Format blurring: how the advent of the Walmart Supercenter has changed the U.S. grocery industry

Abstract

This paper develops a game-theoretic model that analyzes how a grocery store responds to the entry of a Walmart Supercenter using its store-format choice. By adopting a set of realistic assumptions, such as the cost advantage of Walmart and differentiated services of grocery stores, we find that the distance to a Walmart Supercenter is a key moderating factor in the store-format choice of grocery stores. Grocery stores would prefer to sell non-food items, but when sufficiently close to Walmart Supercenters they would specialise in food items, as consumers find it less costly to engage in two-stop shopping, making the gain from non-food items smaller. So an asymmetric equilibrium becomes feasible, wherein grocery stores carrying increasingly more non-food products and a new grocery store concept like Whole Foods and Wild Oats emphasising high-quality, organic foods can coexist. Our results yield important managerial implications. Under the specialisation strategy, the quality of its differentiated services should be sufficiently high, at least two to four times the disutility of two-stop shopping. Under the expansion strategy, grocery stores should engage in loss leadership, pricing non-food items below cost to lure large-basket consumers while earning higher margins from food items to compensate for the loss.