Store Format Choice and Consumer Response

A Comparative Analysis of Differential Consumer Response Across Supermarket and Specialty Store

Ashish Kumar, Minakshi Trivedi, Ram Bezawada, & Karthik Sridhar (2012) — JRCS

Motivation

  • Retail Evolution: Retailing has evolved from traditionally micro-managed small formats (“mom and pop” stores) to corporate-managed large formats (supermarkets).
  • Cross-Shopping Behavior: Consumers frequently shop across distinct store formats even for similar product categories.
  • The Core Puzzle: Do consumer preferences and sensitivities to marketing mix remain constant across store formats, or do they show differential response behavior?
  • Research Question: How do marketing sensitivities, convenience drivers, and cross-category utility correlations vary for similar categories across Supermarkets and Specialty formats?

Theoretical Gap: A majority of prior format-choice literature assumes that consumer response parameters (e.g., price and promotion sensitivities) are static across formats. This study posits and tests format-specific differential response behavior.

Methodology and Model

Data and Scope: - Unique basket-level panel dataset of 225 households in the Northeast US over a 2-year period (Jan 2003 – Dec 2004). - Category studied: Candy / Confectionery, segmented into: - Boxed Chocolates (Premium, gift-oriented, occasion-specific). - Non-Boxed Chocolates and Other Candy (Non-premium, regular consumption). - Store formats compared: Supermarket (broad grocery assortment, high visit frequency) vs. Specialty Store (deep specialty/exclusive confectionery assortment, low visit frequency).

Model Formulation: - Hierarchical Bayesian Multivariate Probit Model estimated using Markov Chain Monte Carlo (MCMC) with Gibbs Sampling (50,000 iterations, 40,000 burn-in). - Full covariance structure captures unobserved utility correlations within and across formats, accounting for household-level heterogeneity.

Key Results

  • Estimates from the proposed Full Model reveal massive asymmetric sensitivities to marketing variables across store formats:
Category Covariate Supermarket (Full Model) Specialty Store (Full Model)
Boxed Chocolate Price ($/oz) -3.7858 -0.2497
Promotion 5.8278 0.6378
Non-Boxed Chocolate Price ($/oz) -1.9030 -1.5265
Promotion 4.8764 0.9359
Other Candy Price ($/oz) -4.0534 -0.1131
Promotion 6.8048 0.2320
  • Key Sensitivities: Consumers are highly price- and promotion-sensitive when buying confectionery in supermarkets, but highly inelastic in specialty formats.
  • Convenience Drivers:
    • Assortment index has a stronger draw in Supermarkets (2.5091 vs. 1.4289).
    • Distance has non-linear effects; consumers have a significantly higher willingness to travel further to visit a Specialty Store.

Cross-Category Correlations

  • Investigating the cross-category utility correlations (\(R_u\) matrix) within and between formats reveals a fascinating contrast in consumer shopping trip motivations:

Supermarket Format (-ve Correlations)

  • Cross-category correlations in utility within the supermarket are negative.
  • Interpretation: Products act as substitutes. Consumers visiting supermarkets frequently tend to purchase only one category (e.g., either boxed or non-boxed) per trip.

Specialty Store Format (+ve Correlations)

  • Cross-category correlations in utility within the specialty store are positive.
  • Interpretation: Products act as complements. Consumers make deliberate, planned trips to specialty stores and engage in joint purchasing across categories to maximize the utility of their trip.

Holidays Impact: Occasion-specific holidays (Valentine’s Day, Christmas) positively impact all categories in the Specialty Store, but depress non-boxed grocery candy sales in Supermarkets.

Retail Simulation: Pricing Strategy

  • To study market responses, a simulation was conducted analyzing a 10% price cut in premium Boxed Chocolates:
Scenario / Store Format Supermarket Market Share / Profit Change Specialty Store Market Share / Profit Change
Scenario 1: Supermarket 10% Price Cut +28.80% (Share) / +15.59% (Profit) -0.55% (Share) / -0.52% (Profit)
Scenario 2: Specialty Store 10% Price Cut -0.45% (Share) / -0.26% (Profit) +0.57% (Share) / +0.46% (Profit)
Scenario 3: Coordinated 10% Price Cut +14.02% (Share) / -0.29% (Profit) -0.40% (Share) / -0.74% (Profit)
  • Asymmetry in Price Wars:
    • A supermarket price cut dramatically captures market share and profit for itself, while barely affecting the specialty store.
    • A specialty store price cut yields almost no gains for itself, as demand is highly price-inelastic.
    • A coordinated price war damages specialty store profits (-0.74%) but still yields positive share gains for supermarkets.

Implications

  • Supermarket Retail Strategy:
    • Highly responsive to promotions. Should actively use price cuts, feature ads, and promotional displays to drive candy volume.
    • Rely on a broad assortment to draw shoppers making frequent multi-purpose trips.
  • Specialty Store Retail Strategy:
    • Price cuts and discount promotions are highly ineffective due to inelastic demand.
    • Leverage positive cross-category correlations by using bundling (e.g., boxed chocolate + regular candies) and cross-merchandising.
    • Focus on holiday-themed events and superior quality to justify premium pricing and maintain high margins.

Citation: Kumar, A., Trivedi, M., Bezawada, R., & Sridhar, K. (2012). Journal of Retailing and Consumer Services, 19(6), 561-569. https://doi.org/10.1016/j.jretconser.2012.07.001