The Effects of Wal-Mart on the Profitability and Investor Valuation of its Suppliers

Abstract

The U.S. retail market exhibits increasing buyer concentration among larger retailers. As a result, the increasing clout may enable larger retailers to dictate terms from their suppliers. We utilize the major customer disclosure (SFAS 131) and focus on 150 suppliers who identify Wal-Mart as a major customer. We find that supplier gross margins increase, while return on assets deteriorates. Days' sales in inventory lengthened as expected; however, the effect was offset by an increase in days' purchases in accounts payable. We also observe negative valuation implications separate from the effects of lower earnings that are consistent with greater risk for suppliers from their Wal-Mart relationship. Supplier power mitigates some of the negative effects. The findings provide insight on financial and valuation implications of supply chain dynamics where one firm has an economic dependence upon a major customer.

Keywords: Buyer Power, Supplier Power, Major Customer Disclosures, Wal-Mart

JEL Classification: L16, L81, M41, M45