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

38 Pages Posted: 6 Jun 2006

See all articles by Marty Gosman

Marty Gosman

Quinnipiac University

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Date Written: May 30, 2006

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

Suggested Citation

Gosman, Marty and Kohlbeck, Mark J., The Effects of Wal-Mart on the Profitability and Investor Valuation of its Suppliers (May 30, 2006). Available at SSRN: https://ssrn.com/abstract=906606 or http://dx.doi.org/10.2139/ssrn.906606

Marty Gosman

Quinnipiac University ( email )

275 Mt. Carmel Avenue
Hamden, CT 06518
United States
203-582-8755 (Phone)

Mark J. Kohlbeck (Contact Author)

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

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