Understanding format-level differences can help determine how consumers respond to changes in marketing mix instruments
The U.S. grocery retail and food services industry has gone through a significant shift in consumer preferences regarding brands and retail formats. Besides supermarkets, grocery purchases also occur in retail formats such as mass merchandisers, drugstores and convenience stores. This has blurred the traditional associations between product categories and channels.
From 2004 to 2010, mass merchandisers increased their share of dry grocery expenditures from 19% to 25%; meanwhile, the share of dry grocery expenditures at traditional grocery stores declined from 63% to 57%. At the same time, there has been a significant increase in grocery sales at convenience stores as compared to supermarkets and mass merchandisers. A study in the Journal of Marketing explores differences in consumer sensitivity to marketing mix variables across these retail formats. It’s an increasingly important factor, as food manufacturers vie for additional distribution coverage in nontraditional formats, which not only differ in their wholesale margin, but also in the type of shopping trips consumers make to them.
To explore differences in how brands respond to changes in marketing mix across retail formats, our research team developed a conceptual framework that links retail formats to different types of shopping trips—major versus minor, planned versus unplanned, for example—and relates how sensitivity to marketing mix variables varies across shopping trip types. Our conceptual framework defines major and minor trips based on dollar spending, number of items and number of product categories purchased. In addition, we posit that while major trips are always planned, minor trips (or fill-in trips) can be either planned or unplanned. Fill-in trips are made in between major trips and are mostly planned in that the household realizes the need for the trip ahead of time. By contrast, unplanned minor trips arise mostly due to unforeseen circumstances such as running out of a specific item or ingredient that is needed urgently and requires running to the store to purchase.
Each trip is associated with certain fixed components (independent of basket size) and variable components (based on basket size and category-level marketing mix) of utility. The fixed component of utility is a function of distance to the store, store loyalty and other factors. The variable component depends on prices, nonprice promotions and line lengths of chosen brands and the urgency of need. To the extent that consumers make a trade-off between these components for different types of shopping trips, they might favor certain retail formats over others. In our analysis, we use revealed preference (transactions) data to cluster trips into different types and show that major trips are more likely to be made to supermarkets and mass merchandisers, fill-in trips to drugstores and unplanned minor trips to convenience stores.
Consumers make different types of trips (major, fill-in and unplanned) to different retail formats (supermarkets, mass merchandisers, drugstores and convenience stores). Given the differences in urgency and basket size across trip types, consumers are likely to differ in their sensitivities to changes in marketing mix variables such as price, line length and deals on these various types of trips. These, in turn, translate into differences in how sensitive consumers are to marketing mix variables across retail formats.
How Practitioners Can Put the Findings Into Action
Rather than shop for different categories at different formats, consumers are increasingly shopping for multiple product categories at the same format. This leads to “channel blurring.” A retailer may be competing not only with other retailers of the same format, but also with those in other formats. In combination with our finding that consumers differ in their sensitivities to changes in marketing mix variables across formats, a consumer can now also purchase the same brand at different formats while exhibiting different sensitivities. This can increasingly lead to manufacturers cannibalizing their own sales across retail formats. Both retailers and manufacturers need to take a more nuanced view of the marketplace, which recognizes differences in marketing mix across formats and accounts for differences in sensitivities to changes in marketing mix in those formats.
What Comes Next
Our study paves the way for more research in store format patronage. Specifically, it’s important to understand how consumers choose which store formats to visit in a week, and how changes in marketing mix variables influence format and store patronage while accounting for trip-level differences. This will allow manufacturers and retailers to understand how fixed and variable shopping costs, along with trip type differences, drive store adoption.
Because consumers expend time and effort to visit a retail format (a fixed component), they are unlikely to purchase each product category at the format that gives them highest utility. Because of the commute, consumers are less likely to avail of a price discount or a feature at a different format from the one they visit frequently. This implies that in the presence of the fixed component of utility, consumers are likely to be less sensitive to changes in marketing mix variables of individual brands. Based on this framework, we derive the ordering of sensitivity to marketing mix variables across retail formats.
For our empirical analysis, our research team studied top-10 spending product categories (orange juice, dry dog food, ready-to-eat cereal, ground coffee, frozen pizza, refrigerated yogurt, refrigerated milk, heavy-duty liquid detergents, toilet tissue and paper towels) that span four product departments (dry grocery, nonfood grocery, dairy and frozen). Our empirical analysis studies the effects of the three marketing mix instruments across different trip types and in four different retail formats (grocery, convenience, drugstore and mass merchandisers).
Using trip-level information, we estimate that changing prices and nonprice promotions impact brand shares most on fill-in trips and least on unplanned trips. Linking trip type to the retail format, we show that changing prices and nonprice promotions impact brand shares least at the convenience stores level. By contrast, changing line length impacts brand shares most at convenience stores and least at supermarkets and mass merchandisers. We explore the potential implications of our findings in the wake of the recent price increase in Procter & Gamble products and find that the impact on profits of such a price increase varies by retail format. We also find that any potential line length change impacts profits by at least as much as price changes. Together, these findings highlight the importance of accounting for format-level differences in how consumers respond to changes in marketing mix instruments.
[Ed. Note: Per the authors, regarding the effects of the COVID-19 pandemic on grocery stores: “Our findings are based on data from 2011-2014 where we do not observe any macroeconomic shocks. Also, we do not account for the effect of income in our analysis, so the paper cannot speak to how consumer shopping behavior may change in the event of an unprecedented crisis such as the pandemic we’re facing right now.”
Illustration by Bill Murphy.