income growth, some portion of sales are merely being redistributed from existing stores to the Supercenter. Since food items sold in Supercenters are reported in the general merchandise category and not in the food stores' category, these data allow us to examine distributional changes occurring among retail merchandise categories. In addition, we analyze nonmetropolitan markets where much of Wal-Mart's growth has occurred and where any negative impacts of Supercenter entry on existing stores are likely to be most severe.

Data

This analysis focuses on the impact of a new Wal-Mart Supercenter on existing food store sales in the host market area. By October 2005, there were fifty-one Wal-Mart Supercenters in forty counties in Mississippi. The first Supercenters opened in the state in September 1992. Opening dates for Supercenters in Mississippi were obtained from Wal-Mart's website and from local newspaper archives. (2)

Sales tax data reflecting food and beverage sales were collected for all 82 Mississippi counties from fiscal year 1990 to 2005. (3) The food and beverage category reported by the state includes not only grocery stores, but also restaurants and drinking establishments. Previous studies have found that restaurant sales in the host town may increase following the addition of a Wal-Mart store. As such, the impact on this category could comprise two offsetting effects: an increase in restaurant sales and a decrease in grocery sales. We include data from County Business Patterns on the number of eating and drinking establishments in our analysis to control for growth in the number of restaurants.

Figure 1 provides a preliminary look at the potential impact of Supercenters on food and beverage sales, plotting the average per capita sales ratios for host and non-host counties from 1990 to 2005. Without controlling for other factors such as income growth, the figure suggests that around the time of entry of the first Supercenters in the state, trends in per capita food and beverage sales across the two groups began to diverge. By 2005, the average non-host county experienced a gain in per capita sales of roughly 50%, whereas the average host county's per capita sales rose only half as much, roughly 23%. Meanwhile, average population and income in host counties, two major drivers of retail sales growth, outpaced that in non-host counties. (4) The following analysis attempts to quantify the divergence in per capita retail food sales that appears in figure 1 and to determine if it is statistically significant after controlling for other county characteristics and for the likelihood that Wal-Mart locates its Supercenters in higher-growth counties.

[FIGURE 1 OMITTED]

Estimation Strategy

We use a difference-in-differences estimation strategy to examine the impact of Wal-Mart Supercenters on changes in the local market's food store sales. The difference-in-differences method compares outcomes in host counties before and after the addition of a Supercenter as well as comparing these changes with a control group of counties without a Wal-Mart Supercenter.

Equation (1) provides the basis for our empirical specification.

(1) [S.sub.it] = [X'.sub.it][[beta].sub.0] + [[beta].sub.t], + [[gamma].sub.i] [[delta].sub.w] + [W.sub.it] + [[epsilon].sub.it].

Let [S.sub.it] be food store sales for county i at time t, [X.sub.it] be a set of covariate controls that capture differences across counties, [[beta].sub.t] be a time effect that does not vary across counties, and [[gamma].sub.i] be a county effect that is fixed over time. The presence of a Wal-Mart Supercenter is indicated by the variable [W.sub.it] that is measured as the number of Wal-Mart Supercenters open in the county at time t, weighted by the number of years open. (5) The coefficient on [W.sub.it] measures the effect of the Supercenter on sales. The reference group in this case is counties that do not have a Supercenter at time t. Time is measured in years; the change from period 0 to period 1 represents a change from one year to the next. Differencing equation (1) yields

(2) [S.sub.i], - [S.sub.it-1] = ([[beta].sub.t], - [[beta].sub.t-1]) + ([X.sub.it] - [X.sub.it-1])'[[beta].sub.0] + [[delta].sub.w]([W.sub.it], - [W.sub.it]-1) + ([[epsilon].sub.it] - [[epsilon].sub.it-1]),

where ([W.sub.it] - [W.sub.it-1]) measures the change in intensity of Wal-Mart's Supercenter presence and the county fixed effects disappear. Since the impact of a new Supercenter may occur over a number of years, and not just in the first year of opening, we modify equation (2) to incorporate lags,

(3) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]