Supplier Responses to Wal-Mart s Invasion of Mexico

Transcription

1 Supplier Responses to Wal-Mart s nvasion of Mexico Leonardo acovone (The World Bank) Beata Javorcik (University of Oxford and CEPR) Wolfgang Keller (University of Colorado, NBER, and CEPR) James Tybout (Penn State University and NBER) June 2009 () Wal-Mart s nvasion of Mexico June / 42

2 Equilibrium price setting when products di er in quality () Wal-Mart s nvasion of Mexico June / 42

3 Mexico: a globalization shock () Wal-Mart s nvasion of Mexico June / 42

4 Wal-Mart o ers its retailing services to Mexican rms () Wal-Mart s nvasion of Mexico June / 42

5 Wal-Mart s nvasion of Mexico: the argument Wal-Mart enters after NAFTA and Mexico s joining the GATT in 1985 Wal-Mart brings its business practices to Mexico The FD triggers massive reshu ing among Mexican producers Wal-Mart increases their market size (national distribution) F Heterogeneous rms: strong rms gain, weak rms lose Wal-Mart s FD gives incentives to innovate and upgrade Upgrading required to ensure compatibility w/ Wal-Mart F Heterogeneous rms: strong rms upgrade, weak rms do not () Wal-Mart s nvasion of Mexico June / 42

6 Overview 1 Firm interviews in Mexico as input for modeling the impact of Wal-Mart on Mexican suppliers (summarized in Javorcik, Keller, and Tybout 2008) 2 Simulation of sales, upgrading, pricing and other rm responses 3 Regression evidence on the same variables using Mexican micro data () Wal-Mart s nvasion of Mexico June / 42

7 The nvasion Wal-Mart entered Mexico via joint venture with Bodegas Aurrera in 1992 Bought controlling interest in 1997 and became Wal-Mart de México (Walmex) Walmex is Mexico s largest private employer since 2003 () Wal-Mart s nvasion of Mexico June / 42

8 Walmex store formats () Wal-Mart s nvasion of Mexico June / 42

9 Regional Distribution Centers Walmex stores are supplied by regional distribution centers (CEDS), as well as direct deliveries from producers 30 percent of perishable goods are bought locally directly from suppliers Supplying a single CEDS gives a producer access to the entire network () Wal-Mart s nvasion of Mexico June / 42

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26 Walmex geographic expansion patterns: summary Walmex started out in the most populated area partly because Aurrera was already there Walmex expanded by adding stores throughout Mexico, rather than gradually radiating out from the center n contrast to Wal-Mart s strategy in the United States (Holmes 2007) Distribution centers followed stores, so suppliers proximity to stores means they have good access to Walmex () Wal-Mart s nvasion of Mexico June / 42

27 Becoming a Walmex supplier: the pros Substantial increase in market size () Wal-Mart s nvasion of Mexico June / 42

28 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods () Wal-Mart s nvasion of Mexico June / 42

29 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses () Wal-Mart s nvasion of Mexico June / 42

30 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses Walmex requires on-time deliveries ( ned if not) and drivers must carry identi cation cards () Wal-Mart s nvasion of Mexico June / 42

31 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses Walmex requires on-time deliveries ( ned if not) and drivers must carry identi cation cards Shipments must be on standardized corner-protected palettes (rentable from Walmex), subject to third-party quality audits () Wal-Mart s nvasion of Mexico June / 42

32 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses Walmex requires on-time deliveries ( ned if not) and drivers must carry identi cation cards Shipments must be on standardized corner-protected palettes (rentable from Walmex), subject to third-party quality audits Getting ready for Wal-Mart () Wal-Mart s nvasion of Mexico June / 42

33 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses Walmex requires on-time deliveries ( ned if not) and drivers must carry identi cation cards Shipments must be on standardized corner-protected palettes (rentable from Walmex), subject to third-party quality audits Getting ready for Wal-Mart is like "getting into a company version of basic training with an implacable Army drill sergeant" () Wal-Mart s nvasion of Mexico June / 42

34 Becoming a Walmex supplier: the pros Substantial increase in market size Bene ting from Walmex innovative business methods Modernized T-based system of channeling deliveries from suppliers through centralized warehouses Walmex requires on-time deliveries ( ned if not) and drivers must carry identi cation cards Shipments must be on standardized corner-protected palettes (rentable from Walmex), subject to third-party quality audits Getting ready for Wal-Mart is like "getting into a company version of basic training with an implacable Army drill sergeant" "helps everything: customer focus, inventory management, speed to market" (Fishman 2003) () Wal-Mart s nvasion of Mexico June / 42

35 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) () Wal-Mart s nvasion of Mexico June / 42

36 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) Often makes a take-it-or-leave-it o er () Wal-Mart s nvasion of Mexico June / 42

37 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) Often makes a take-it-or-leave-it o er Expects product innovation or annual price concessions () Wal-Mart s nvasion of Mexico June / 42

38 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) Often makes a take-it-or-leave-it o er Expects product innovation or annual price concessions Uses store brands to create competition () Wal-Mart s nvasion of Mexico June / 42

39 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) Often makes a take-it-or-leave-it o er Expects product innovation or annual price concessions Uses store brands to create competition For a supplier to complain about Wal-Mart s approach () Wal-Mart s nvasion of Mexico June / 42

40 Becoming a Walmex supplier: the cons Walmex keeps negotiations with its suppliers as stark as possible both the bargaining environment and the number of negotiable contract features (price, quality, quantity) Often makes a take-it-or-leave-it o er Expects product innovation or annual price concessions Uses store brands to create competition For a supplier to complain about Wal-Mart s approach "would be committing suicide. f Wal-Mart takes something the wrong way, it s like Saddam Hussein. You just don t want to p them o " (Paul Kelly, business consultant; Javorcik, Keller, and Tybout 2008) () Wal-Mart s nvasion of Mexico June / 42

41 A simple model of Walmex upstream industry ndirect utility from a unit of product j for consumer i: U ij = θ 1 ln(ξ j ) + β w w j + θ 2 ln (Y P j ) + ɛ ij def = U ij + ɛ ij. ξ j : Quality of good supplied by rm j P j : Price of good j Y : ncome of representative consumer w j : = 1 if j retails through Walmex, 0 otherwise ɛ ij : Type 1 extreme value, iid across consumers and goods f rm j sells through Walmex, it makes its product more accessible to consumers, so more consumers choose it () Wal-Mart s nvasion of Mexico June / 42

42 Static and dynamic rm heterogeneity Firms products di er in terms of their current quality, ξ j At the beginning each period, each type of rm decides whether to exit for scrap value or continue operating Potential entrants decide whether to create new rms Those that continue choose a level of investment in innovation nvestment increases the probability of quality improvement () Wal-Mart s nvasion of Mexico June / 42

43 The choice of retailing Each incumbent rm decides whether to sell through Walmex (w j = 1 or w j = 0) The bene t: Access to Walmex consumer base The cost: Walmex dictates a low price Pure Bertrand product market competition for rms not selling through Walmex () Wal-Mart s nvasion of Mexico June / 42

44 Nash Equilibrium n equilibrium The transition density for the industry states is correctly understood by all agents Spot markets clear at optimal price (P j ) and retail (w j ) choices Optimal investments towards quality improvements are made Given parameters, we solve for the oblivious equilibrium numerically Oblivious equilibrium: approximation technique introduced by Weintraub, Benkard and Roy (2007) () Wal-Mart s nvasion of Mexico June / 42

45 Optimal price setting Firms selling through Walmex must meet a minimum quality level and price at: P j = P 0 + θ 3 ln(ξ j ), θ 3 > 0 The remaining rms do best to price at: P j = Y + θ 2C j (1 h j ) 1 + θ 2 (1 h j ), j 2 where h j = h(jjw, P, ξ) = exp U ij ` exp U i` + 1 () Wal-Mart s nvasion of Mexico June / 42

46 Equilibrium retailing choice Firms anticipate second stage equilibrium prices for each quality level Given the decisions of their competitors (w j ), they make the pro t-maximizing Walmex choice by comparing π j = π(j, w j = 0jw j, ξ) = (P j C ) h j M and π j = π(j, w j = 1jw j, ξ) = P j C h j M Equilibria in retailing choices obtain when: [π j (j, w j = 1jw j, ξ) π j (j, w j = 0jw j, ξ)] w j +[π j (j, w j = 0jw j, ξ) π j (j, w j = 1jw j, ξ)] (1 w j ) 0 8 j. () Wal-Mart s nvasion of Mexico June / 42

47 Product quality investments r j is the current level of R&D of the j th producer in order to in uence its product quality next period, hereafter denoted ξ 0 j Product quality realizations are elements of a discrete ordered set Quality moves at most one position for each rm per period () Wal-Mart s nvasion of Mexico June / 42

48 The evolution of product quality over time With R&D e ort r, a rm s probability of success is Firms lose a quality step with exogenous probability δ The quality transition probabilities are h i Up : Pr ξj 0 = ξ i+1 jξ j = ξ i = h i Constant : Pr ξj 0 = ξ i jξ j = ξ i = h i Down : Pr ξj 0 = ξ i 1 jξ j = ξ i = 1 ar 1+ar ar j 1+ar j (1 δ) 1 ar j 1+ar j (1 δ) + ar j 1+ar j δ ar j 1+ar j δ () Wal-Mart s nvasion of Mexico June / 42

49 Bellman equation Let the i th element of s = (s 1, s 2,..., s K ) be the number of rms in the industry at quality level ξ i Let s j be the same vector, except in that it leaves rm j out of the count Let π ξ j,, s j be the pro ts of rm j when it is at quality ξj, and the remainder of the industry is at s j Then optimal decisions are characterized by: V ξ j,, s j = max φ s, max π ξ r j,, s j c r r + βe Ωj V. ξ 0 j,, s 0 j j () Wal-Mart s nvasion of Mexico June / 42

50 Entry and exit Firms enter at some common initial quality level when the expected pro ts exceeds the (exogenous) cost of creating a new rm Firms exit when the scrap value φ s exceeds its continuation value () Wal-Mart s nvasion of Mexico June / 42

51 Simulations: main parameters Without Walmex With Walmex option C : Marginal costs β w : Walmex boost ξ : Min. Walmex quality n.a. 2.0 θ 3 : Quality-price rel n n.a. 0.4 () Wal-Mart s nvasion of Mexico June / 42

52 Price setting in the Walmex world () Wal-Mart s nvasion of Mexico June / 42

53 R&D investment Blue line: No Walmex Green line: Walmex is present () Wal-Mart s nvasion of Mexico June / 42

54 Product quality upgrading Blue line: No Walmex Green line: Walmex is present () Wal-Mart s nvasion of Mexico June / 42

55 The number of rms Blue line: No Walmex Green line: Walmex is present () Wal-Mart s nvasion of Mexico June / 42

56 Key model implication Both static and dynamic responses to Walmex vary across the quality distribution: Low Medium High Sales nnovation & Upgrading Price ++ + * ++ + * + () Wal-Mart s nvasion of Mexico June / 42

57 Simulations: speci c results 1 Net exit occurs (39 rms! 20 rms) 2 Operating pro ts increase by 23% 3 Exit and entry rates fall (3.5%! 1.8%) 4 Consumer surplus rises by 2% () Wal-Mart s nvasion of Mexico June / 42

58 Regression evidence: key data Panel data on Mexican manufacturing establishments (1993 to 2002) Almost 7,000 establishments (= plants) across 205 industry groups Source: NEG Number of Walmex stores, by state and over time nformation on whether products are carried by Walmex, or not Control variables: State GDPs, US and Mexican tari levels, and xed e ects () Wal-Mart s nvasion of Mexico June / 42

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61 Estimation denti cation: Are establishments that sell a Walmex-type product a ected di erently when Walmex regional presence increases, compared to establishments that do not sell Walmex-type products? Use simultaneous quintile regressions: Y it Y jt = β q 1 ln(n st) + β q 2 WMX j + β q 3 ln(n st) WMX j +β q 4 ln(gdp st) + β q 5 ln(gdp st) WMX j +β q 6 TARMEX jt + β q 7 TARUS jt + α q t + ε q it, where i 2 state s, industry j; e.g., in the rst results, dependent variable Y it is domestic sales of establishment i in year t q is the quintile of the sales distribution (generally, the Y it variable dist n) () Wal-Mart s nvasion of Mexico June / 42

62 Summary statistics () Wal-Mart s nvasion of Mexico June / 42

63 Walmex and changes in sales for small versus large rms ln(#walmartstores) WalMartProduct ln (#WalMartStores) WalMartProduct ln(stategdp) ln(stategdp) WalMartProduct 20th percentile (0.014) (0.871) (0.038) (0.020) (0.053) 80th percentile (0.015) (0.968) (0.042) (0.023) (0.059) Number of obs: 52,861; regression also includes constant, tari levels, and time xed e ects; bootstrapped standard errors in parentheses () Wal-Mart s nvasion of Mexico June / 42

64 Changes in sales across quintiles Coefficient on ln(#walmexstores) x WalMartProduct q20 q40 q60 q80 () Wal-Mart s nvasion of Mexico June / 42

65 Changes in R&D spending across rms q20 q40 q60 q80 () Wal-Mart s nvasion of Mexico June / 42

66 Skill composition as another indicator of upgrading q20 q40 q60 q80 () Wal-Mart s nvasion of Mexico June / 42

67 mporting intermediate inputs from abroad q20 q40 q60 q80 () Wal-Mart s nvasion of Mexico June / 42

68 Walmex and labor productivity changes q20 q40 q60 q80 () Wal-Mart s nvasion of Mexico June / 42

69 The change in prices charged across rms q20 q40 q60 q80 Establishment-level prices incorporate product-level information; index = 100 in 1994, no time xed e ects () Wal-Mart s nvasion of Mexico June / 42

70 Supplier response: Model versus data Sales Low quality Upgrading Price Medium quality ++ + * Low quality High quality Medium quality ++ + * High quality Low quality Medium quality + High quality () Wal-Mart s nvasion of Mexico June / 42

71 Summary Wal-Mart s entry had a major impact on Mexico s manufacturing industry We nd static reallocation (between- rm) and dynamic (within- rm) e ects The industry evolution model matches the interview and quantitative evidence well () Wal-Mart s nvasion of Mexico June / 42

72 mplications Empirical analysis ought to bring possible heterogeneous responses more into focus Market share gains versus losses More technology spending versus less Firm- and labor force upgrading versus downgrading Upstream-downstream relations appear to be important for assessing the impact of trade and FD liberalization on market size, technological change, and welfare () Wal-Mart s nvasion of Mexico June / 42