We investigate how buyer power in the retail market affects suppliers' profitability. Buyer power exists when suppliers depend on a concentrated set of retailers. Further, Wal-Mart, the world's largest retailer, possesses additional buyer power because it has a dominant position in many product supply chains, advanced inventory management practices, and cutting edge technology. We form a sample of firms that supply retailers and utilize the major customer disclosure (SFAS No. 131) to proxy for dependence on major customers and the incremental Wal-Mart effect associated with buyer power. We find that as sales to major customers increase, supplier gross margins and return on assets decrease while their inventory and payables management improves. Wal-Mart is incrementally associated with increasing gross margins, improving cash collections, and extended payment terms with its vendors. Supplier power offsets some of the adverse effects. Our findings provide insight on financial implications of supply-chain dynamics where (1) one firm has an economic dependence upon a major customer, and (2) the major customer is a leading channel member.

In this case, you will analyze large retailers' increasing clout and its implications for the pricing, inventory, and credit practices of their suppliers. You will use accounting data to explore how changes in these business practices and other phenomena at the firm and industry levels affected retailers' and suppliers' financial performances. In addition, you will examine stock return information to determine how Wall Street responded to the effects of these changes on firms' profitability. As a result, the case will increase your understanding of how to use accounting data to assess the effect of marketing and managerial decisions on financial performance. You will consider these issues for four large retailers (JCPenney, Target, Toys “R” Us, and Wal-Mart) and three manufacturer-suppliers (Garan, Mattel, and National Presto).

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