AMHERST, Mass. - In 2003, Wal-Mart became the largest food retailer in the United States through the expansion of supercenters, stores that offer a full line of groceries in addition to goods found at regular Wal-Mart stores. University of Massachusetts Amherst researchers have shown that supercenters have a significant impact on conventional supermarkets within a five-mile radius, causing them to lower their prices.

Even when conventional supermarkets lower their prices to be competitive, prices were still significantly lower at Wal-Mart supercenters. The estimated average price difference between supercenters and supermarkets ranges from 14 to 23 percent for national brand goods and 7 to 18 percent for private labels. This translates into savings for the average family.

Results of the study by Nathalie Lavoie, a resource economist at UMass Amherst, and graduate student Richard Volpe, were published in the spring 2008 issue of the Review of Agricultural Economics.

"Families that shop exclusively at supermarkets within five miles of a supercenter can expect to save between $37 and $104 per person each year, since Wal-Mart will cause these stores to lower their prices," says Lavoie. "Consumers living within five miles of a supercenter can save $88 to $223 per person if they shop exclusively at the supercenter."

The largest savings was for consumers from cities and towns without a supercenter, where grocery prices were not lowered by the competition. Shoppers willing to travel to find a supercenter stand to save between $186 and $298 per person each year.

"The question of whether Wal-Mart is good for the economy is difficult to answer because it involves so many factors, but our study does show that consumers who want to purchase groceries as inexpensively as possible do benefit from the presence of supercenters," says Lavoie.

Lavoie and Volpe collected price data on identical products from six supercenters in Massachusetts, Connecticut and Rhode Island and from conventional supermarkets in the same areas. Products covered a wide range of departments including dairy, frozen goods, health and beauty aids, meat, produce and dry grocery. The survey covered both national brands and private label goods, commonly known as store brands.

The team found that Wal-Mart supercenters result in a price decrease of 6 to 7 percent for national brands at conventional supermarkets located within a five-mile radius. A decrease of 3 to 8 percent was noted for store brands. Prices in the grocery and dairy departments were lowered the most, and no impact was noted on the price of frozen foods.

Much of the observed difference has to do with the way Wal-Mart sets prices. Wal-Mart uses Everyday Low Pricing (EDLP), meaning that all goods are marked up by the same percentage regardless of what price they were acquired at. Sales, promotions and advertising do not play heavily into the practice of EDLP, which allows Wal-Mart to set prices that are lower than its competitors.

In contrast, most supermarkets use a strategy called High-Low Pricing (HLP), where most products are given a high markup, but some goods are put on promotion. In some cases, promotional items are sold at a loss to the store in order to increase customer traffic. Many of the nation's largest supermarket chains are gradually lowering their prices and decreasing the frequency and size of promotions at some of their locations in an effort to be more competitive.

"Wal-Mart also has enormous buying power since they can buy huge quantities at a given time, which enables them to drive down prices that they pay manufacturers for goods," says Lavoie. "Supermarket chains in New England such as Stop & Shop and IGA are too small to possess such power, which gives Wal-Mart a significant cost advantage."

"The full impact of Wal-Mart supercenters on the economy needs to take into account their effect on customers, employees, competitors and consumers," says Lavoie. "But we conclude that Wal-Mart supercenters have a positive effect on the welfare of price-sensitive consumers."