In Walmart Supercenter conversions, surprising effects

Since the mid-1990s, a key feature of Walmart’s growth strategy has been the conversion of stores to "supercenters" — that is, a full-line discount store with a full-line supermarket under one roof. The strategy has been so effective that Walmart is now the largest grocery store in the world. Walmart is, in fact, the largest company in the world.

Since the mid-1990s, a key feature of Walmart’s growth strategy has been the conversion of stores to "supercenters" — that is, a full-line discount store with a full-line supermarket under one roof. The strategy has been so effective that Walmart is now the largest grocery store in the world. Walmart is, in fact, the largest company in the world.

What is behind the success of Walmart’s supercenter conversions? Industry observers had plenty of ideas, but no concrete answers because the question had been largely unstudied before it piqued the interest of Sungho Park, an associate professor of marketing at the W. P. Carey School of Business.

The reason the question had been largely unstudied is that researchers, including Park and his colleague Minha Hwang, then a professor at McGill University in Canada, faced significant data limitations — namely, the fact that Walmart doesn’t release its customer shopping data.

But Park and Hwang devised a way around the data problem: get shoppers’ data from the shoppers themselves. The two professors turned to Nielsen, which collects consumer panel data through home scanners. Consumers scan their receipts and send them to Nielsen, which then aggregates the data. Park says, “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.”

Commonly held assumptions don’t hold up to analysis

When Park and Hwang analyzed the data, they found that those commonly held industry assumptions about the effects of a supercenter conversion were largely wrong.

Industry analysts had long believed that it was increased visits driving the increased revenue that came when Walmart converted a store to a supercenter. Park and Hwang found that revenue rose post-conversion by 41 percent, but it wasn’t largely because of increased visits. While visits did increase by 10 percent, the largest revenue gains came from increased basket size (average sales per customer per visit), which rose 31 percent.

“The increase in basket sizes, which industry analysts have largely ignored, is critical to understanding the source of revenue gains at Walmart Supercenters,” Park and Hwang wrote in “The Impact of Walmart Supercenter Conversion on Consumer Shopping Behavior,” published in March 2016 in the Management Science.

Another industry assumption was that Walmart converted stores to supercenters not so much to profit from grocery sales but to draw customers in and then sell them on higher-margin nonfood items, “which potentially treats the entire food business as a loss leader,” says Park.

It is true that the grocery industry has very thin margins — five percent, on average. And it is true that grocery items cost significantly less at Walmart than at competing grocery stores. But it is not the case, Park and Hwang found, that Walmart’s increased grocery sales carried over to increased sales of nonfood items. They write, “Non-food categories, which are farther away from newly added (grocery) departments both in physical distance and category association, do not benefit from positive demand spillover effects.”

Park explains, “If I already go to Walmart to buy batteries, and the store is now a supercenter with groceries, then I’ll also buy milk. So compared to when the store was just a store, I’m now spending more money because I’m buying milk as well as batteries. But I’m not going more often, and I’m not buying more batteries just because the store also sells milk.”

Industry analysts had also assumed that competing grocers in the area of the converted supercenter would suffer from decreased basket size (that is, lower average sales per customer). Certainly, Walmart has profoundly affected the grocery industry. “In the past decade, 29 grocery chains have filed for bankruptcy, citing Walmart as a catalyst in 25 of those cases,” says Park. He and Hwang found that revenue at competing grocery stores declined 20 percent post-conversion.

But that revenue loss was due more to decreased visits than decreased basket size. Park and Hwang write, “Among competing retailers, grocery stores experience the most significant loss mostly from fewer store visits, with a much smaller impact attributable to per-visit expenditure (i.e., basket size).” The average number of visits per grocery customer declined 18 percent while the average basket size decreased six percent.

So the positive effects on the converted supercenters were largely due to increased basket size, but the negative effects on competing grocers were largely due to decreased visits. Park explains, “While I’m not visiting Walmart more often just because it now sells groceries, if I’m buying groceries at Walmart then I’m not visiting the grocery store. On the flip side, if I’ve decided not to buy groceries at Walmart, and I still buy them at the grocery store, then I’m spending about the same amount of money there as I did before.”

Lessons for Walmart, and competitors

Park and Hwang’s research offers valuable lessons for Walmart, and for its grocery competitors. For Walmart, the fact that revenue increases post-conversion are driven largely by increased basket size rather than increased visits suggests that in-store promotions and other tactics to further increase basket size might have a larger effect on revenue than promotions designed to get people into the store more often.

Perhaps more significantly for Walmart, the fact that demand for food items doesn’t spill over into increased demand for non-food items suggests that the company “carefully consider physical distance and category association so as to benefit from positive demand spillover from retail scope expansion,” write Park and Hwang. But they “leave to future research” the identification of the exact roles of physical distance and category association in demand spillover to existing categories.

The fact that grocery stores’ weekly revenue loss is driven more by a decrease in store visits than a decrease in basket size implies that grocery store managers “should focus on promotion or assortment tactics to win back the lost trips rather than promotions aimed at increasing basket sizes,” says Park.

How can grocery retailers attract customers back from a Walmart Supercenter? They could try to become more like Walmart. Park says, “There has been a move in the supermarket industry toward consolidation through mergers and acquisitions with the hope of leveraging similar bargaining power and economies of scale as Walmart.”

But Park says that it has been very hard for grocery retailers to beat Walmart at Walmart’s game. So he suggests that retailers do just the opposite and very clearly differentiate themselves from Walmart. Experts offer five ways grocery retailers might do that: 1) with a clean store and friendly staff; 2) by improving fresh produce and custom-cut meat departments; 3) by emphasizing deli, ready-to-eat foods, and salad bars; 4) by broadening product assortment; and 5) by increasing the focus on understanding customer needs.

Walmart has had tremendous success being all things to all people. But few other retailers could pull off such a strategy; they don’t have the supply chain, the market share, or the vendor control. So instead of following Walmart’s lead toward a one-stop-shop model, competing retailers should look to very clearly differentiate themselves as not Walmart.

That’s a strategy that has worked well for Whole Foods, for example, which while a much smaller company, has 50 percent higher sales per square foot than Walmart does.

Bottom line

New research by marketing professor Sungho Park upturns commonly held assumptions about the effect of a Walmart Supercenter conversion. Key findings include:

• Walmart’s revenue post-conversion rose 41 percent, but most of that rise was due to an increase in basket size (that is, average sales per customer per visit), not increased visits.
• Increased sales of food items at a converted supercenter did not carry over into increased sales of nonfood items.
• Post-conversion, sales at nearby grocery stores fell 20 percent. Most of that decrease was due to a decrease in visits, not a decrease in basket size.
• Walmart could consider strategies to relocate and promote nonfood items to increase shoppers’ average basket size.
• Nearby retailers would likely be more successful differentiating themselves rather than trying to be like Walmart.