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Retailing in the 21st Century
Manfred Krafft ´ Murali K. Mantrala
(Editors)
Retailing
in the 21st Century
Current and Future Trends
With 79 Figures and 32 Tables
12
Professor Dr. Manfred Krafft
University of Muenster
Institute of Marketing
Am Stadtgraben 13±15
48143 Muenster
Germany
mkrafft@uni-muenster.de
Professor Murali K. Mantrala, PhD
University of Missouri ± Columbia
College of Business
438 Cornell Hall
Columbia, MO 65211
USA
mantralam@missouri.edu
ISBN-10 3-540-28399-4 Springer Berlin Heidelberg New York
ISBN-13 978-3-540-28399-7 Springer Berlin Heidelberg New York
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Foreword
Hans-Joachim Körber
Chief Executive Officer of METRO AG
In general, retailing is perceived as a rather traditional busi-
ness sector. Very many believe that this industry is mostly
concerned with making good deals, putting high pressure on
suppliers, and selling at competitive prices. The marketing
side of this business is perceived as being rather short-term
oriented and mostly concerned with price promotions.
However, over the last few years, the world of retailing has
changed dramatically. Retail operations of companies like
Carrefour, Tesco, Wal-Mart, and last but not least METRO
Group, have greatly increased in complexity and sophistication. Today, the re-
tailing sector is one of the leading industries in applications of innovations such
as radio frequency identification (RFID) and self-service technologies. Retailing
has been the industry that has principally fostered breakthroughs in supply chain
management and logistics. Retailing leads other sectors in customer data cap-
ture, data warehousing and analyses. Retailing provides the setting for research,
development and applications of advanced analytical, econometrics and optimi-
zation methods in domains like pricing and integrated marketing communications
management. Retailing, specifically online retailing, is still the main commercial
application area of the Internet and is at the vanguard of the globalization of
business. Last but not least, to manage such operations, retailing demands and
employs numerous employees with specialized training and expertise. However,
many of these advances in modern retailing remain largely unknown to the out-
side world where the old image of retailing as a slow-moving business with few
management challenges and unexciting career prospects remains prevalent.
Even within the retailing profession, many practitioners remain unfamiliar with
all the current trends and advances in retailing management methods, technologies
and applications.
To improve contemporary retailing’s public image, enhance the knowledge of
its practitioners, and stimulate further retailing research, there is a great need for a
source that documents and provides objective information on the current trends
and advances in retailing. I believe that this book “Retailing in the 21st Century –
VI Foreword
Current and Future Trends” edited by Manfred Krafft and Murali K. Mantrala
effectively meets these objectives.
The editors of this book have successfully brought together an impressive list
of authors who include industry experts and leading academic scholars from
Europe, the United States, Australia, and Asia. In the chapters of this unique book,
these experts share their knowledge and insights about diverse topics ranging from
retailing trends around the world to retailing strategies, marketing, operations and
human resource management. From my perspective, the combination of insights
from practitioners as well as from scientists is one of the major strengths of this
book, leading to interesting blends of practical and academic knowledge.
Another interesting characteristic of this edition is its focus on some of the lat-
est developments in marketing and technology in retailing, including RFID, elec-
tronic price tags, digital advertising displays, self check-out systems, personal
selling assistants, and smart kiosks. Several authors describe how these new tech-
nologies have been successfully demonstrated in the METRO Group’s “Future
Store” in Rheinberg. However, the authors also describe how these technologies
affect consumer behavior, employee behavior, and competitive behavior.
Metro helped this book project to become true by providing information and
inviting the interested authors. Aside from presenting and exchanging their ideas
for the respective chapters, all participants had a tour of the Future Store and thus
got a first-hand impression of how retailing could look like in a few years. This is
also one of the aims of the editors and authors of this book – not only investigate
recent trends and share industry and academic insights, but also look ahead into
the near future of retailing.
Overall, I believe that practitioners as well as academics will strongly benefit
from this book and find it stimulating and thought-provoking. Examples of best
practice in retailing and most recent findings from academic research convey in-
teresting insights into current and future trends.
Dr. Hans-Joachim Körber Duesseldorf, July 2005
Chief Executive Officer
METRO AG
Acknowledgements
Before we started on this project in late 2003, we were unaware of the huge in-
vestments of time and effort that go into editing a book. We naively thought that
you simply ask some colleagues to cover certain topics, wait for their chapters
being submitted on time, do some editing and send the whole material to the pub-
lisher. Now we know better …! Since the authors who contributed to this book are
either top executives or among the world’s leading retailing academics with many
demands on their time, our tight deadlines for submitting first drafts of the chap-
ters, peer reviews of all manuscripts and final revisions of the contributions got
challenged quite frequently. Throughout, however, there was remarkable enthusi-
asm for this project shown by all our contributors, and we are gratified by their
dedication, commitment to quality and responsiveness that enabled this book of
twenty-three chapters by 46 experts to be completed in fourteen months from the
contributors’ kick-off meeting in mid-June 2004. Our many thanks to all our con-
tributors!
This book would have never taken off without the generous support of METRO
AG and exclusive access to information about Metro’s Future Store Initiative. It
would never have been completed without the unstinting support, administrative
and editorial assistance of Frederike Göhlich of University of Muenster, Thomas
Hamela, Hans-Joachim Körber, Julia Merkel, Zygmunt Mierdorf, and Gerd
Wolfram of METRO AG, and Martina Bihn and Irene Barrios-Kezic of Springer.
Our heartfelt thanks to all these dedicated individuals!
Finally, this project consumed quite some of our leisure time that should have
been devoted to our families. Though we are quite enthusiastic and proud about
the final outcome of our work, we also feel sorry about neglecting them on many
weekends and holidays we should have been with them. For all their patience and
moral support, we dedicate this book to Anna-Kristina, Christine, Elisabeth, Ole-
Michel, Surya, Vidya and Ashwini.
Manfred Krafft
University of Muenster, Germany
Murali K. Mantrala
University of Missouri, Columbia, USA
Table of Contents
Foreword ....................................................................................................V
Acknowledgements................................................................................. VII
Overview..................................................................................................... 1
Manfred Krafft and Murali K. Mantrala
PART I: INTRODUCTION
Retail Success and Key Drivers............................................................. 13
Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
Retailing in the Global World: Case Study of Metro............................ 27
Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
PART II: GLOBAL, ENVIRONMENTAL,AND MARKET TRENDS
Global Trends
Retail Trends in Europe .......................................................................... 41
John Dawson
Trends in U.S. Retailing .......................................................................... 59
Barton A. Weitz and Mary Brett Whitfield
Trends in Retailing in East Asia............................................................. 77
Roy Larke
Environmental Trends
Future Store Technologies and Their Impact
on Grocery Retailing ............................................................................... 95
Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
X Table of Contents
The Third Wave of Marketing Intelligence ..........................................113
Raymond R. Burke
Applications of Intelligent Technologies in Retail Marketing........... 127
Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
New Automated Checkout Systems.................................................... 143
Thorsten Litfin and Gerd Wolfram
Market Trends
Understanding Retail Customers ........................................................ 159
Mark D. Uncles
Future Trends in Multi-channel Retailing ........................................... 175
Peter Sonneck and Cirk Sören Ott
Retail Competition................................................................................. 193
Edward J. Fox and Raj Sethuraman
PART III: TRENDS IN RETAIL MANAGEMENT
People
New Challenges in Retail Human Resource Management................ 211
Julia Merkel, Paul Jackson, and Doreén Pick
Product
Retail Assortment: More Better ........................................................ 225
Susan M. Broniarczyk and Wayne D. Hoyer
Out-of-Stock: Reactions, Antecedents, Management Solutions,
and a Future Perspective...................................................................... 239
Peter C. Verhoef and Laurens M. Sloot
Pricing
Recent Trends and Emerging Practices in Retailer Pricing ............. 255
Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
Retail Pricing – Higher Profits Through
Improved Pricing Processes ................................................................ 271
Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Table of Contents XI
Distribution (Place)
Current Status and Future Evolution of Retail Formats.................... 289
Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
Electronic Retailing............................................................................... 309
Barton A. Weitz
Operations, Promotion, and Marketing
Communications
Supply Chain Management in a Promotional Environment.............. 325
Arnd Huchzermeier and Ananth V. Iyer
Sales Promotion .................................................................................... 345
Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
Understanding Customer Loyalty Programs...................................... 361
Werner J. Reinartz
Integrated Marketing Communications in Retailing .......................... 381
Kalyan Raman and Prasad A. Naik
About the Editors .................................................................................. 397
About the Authors................................................................................. 399
Overview
Manfred Krafft1 and Murali K. Mantrala 2
1 University of Muenster, Germany
2 University of Missouri, Columbia, USA
Retailing in the new millennium stands as an exciting, complex and vital busi-
ness sector in most developed as well as emerging economies. The Foreword of
this book by Hans-Joachim Körber, CEO of METRO Group, highlights the rapid
changes taking place today in the world of retailing. Key trends and develop-
ments such as changing customer needs and increasing interest in the shopping
experience as much as products, retailer consolidation, emerging multi-channel
retailing strategies, changing nature of competition within and between retail-
ing formats, globalization and technological breakthroughs such as radio fre-
quency identification (RFID) and personal selling assistants (PSAs), are having
or will soon have a dramatic impact on the way large retailers do business in
this new century. Retailing in the 21st Century is intended to help business
leaders, analysts, policymakers, retailing executives, consultants and academics
better understand these trends in retailing and their current and potential im-
pacts, develop strategies and tactics for better performance, and identify issues
and questions for further research. With twenty-three crisp and insightful chap-
ters contributed by many of the world’s leading experts in various facets of
retailing, Retailing in the 21st Century offers in one book a compendium of
state-of-the-art, cutting-edge knowledge to understand and guide successful
retailing in the new millennium.
Additional information (e.g., a subject index and further references) are available
on the companion website of the book at www.springeronline.com/3-540-28399-4.
Overview of Chapters
The twenty-three chapters in the book are divided into three Parts: (I) Introduc-
tion; (II) Global, Environmental and Market Trends; (III) Trends in Retail Man-
agement. The chapters in Part I provide an overview of current trends in retailing
and key drivers of retail success in national and international markets. Part II con-
tains chapters that examine, in more depth, specific trends in different geographical
regions of the world, trends in retailing technology and data environments, and
2 Manfred Krafft and Murali K. Mantrala
market trends with respect to retail customers, channels and competitors. Part III
covers trends and evolving issues in the management of a retail firm’s human
resources, marketing mix, i.e., pricing, promotion and distribution, and supply
chains. All chapters review and provide insights into current trends as well as offer
predictions for the future. Below, we provide more details on the specific chapters
in each of these three Parts.
Introduction
The Introductory section consists of two chapters which focus on the factors driving
national and international success in retailing.
Retail Success and Key Drivers
This chapter, co-authored by Dhruv Grewal,R. Krishnan,Michael Levy, and
Jeanne Munger, describes broad changes currently occurring across the retail
landscape, e.g., retail consolidation, and challenges facing retailers such as intensi-
fying competitive pressures, overstoring, and savvier, value-seeking customers.
Observing that in spite of these obstacles many retailers continue to succeed, the
authors present a framework that identifies the key drivers of success in today’s
retailing environment. Specifically, they distinguish between four segments of
retailers: Innovative,Low-Price,Big Middle and In Trouble retailers. The authors
note that most successful retailers compete in the Big Middle which is where the
largest potential base of customers reside. Success drivers of Big Middle retailers
include store atmospherics, customer service, attractive merchandise selections at
value prices, efficient supply chain management, and advanced technology. Look-
ing ahead, the authors foresee further retail consolidation and success being en-
joyed by those retailers who continuously provide value, are innovative, and are
able to control their costs
Retailing in the Global World: Case Study of Metro
After four decades of being in the retailing business, METRO Group has
become the third-largest retailer in the world. Currently, about half of the
company’s revenue comes from outside Germany. The story of the growth and
transformation of Metro from its humble beginnings in the Ruhr valley of
Germany just 40 years ago to a global retailing giant is an interesting case
study that is described by Zygmunt Mierdorf,Murali K. Mantrala, and Manfred
Krafft. The authors review Metro’s history and strategies and draw lessons and
implications for retailers interested in international growth. In their case,
they focus on Metro Cash & Carry (C&C), the most successful of METRO
Group’s six major sales divisions. Metro C&C is a self-service wholesaling
concept that is also the most international unit, with more than 500 outlets in 28
countries.
Overview 3
Global, Environmental & Market Trends
Part II of this book consists of a total of nine chapters: three chapters on Global
Trends; three chapters on Environmental Trends; and three chapters on Market
Trends.
Global Trends
Trends in Europe
The rapid restructuring of European retailing is described in this chapter by John
Dawson. In this process, retailing is changing from a reactive to a proactive sector
in the European economy. The author considers four characteristics of this restruc-
turing: fast growth of large firms, a more strategic approach to managerial deci-
sion taking, more complex organisational structures, and more retailer co-
ordinated value chains. He examines why these changes are taking place and the
implications for retailers. Dawson identifies “experience innovation” playing a
central role in how European retailers are changing the sector. He foresees future
developments in European retailing being driven by continued innovation, greater
retail control of branding, development of the experience innovation and customer
experience management approach, and a steady exploitation of economies of scale
and scope. However, the big unknown factor is the role that government will play
in shaping and regulating retailing in Europe in the coming years.
Trends in U.S. Retailing
In this chapter, Barton A. Weitz and Mary Brett Whitfield, identify three important
consumer trends affecting retailers in the highly competitive U.S. retail industry:
(1) the size and importance of two age cohorts – baby boomers and generation Y;
(2) the growing ethnic diversity; and (3) the increasing sophistication of shoppers.
In response to these trends, retailers are using the classic competitive strategies of
low cost and differentiation. Retailers are either developing approaches for lower-
ing their costs (scale economies, supply chain management and technology) to
provide lower prices, or tailoring and personalizing their offer to better satisfy the
needs of specific market segments by providing unique merchandise and services.
Within this context, Weitz and Whitfield explore specific trends in the various
retail sectors: food, general merchandise, and non-store retailing. The chapter
concludes with a visionary look at how technology will be used to provide cus-
tomers a more intimate shopping experience in the future.
Trends in Retailing in East Asia
The author of this chapter, Roy Larke, describes the rapid development of retailing
in East Asia in recent years. Despite a wide diversity in cultures, languages, and
incomes, this region has become a magnet for international retailers due to a high
4 Manfred Krafft and Murali K. Mantrala
population base and relatively low levels of existing competition. Some markets,
notably Malaysia, Thailand, Singapore and Hong Kong, are already host to nu-
merous international retail firms, but the largest markets of China and Japan are
now just beginning to receive the attention of overseas retailers. Larke emphasizes
that it is not just Western firms with Western ideas who are spreading in East
Asian distribution.Japanese retailers are also highly active across the region and
represent the largest presence in terms of company numbers of any single national-
ity currently operating in China and other parts of East Asia. Together, Western and
Japanese retailers are playing a major role in changing and modernizing distribu-
tion structures and understanding their impact on local economies and consumer
cultures is an important issue for future research.
Environmental Trends
Future Store Technologies and Their Impact on Grocery Retailing
Co-authored by Kirthi Kalyanam,Rajiv Lal, and Gerd Wolfram, this chapter pro-
vides an overview of the innovative technologies deployed in Metro’s pilot “Fu-
ture Store” in Rheinberg, Germany including: personal selling assistants, digital
advertising displays, electronic price tags, and radio frequency identification
(RFID) technologies. The authors describe the insights gained from studies of the
consumer and retailer use case scenarios supported by these technologies. They
assess the deployment of these technologies and describe the rollout decisions
taken by Metro. The chapter closes with an assessment of the expected impact on
the future of grocery retailing. The authors predict that retailers who have the abil-
ity to integrate these technologies to launch new strategies that enhance the cus-
tomer experience will be the biggest beneficiaries.
The Third Wave of Marketing Intelligence
In this chapter, Raymond R. Burke identifies three waves of change that have
transformed marketing research in retail settings over the past 25 years. The first
wave that started at the beginning of the ‘80s was the wide diffusion of UPC bar-
code scanning. The second wave that began ten years later was customer relation-
ship management or CRM based on retailer introduction of customer loyalty
cards. This chapter focuses on the third wave of marketing intelligence, called
customer experience management, which is just getting underway. Recent innova-
tions in the real-time tracking of customer behavior in retail stores allow marketers
to measure consumer response to the in-store environment and manage the shop-
ping process. Burke reviews the genesis of customer experience management,
describes available tools for tracking shopper behavior and measuring store per-
formance, and discusses two case studies which illustrate the use of tracking re-
search in retail settings. The chapter concludes with a discussion of the challenges
in conducting computer-based observational research and future directions.
Overview 5
Applications of Intelligent Technologies in Retail Marketing
Most large retailers today have made efforts to create data warehouses that combine
the massive databases formed by barcode and/or RFID systems together with the
data coming from typically disparate on-line transaction processing (OLTP) systems
(e.g., finance, inventory, and sales) at a single location. Smart and powerful data
analyses technologies are now needed to extract knowledge from these data ware-
houses as well as support decision-making in today’s increasingly complex retailing
operations environments. Such data analyses tools are termed “intelligent” if they
are adaptive, i.e., react to and learn from changes in inputs from their environment.
This chapter by Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala describes
several intelligent technologies such as fuzzy logic systems,neural networks analy-
ses and soft computing, their advantages relative to traditional statistical methods,
and their recent and potential applications in retail marketing.
New Automated Checkout Systems
In this chapter, Thorsten Litfin and Gerd Wolfram describe new automated self
checkout systems that enable shoppers to scan, bag and pay for their purchases
with very little or no help from store personnel. Although this technology has
existed for more than a decade, it is still in the early stage of the diffusion proc-
ess. The authors discuss the potential benefits of automated self check out sys-
tems for retailers, e.g., lower costs and greater flexibility, as well as for custom-
ers such as shorter queues, a faster checkout process, more privacy and greater
control of their purchasing. However, customer’s acceptance of such systems is
crucial for their success. The authors describe primary research based on a con-
ceptual model of customer acceptance that was conducted at Metro’s Future
Store to learn more about the prospects for self checkout systems and differ-
ences between users and non-users of such systems. Based on the findings of
this study and other empirical research, the authors offer directions on how ven-
dors of these systems and retailers can encourage greater customer acceptance of
these systems in the future.
Market Trends
Understanding Retail Customers
Retail customer behavior is the focus of this chapter by Mark Uncles. The chapter
begins with a retrospective assessment of our understanding of retail customers,
paying particular attention to patterns of consumer choice. Based on this assess-
ment, the author concludes that considerable advances have been made in the
analysis and understanding of what customers buy, how much they buy, at what
price, and so forth. Nonetheless, there remain many unresolved issues and under-
standing these is becoming harder because the customer landscape is changing,
indeed a buyer-centric revolution is taking place in retailing, under the influence
6 Manfred Krafft and Murali K. Mantrala
of four forces of change: the rise of technologically-savvy customers, the spread-
ing fad and fashion-consciousness of retail customers, the growing importance of
experiential shopping, and increasing consumer assertiveness. Uncles discusses
how these forces of change are having an impact on consumer choices and pre-
senting new challenges for retail analysts.
Future Trends in Multi-channel Retailing
Retailers find themselves in an increasingly complex environment shaped by the
rise of new competing channels and store formats on the one hand, and, on the
other hand, consumers who demonstrate multi-channel shopping behavior and
needs structure. In this chapter, Peter Sonneck and Sören Ott describe these two
trends and the challenges they pose for individual retailers endeavouring to inter-
pret consumers’ multi-channel shopping process and satisfy their individual needs
and requirements. The authors propose a framework to perform such analyses and
offer guidelines for how retailers can react to multi-channel shopping behaviour
and develop their related strategies. The authors conclude that the future belongs
to multi-channel rather than single-channel retail organizations, particularly those
that offer a network of channels, rather than a “parallel configuration,” and store
formats that are transparent to consumers.
Retail Competition
This chapter by Edward J. Fox and Raj Sethuraman focuses on key trends and
evolving issues in the two types of prevailing competition – within- and between-
format – among packaged goods retailers, e.g., grocery stores and mass merchan-
disers. The authors organize their discussion around four key dimensions of retail
competition: price, variety, assortment, and store location. They note that there is
a trend of increasing between-format competition as all retailers extend their
product offerings to provide one-stop shopping convenience for their customers.
On the other hand, since consumers want more locational convenience with lim-
ited assortments, retailers respond with smaller store formats (e.g., dollar stores,
Wal-Mart Neighborhood Markets). International expansion, consolidation within
formats, and multi-channel retailing are discussed as the major within-format
competition trends. Finally, both between- and within-type competition are af-
fected by the trend of retailers moving off the mall to standalone or strip center
locations.
Trends in Retail Management
Part III of this book consists of a total of twelve chapters that cover People, Prod-
uct Assortments, Pricing, Distribution, Promotions, Marketing Communications,
and Supply Chain Management.
Overview 7
People
New Challenges in Retail Human Resource Management
This chapter, written by Julia Merkel, Paul Jackson and Doreén Pick, describes
the critical role of Human Resource Management (HRM) in the formulation and
execution of business strategies of international retailers. Rapid changes in retailing
business necessitate new concepts and solutions in HRM. The authors give an over-
view of these changes, which include both external developments, e.g., changes in
consumer behavior, selling formats and the competitive landscape, and internal
changes such as those related to corporate governance and information technologies,
and the new challenges they pose for HR managers of international retailers. The
authors emphasize that it is HR managers’ responsibility to ensure that the organiza-
tion’s business strategy adapts to cultural differences of diverse countries as well
prepare a diverse workforce for the future world of retailing business. The chapters
outline a series of steps to be taken by HRM of retailers to meet these goals.
Product
Retail Assortment: More
z
Better
Retailers have assumed that larger product assortments better meet consumer
needs. Thus, the number of products offered within retail categories has escalated
in recent years despite higher inventory costs and greater risk of out-of-stocks. In
this chapter, Susan Broniarczyk and Wayne D. Hoyer review recent research that
questions this conventional wisdom and show that more product assortment does
not necessarily lead to a better shopping experience for the consumer. The authors
focus on four questions: 1) How do consumers perceive assortment?; 2) How
should assortments be organized?; 3) How do marketing mix variables interact
with assortment?; and 4) How does assortment affect consumer choice? The au-
thors’ review of research indicates that through selective reduction and proper
organization, retailers can shrink the number of products offered without lowering
consumer perceptions of assortment. Moreover, shoppers seem more satisfied with
their shopping experience and more likely to make a purchase from smaller prod-
uct assortments. Thus, having an optimal rather than simply large assortment is
critical for retailers. New technology such as RFID tags is expected to facilitate
such assortment management
Out-of-Stock: Reactions, Antecedents, Management Solutions, and
a Future Perspective
Out-of-stocks (OOS) remain an issue of concern for many retailers as they can have
strong negative consequences for retailers, including lost sales opportunities and
consumer complaints. In this chapter, Peter C. Verhoef and Laurens M. Sloot review
findings from empirical studies of consumer reactions towards OOS situations, the
8 Manfred Krafft and Murali K. Mantrala
antecedents of these reactions and management solutions to reduce OOS. Surveys
indicate that the most prevalent consumer reactions to OOS are brand switching and
postponement of the purchase. Important antecedents of these reactions relate
mainly to the brand and the product, such as brand equity. The authors also discuss
new developments such as the adoption of RFID technology and automated store
ordering systems and their likely impact on OOS in the future. They predict that the
use of these new technologies will substantially reduce OOS in the coming years.
Pricing
Recent Trends and Emerging Practices in Retailer Pricing
Ruth N. Bolton,Venkatesh Shankar and Detra Y. Montoya identify and examine
the impact of four major retailing trends, namely, retail consolidation, changing
manufacturer practices, advances in technology, and the emergence of e-tailing,
on retailer pricing practices. In this new retailing environment, there is a renewed
emphasis on profitable pricing strategies. Specifically, the authors’ analysis of
successful pricing strategies suggests a movement toward customized pricing
which they examine in depth utilizing a six-step pricing architecture. The authors
anticipate that in the future, there will be movement away from heavy trade allow-
ances, increased customization to local conditions, greater pricing flexibility, and
more multi-channel consistency of retailer pricing.
Retail Pricing – Higher Profits Through Improved Pricing Processes
In this chapter, Hermann Simon,Andreas von der Gathen and Philip W. Daus
identify three major drivers of profit: price, volume and costs. Despite the enor-
mous impact of price on profits, and the huge potential for improvement in the
area of pricing, retailers have paid very little attention so far to the optimization of
pricing processes. Prices are still set on the basis of intuition and subjective judg-
ment rather than being developed in a systematic manner, leading to reduced mar-
gins and lower profitability. To tap new profit potential, retailers should establish
superior pricing processes. This article gives an overview of key elements of pric-
ing processes and develops a five-step scheme for implementing improved pricing
processes, beginning with the formulation of strategic guidelines and ending with
how to establish a control and monitoring system for pricing.
Distribution
Current Status and Future Evolution of New Retail Formats
In this chapter, Heiner Evanschitzky,Markus Blut and Dieter Ahlert survey the
current retail landscape of G8 countries. The authors observe that each national
economy has its own retail structure and there is variation in the development and
significance of retail formats across countries. Further, retailers who dominate
Overview 9
selected formats in their domestic market have been quite successful in transfer-
ring these same formats to other countries. The authors also note that there is po-
tential in specific underdeveloped retail markets for the introduction of particular
retail formats by national or international retailers. Thus, this comparative analysis
of the current status of the retail landscape in various G8 countries offers insights
into how retailing in these countries will evolve in the future.
Electronic Retailing
It has frequently been emphasized that there are several unique benefits and limi-
tations offered by an electronic channel as compared to store and catalog channels.
In his chapter on electronic retailing, Barton A. Weitz discusses the classes of mer-
chandise and services being sold through the electronic channel today and likely to
be sold in the future, the retailers who are best positioned to successfully sell mer-
chandise and services through an electronic channel, the growth of multi-channel
retailers and the issues they face, and specific opportunities and problems involved
in selling through an electronic channel, such as personalization, privacy, pricing,
and fulfillment. The chapter also offers some projections of the worldwide growth
of electronic retail sales in the future.
Operations, Promotion & Marketing Communications
Supply Chain Management in a Promotional Environment
Grocery retailer supply chains in Europe are characterized by high promotion
intensity. For example, promotions of selected items such as diapers from Procter
& Gamble are frequently used to drive store traffic to gain market share and visi-
bility. This chapter by Arnd Huchzermeier and Ananth V. Iyer focuses on supply
chain management issues associated with products frequently on promotion. The
authors emphasize the need for an accurate forecast of the demand impact of such
promotions and its role in affecting orders and inventories. Their approach ac-
counts for demand forecasting, coordination issues with suppliers and the man-
agement of logistics to the store. This problem is complicated by the consumer
choice of package size and purchase quantity in a competitive environment. The
chapter includes a state-of-the-art review of the relevant literature and a discussion
of current research insights on the benefit of manufacturer-retailer collaboration in
such an environment.
Sales Promotion
The chapter by Karen Gedenk,Scott A. Neslin and Kusum L. Ailawadi aims at two
objectives. First, the authors take a look at what is known about the effectiveness
of retailer promotions so far. Retailers have been using sales promotions like tem-
porary price reductions, coupons, displays, and feature advertising for a long time
and a lot of research has been done on their effects. Gedenk, Neslin and Ailawadi
10 Manfred Krafft and Murali K. Mantrala
review which promotion instruments retailers may use, which effects these promo-
tions may have on sales and profits, and what is known about the strength of these
effects. Second, the authors look at the opportunities for sales promotions that
arise from new technologies like loyalty cards, personal shopping assistants, elec-
tronic shelf labels, and electronic advertising displays. First, these technologies
allow retailers to give consumers more targeted information on promotions at the
point-of-purchase. For example, consumers may be alerted to a promotion for
detergent, when their shopping cart is close to the detergent aisle. Second, retailers
may use the technologies to target not information, but the promotion itself. For
example, loyalty card data can be used to target coupons at specific consumers.
Third, the new technologies may be used to enhance cross-selling. The authors
review the new technologies available, as well as the opportunities arising from
them for more effective retail promotions in the future.
Understanding Customer Loyalty Programs
Loyalty programs (LPs) have become an extremely prevalent marketing tool
across a large number of industries. In particular in retailing, LPs are in many
cases a critical part of the entire offering. Despite the prevalence of LPs, there are
still many open questions regarding their efficiency and effectiveness. Werner J.
Reinartz addresses this aspect in his chapter by generating structured insights
around the strategic management of LPs. First, his chapter gives a descriptive
overview with respect to the different types and design characteristics of LPs.
Following this overview, the chapter discusses the specific possible roles that LPs
play as a marketing instrument, that is, "What are the various managerial objec-
tives of introducing a LP?". Finally, the chapter summarizes the findings from
recent academic research around LPs, addressing the question of why different
LPs have been more or less successful in reaching their objective. The chapter
concludes with a summary and an outlook on future LP issues.
Integrated Marketing Communications in Retailing
The key challenge for retailers in the near future is to build strong brands by or-
chestrating new in-store technologies that facilitate real-time communication (e.g.,
RFID, wireless sensors, ubiquitous and mobile computing, personal shopping
assistant or “smart carts”) with the usual out-of-store branding communications to
customers (e.g., print advertisement). To accomplish this goal, retailers will find
the concept of Integrated Marketing Communications (IMC) relevant for design-
ing profitable marketing strategies. In this chapter Kalyan Raman and Prasad A.
Naik review the genesis and definition of IMC, present the standard multimedia
model of communications, and elucidate the emerging results from the IMC model
that reveal how retailers should act differently when determining the communica-
tions budget amount and its allocation in the presence of synergies. In addition,
the authors discuss the effects of uncertainty on the profitability of IMC programs.
Finally, the authors extend the IMC framework to futuristic retailing and identify
new research avenues.
PART I:
Introduction
Retail Success and Key Drivers
Dhruv Grewal1, Ram Krishnan2, Michael Levy3, and Jeanne Munger 4
1Babson College, Babson Park, USA
2University of Miami, Coral Gables, Florida, USA
3Babson College, Babson Park, USA
4University of Southern Maine, School of Business, Portland, USA
Retail Success and Key Drivers
The global retail landscape is changing in dramatic ways. Retail sales are currently
improving. The US retail industry posted a 7.6% increase in sales in 2004 (US
Department of Commerce News, 2004). The competitiveness of the marketplace,
however, is escalating. Whereas category killers were once the store of choice for
a variety of products, Wal-Mart has taken over as the world’s biggest seller of
toys, diamond jewelry, underwear, DVDs, and food. As the world’s leading re-
tailer, Wal-Mart has a formidable history of providing greater value to consumers
than its competitors, in part due to its innovative supply chain management.
French-based Carrefour, the world’s second largest retailer, operates six different
formats in 31 countries (but not in the United States.). Based in Germany, Metro is
ranked 4th in global sales after Wal-Mart, Carrefour, and Home-Depot, and it
operates six different types of retail formats in 28 countries.
Significant consolidation by big players such as the acquisition of Sears by K-
Mart, expansion of existing retailers into new geographic areas and into new
channels, forward integration by manufacturers, and dramatic improvements in
productivity are all shaping this increasingly competitive industry. This leads to
more overstoring – a disproportional increase in the number of retailers in relation
to the growth in the population – in more and more markets. In this environment,
customer retention is becoming difficult as shoppers become savvier and are will-
ing to shop at a wide variety of stores and across a broad range of retailing formats
(see, e.g., Weitz, Whitfield; Sonneck, Ott in this book). Indeed, a number of mar-
ket pressures are forcing retailers to consider how to provide customers with
greater perceived value than do their competitors.
The global business environment has not been kind to retailers since 9/11. The
confluence of a number of factors adds to their challenges: deflation, high un-
employment, lower consumer confidence, accounting irregularities, terrorism, the
14 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
war in Iraq, ethnic violence in many parts of the world, higher oil prices, and a drop
in tourism. Retailers are responding to these challenges in a variety of ways. Some
are rising to the challenges and entrepreneurially launching new formats, while oth-
ers are remaining competitive by driving down costs by using sophisticated commu-
nication and information systems to manage their businesses. For example, at the
8,200 Seven Eleven stores in Japan, each customer’s market basket is scanned.
These data are sent via satellite and the Internet to corporate headquarters. Head-
quarters then aggregates the data by region, product, and time, and makes that in-
formation available to all stores and suppliers by the following morning. Orders for
fast food and fresh food items are placed three times a day, orders for magazines
once a day, and orders for processed food items three times a week. Because of the
stores’ limited size, deliveries are made ten times a day (Hau L. Lee, Seungjin
Whang, 2001). Those retailers who do not respond quickly and in appropriate ways
find themselves floundering and being forced to take a deep hard look at their busi-
nesses, at times taking refuge behind bankruptcy protection.
Retailers facing these challenges must understand the key drivers of retail suc-
cess in order to remain viable. Building on our research and review of the various
characteristics of the retail industry, we present an overview of the retail landscape
framework and describe strategic levers that retailers must consider as they deliver
value to their customers.
Retailing is indeed a dynamic enterprise, and we propose a model to describe
some of the more successful retail strategies that have emerged in the last few
decades (See Figure 1). This model describes the evolution of retail strategy based
on two dimensions: relative price, which is depicted on the horizontal axis, and
relative offerings, depicted on the vertical axis. Retailers typically fall into one of
four segments: Innovative, Big Middle, Low Price and In Trouble. Retailers occu-
pying the Innovative segment direct their strategies toward quality-conscious mar-
kets seeking premium offerings; Low Price retailers appeal to price-conscious
segments; the Big Middle retailers thrive because of their value offerings, and the
In Trouble retailers are those who are unable to deliver high levels of value rela-
tive to their competitors. We will now briefly examine each of these.
Innovative Segment
Driven by intense competition and choosy consumers, such retailers as Urban
Outfitters, Trader Joe’s, Abercrombie and Fitch, Crate and Barrel, Starbucks, and
Japan’s Jomo gas stations have adopted innovative retail formats to increase the
value of the shopping experience.
Recognized for its strong brand image, Urban Outfitters is known as the place
for hip young adults to get more for their money. And since its target market ab-
hors the notion of a Wall Street corporate image, the stores operate without a cor-
porate logo. Contrary to conventional thinking, this uniqueness actually enhances
the brand image, with each store individually designed and no two stores looking
alike. Each store offers an eclectic selection of hip clothing and home items,
Retail Success and Key Drivers 15
Relative Price
Relative Offerings
Low Price
Innovative
Value
Big Middle Segment
In Tr ouble
Low High
Low
High
Exit
Retailing
Fig. 1. Retail Landscape
(Source: Levy, Grewal, Peterson and Connolly (2005))
merchandised in stores made to look like “your first apartment.” In-store mer-
chandising is spotlighted using hand-made signs in an environment with salvaged
and refurbished furniture, thus supporting the image in a way that resonates with
its target market of consumers seeking to find personal items that are different
from what is offered by its cookie-cutter competitors.
Jomo, Japan’s sixth-largest gas station chain, remodeled its gas stations so that
consumers would enjoy waiting for services. It introduced spiffier pumps, com-
fortable cafes, kiddy areas, and massage chairs. The employees perform a choreo-
graphed carwash dance, which is greatly appreciated by the waiting public. The
company has made “hanging around” more fun, and these innovative changes
resulted in an 82% increase in operating profits. Stores such as these are abundant.
Other innovative retailers have strategically expanded the notion of retailing.
Venturing beyond just being a place to buy merchandise, they provide an enter-
taining and educational experience for consumers. Bass Pro Shops Outdoor World
in Lawrenceville, Georgia offers a 30,000-gallon aquarium stocked with fish for
casting demonstrations, along with an indoor archery range and a 43-foot-high
climbing wall. Chicago-based American Girl provides a memorable experience by
welcoming parents and their daughters to share lunch with their new friends –
their newly purchased American Girl dolls. Build-A-Bear Workshops offers
young consumers the opportunity to create their own furry friend, starting with
choosing the type – kitty, bear, bunny, chick, or puppy, choosing or recording their
16 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
own personal message, choosing the stuffing, naming the animal, and finally
dressing their new creation. The experience, however, is more than just making a
stuffed animal. One very magical moment comes when the child picks a bright red
heart, warms it in his/her hands, and makes a wish before putting it inside the
furry friend to be stitched in for evermore.
Even grocery retailers are beginning to focus on the overall customer experi-
ence. Trader Joe’s, the specialty grocery chain, goes beyond offering quality and
variety. It carefully manages the customer experience so that customers have fun –
with a friendly and helpful staff, unique product selection, a sense of discovery
from finding something new on the shelf, and tasty samples. Customers who enjoy
the experience will inevitably buy something they had not originally intended to.
The intent is to design a unique shopping experience that integrates the consumer
into the process to create a lasting, pleasant memory, and ultimately a loyal cus-
tomer. Providing consumers with a stimulating experience and a sense of trial
before the purchase, and leaving a strong positive impression are the primary
goals of these retailers. These retailers, like Neiman Marcus, Nordstrom, Saks
Fifth Avenue, and many small designer boutiques, are enjoying robust sales. They
have a loyal following of customers who enjoy the experience of shopping. This
also appeals to foreign tourists taking advantage of the weak US dollar. High-end
stores in particular are benefiting directly from this trend.
Low Price Segment
So-called extreme value retailers such as Dollar General, Family Dollar, and 99
Cents Only Stores are typical examples of retailers in this segment. Extreme
value retailers are general merchandise discount stores that are found in lower-
income areas, either urban or rural, and are much smaller than traditional dis-
count stores. They compete by offering good value primarily through their low
prices. While the dollar stores are adding stylish private-brand collections and
some luxury goods, e.g., frozen shrimp, to their assortments, low prices remain
the centerpiece of their strategy. Double-digit growth of dollar store-type opera-
tions shows that stocking fast-turnaround items in 8,000- to 10,000-square foot
stores is a good business model. Moreover, they appeal to today’s time-starved
consumers because they are easy to shop in, being small and primarily located in
easy-access strip shopping centers. Even though the average dollar store transac-
tion is only $9, the average margin of 32% outpaces those of convenience stores
(29%), drug stores (27%), supermarkets (31%), discounters (24%), and ware-
house clubs (11%) by keeping prices in check and offering brand and product
mixes known to be valued by customers (MMR Annual Report, 2004). Lower
operating costs contribute to higher dollar store profitability. The double-digit
growth of dollar store-type operations has certainly been an eye opener to such
major players as Target, Albertsons, and Kroger, who are opening dollar aisles
in their stores to compete with dollar stores.
Retail Success and Key Drivers 17
The Big Middle Segment
Wal-Mart, Kohl’s, Lowe’s, and Best Buy are typical examples of retailers in the
Big Middle segment. The source of the largest potential base of customers, the Big
Middle is where most successful retailers compete in the long term, although it is
possible to be successful in the short term with a different approach. In fact, many
of the retailers now in the Big Middle have gotten there by way of initially provid-
ing either an innovative offering or low price or both, thus providing superior
value to customers. For example, Ann Taylor began by offering innovative prod-
ucts that provided customers with high levels of value through superior benefits,
whereas Target got its start by providing customers with high levels of value
through low prices for good-quality goods by means of its operational excellence.
Others, like Home Depot, were innovative in terms of their assortment and category
specialist format, while also offering value through their ability to build partner-
ships with suppliers.
Big Middle retailers have succeeded in leveraging their innovative or low-price
position to transform their niche appeal to the mass market. They occupy an en-
tirely different position in the marketplace, achieved by offering innovative mer-
chandise (variety and breadth of SKUs) at reasonable prices. Clearly, they have
successfully transformed themselves from being perceived as the innovative lead-
ers or the low-price leaders into a hybrid of the two that appeals to a much larger
customer base. They have repositioned themselves by transforming their image as
simply offering either innovative merchandise or low prices to an image as retail-
ers that provide great value over a broader array of merchandise.
Once retailers move into the Big Middle segment, they cannot expect to rest on
their laurels as any who do will get “In Trouble” and potentially be forced to exit
retailing altogether. The Big Middle is a very competitive and profitable space.
Other retailers are constantly vying for consumers’ attention and a place in the Big
Middle. Simply being in the Big Middle is not a sufficient condition for long-term
viability. A case in point is that of conventional department stores. Once the dar-
lings of Wall Street, they are now considered as some of the dinosaurs of retailing,
because they have not been able to sustain superior value through innovative
offerings and high levels of service for the mass market.
Strategic Levers for Retail Success Through Value
Retailers who successfully compete in the Big Middle provide a compelling value
proposition to the customer and are able to respond quickly to market changes. The
successful ones maintain a nimble and flexible mindset and constantly monitor
changes in the marketing environment. They realize that being flexible and being
able to adapt quickly to changes in the marketplace are key to their survival. Exam-
ples of companies that position themselves in such a way as to capitalize on market
trends abound. Executives at Radio Shack recognized the growing sophistication of
18 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
children and successfully entered the toy market by launching a micro radio-
controlled car called ZipZap. T.G.I. Friday’s conducts formal interviews with par-
ents and children and asks servers to observe what customers like and want. As a
result, T.G.I. Friday’s managers have observed that a lot of guests ask servers to
hold the fries or to replace mashed potatoes with salads and vegetables. This has
been verified through the point-of-sale system and confirmed as a significant trend
in an A.C. Nielsen’s report. Carlson Restaurants, the parent company of T.G.I. Fri-
day’s, joined with Atkins Nutritionals, the company founded by the late Dr. Robert
Atkins, to develop Atkins branded low-carbohydrate lunches and dinners to respond
to these emerging needs in the marketplace (Levinson, 2004).
Astute retailers can reap the benefits of responding to market trends. Demo-
graphic changes, emerging lifestyles centered on the home, and lower interest
rates have buoyed the sales of home furnishings companies such as Ikea, Pier One
Imports, Linens and Things, Home Goods, and Williams Sonoma. Retailers that
traditionally did not sell furniture, e.g., Costco, Sam’s Club, Wal-Mart, Target,
and J.C. Penney, have recently expanded their furniture offerings in response to
these trends. Others have been adept at pursuing underdeveloped market opportu-
nities, such as sales to particular demographic groups. Designed to appeal to
women, Lowe’s has enjoyed a handsome payoff and a strong competitive position
against such well-entrenched retailers as Sears and Home Depot. Lazy-Boy Re-
cliner stores have expanded their offerings of recliners to both women and men.
They offer a more traditional model for men who are sports enthusiasts, with over-
sized seating, an attached cooler, and a massager, but have recently begun to mar-
ket a more fashionable line for women who want to lounge in a recliner designed
with them in mind when they watch sports. The fundamental key to success lies in
retailers’ abilities to be nimble or flexible in organizing their offerings in response
to new opportunities in the market.
Central to the ability to capitalize on new opportunities is recognition of the
importance of managing elements of the offering that influence consumers’ per-
ceptions of value. Although there are many factors that affect customers’ value
perception, six major levers of retail success: store factors, service factors, mer-
chandise, price, supply chain, and technology (See Figure 2), will be discussed.
(Other potential strategic levers, such as the role of store promotions and customer
loyalty management, are discussed in other chapters by Gedenk, Neslin, Ailawadi,
and Reinartz in this book.)
Store Factors
A key strategic value driver at the store level is developing the right combination of
format and retail environmental factors. Customers often look beyond the functional
benefits of a physical store to the overall experience it offers. Since much of the
shopping experience is rather mundane, those retailers who can distinguish them-
selves with unusual and exciting store atmospherics add value to the shopping ex-
perience. Some examples of innovative retailers that are migrating to or are already
Retail Success and Key Drivers 19
Store
Factors
Service
Factors
Price
Merchandise
Value
Value
Supply Chain
Technology
Fig. 2. Strategic Levers Impacting on Retailing Success Through Value
in the Big Middle because they excel at store factors are Crate and Barrel, Starbucks,
Japan’s Jomo gas stations, Bass Pro Shops Outdoor World, and American Girl.
A variety of factors influence customers’ store patronage intentions, some of
which are quite subtle. Environmental cues, such as design and ambience, can
have a noticeable effect. Consumers’ perceptions of value and their subsequent
patronage are heavily influenced by their perceptions of the store’s “look and
feel.” Music, color, scent, and crowding can also significantly impact the overall
shopping experience (Baker, Julie, A. Parasuraman, Dhruv Grewal, Glenn Voss,
2002, Spangenberg, Eric R., Ayn E. Crowley, Pamela W. Henderson, 1996, Hui,
Michael K., John E.G. Bateson, 1991). The emotional responses that are induced
by the store experience can have a pronounced impact on the amount of time and
money spent in the store. Therefore, when a store offers a more pleasant shopping
experience, this fosters a good mood, resulting in greater spending. Store atmos-
pherics, as they impact on perceptions of shopping as a fun and enjoyable experi-
ence, are an important strategic tool in proper management for competitive advan-
tage (see chapters by Uncles, Burke, in this book).
Service Factors
Given the time and effort that is invested by retailers in attempts to attract custom-
ers into their stores, it is amazing that so many retailers pay little attention to cus-
tomer service. It is common to visit a retail store and see half-filled shopping carts
abandoned by shoppers who have got tired of waiting for their turn at the check-
out, or to see shoppers looking for a particular item they wanted to purchase but
20 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
have not, because they could not find a service provider to assist them in locating
the item or provide the information they needed to ensure it was the right item.
However, those retailers who do provide great customer service distinguish them-
selves from their competitors, thereby adding significant value to their offering.
Innovative retailers that are migrating to or are in the Big Middle because they
excel at service factors are American Girl, Build-A-Bear, Trader Joe’s, Best Buy,
Container Store, and Lowe’s.
One of the main drivers of good customer service is the level of convenience
that a particular store provides. Retailers need to ensure that their store service
personnel are well trained to provide five sources of convenience: decision con-
venience, being able to provide customers with appropriate information so they
can make informed buying decisions; access convenience, making sure they know
where merchandise is and will assist customers in finding it; transaction conven-
ience, involving training to facilitate transactions such as checkout and returns;
benefits convenience, helping customers to understand the benefits of the products
and services that will result in a more enjoyable experience; and finally post-
benefit convenience, providing the training and empowerment to rectify post-
purchase problems. Retailers that attend to aspects of customer service can con-
tribute to customer perceptions of value, resulting in a strong competitive position.
Merchandise
Most retailers devote a tremendous amount of time and effort to merchandise
management. Retailers who excel in merchandise management do so in one of two
ways. First, they can concentrate on finding unique merchandise that appeals to
their target customers (for more discussion of consumers’ perceptions of retailers’
merchandise assortments see chapter by Broniarczyk and Hoyer in this book).
Second, they can be certain that enough merchandise is where the customer wants
it, when s/he wants it. Those who can do both, like Spain’s Zara or Sweden’s
H&M, are even more likely to provide superior value for their customers. Innova-
tive retailers that are migrating to or are already in the Big Middle because they
excel at merchandise management are Wal-Mart, Carrefour, Metro, Urban Outfit-
ters, Trader Joe’s, Crate and Barrel, Starbucks, American Girl, Build-A-Bear,
Target, Dollar General, and other extreme value retailers.
Generally speaking, greater product variety leads to higher sales levels; how-
ever, retailers do not have the luxury of simply adding more inventory in an era
where productivity in merchandise management is essential to long-term viability.
Innovative merchandise management can be both a challenge and an opportunity,
especially for multi-channel retailers. Some retailers, such as Staples, have taken
slower moving SKUs out of their physical stores, but made them available either
through in-store computer kiosks or over the Internet. Such a system brings value
to both retailer and customers. Customers benefit because they can acquire items
that might be unavailable otherwise. Retailers benefit by making the best use of
their inventory investment.
Retail Success and Key Drivers 21
Price
Price is a critical factor that consumers consider in ascertaining the overall value
of an offering, i.e., whether or not the benefits of the exchange outweigh the sacri-
fices. Understanding what the customer is being asked to give up in exchange for
what they get is therefore key to the ability of the retailer to deliver superior value.
Marketers should carefully determine the price of a good based on the value of
what is being offered in the mind of the potential buyer (see chapter by Simon,
Gathen, Daus in this book for more insights into effective pricing processes). Re-
tailers that are migrating to or are in the Big Middle because they excel at the pric-
ing factor are Wal-Mart, Target, Carrefour, Metro, Trader Joe’s, Zara, H&M,
Kohl’s, Lowe’s, Dollar General, and other extreme value retailers.
Until recently, retailers typically based their initial pricing and subsequent
markdown decisions on arbitrary rules that they believed had worked well in the
past. Fortunately, a few specialized firms have recently developed software pack-
ages to assist retailers in making these important pricing decisions. Some of the
largest retailers in the country (e.g., Home Depot, J.C. Penney) have invested mil-
lions of dollars in sophisticated pricing optimization software. The Canadian ap-
parel retailer Northern Group Retail Ltd. started using ProfitLogic Price Optimiza-
tion (Cambridge, Mass.) software and, in a test, was able to generate $60,000 of
additional gross margin dollars on one stockkeeping unit (SKU) by holding its
outerwear at full price, though prior experience indicated that it should have re-
duced the cost by 30%. Similarly, price and promotion optimization software de-
veloped by KhiMetrics’ (Scottsdale, Ariz.) has been implemented successfully by
top retailers in the grocery, drug, electronics, specialty, and mass merchandising
fields. Results from controlled field experiments demonstrated that gross margin
increased by 5 to 15%, depending on the retailer’s margins, and the results were
consistent across retail industries.
The monetary price of an offering is the only strategic lever of retail success that
generates revenue. It is also one of the most conspicuous sacrifices that consumers
make in the value exchange, although the real retail price should be thought of in
terms of the monetary cost as well as the time and energy it takes to acquire a prod-
uct. Retailers can lower the total cost of acquiring a product by either setting a low
monetary price or by reducing the time and effort expended by customers.
Supply Chain
In times of slow or no sales growth, rising expenses, and increased difficulty of
finding great locations, managerial acumen in supply chain management can gen-
erate significant profits straight to the bottom line. This involves efficient and
effective integration of suppliers, manufacturers, warehouses, stores, and transpor-
tation intermediaries into a seamless value chain so that merchandise is produced
and distributed in the right quantities, to the right locations, and at the right time,
in order to minimize system-wide costs while satisfying the service levels required
22 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
by its customers Retailers that are migrating to or are in the Big Middle because
they excel at supply chain management are Wal-Mart, Metro, Seven-Eleven Stores
in Japan, H&M, and Zara.
To illustrate the power of supply chain management in providing customer
value, consider Spain’s Zara, which runs about 700 fashionable clothing stores in
48 countries (including 9 in the United States). The chain has annual sales of over
$3 billion, an impressive number for a chain founded just under 30 years ago. Zara
produces the majority of its own clothes and makes over 40% of its own fabrics.
Zara also operates its own worldwide distribution network. Controlling the
supply chain gives Zara the flexibility that its competitors can only dream about. It
allows Zara to operate with virtually no inventory build ups, because its stores get
deliveries twice a week and newly supplied items rarely remain on the retail
shelves for more than a week. In fact, Zara has mastered the art of quick-response
(QR) inventory system with a vengeance. Zara takes only 4–5 weeks to design a
new collection and then about a week to manufacture it. Its competitors, by com-
parison, need an average of 6 months to design a new collection, and another 3
weeks to manufacture it.
The company accomplishes this by adding value through an astute use of in-
formation and technology. All of its stores are electronically linked to the com-
pany’s headquarters in Spain. Store managers, together with a fleet of sharp-eyed,
design-savvy, trend spotters who are on Zara’s staff, routinely prowl fashion hot-
spots such as university campuses and “in” night clubs. Their job is to function as
the company’s eyes and ears and to spot the next wave. Using wireless, handheld
devices, they send images back to corporate headquarters so that designers can
produce blueprints for close-at-hand manufacturers to get stitching and produce
garments that will be hanging in Zara stores within weeks.
In effect, Zara’s designers have real-time information when deciding in col-
laboration with the commercial team on the fabric, cut, and price points of a new
line of garments. This combination of real-time information sharing and internal-
ized production means that Zara can work with almost no stock and still have new
designs in the store twice a week. Customers love the results of this high-velocity
quick-response operation – they queue up in long lines at Zara’s stores on desig-
nated delivery days, a phenomenon dubbed “Zaramania” by the press.
Technology
The use of technology goes hand-in-hand with superior supply chain management.
It is not surprising therefore, that the retailers who we believe are migrating to or
are in the Big Middle because they excel at supply chain management are also the
ones who utilize superior technology.
These successful retailers use technology throughout their supply chain. Most
retailers collect sales data at the point of sale. It is what is done with the data after
it is collected that separates superior retailers from the rest. As we noted in the
Retail Success and Key Drivers 23
Zara example, retailers can use sales data to work closely with their suppliers to
plan production and inventory replenishment. Advanced systems like CPFR (col-
laboration, planning, forecasting, and replenishment) use the data to construct a
replenishment forecast that is shared by the retailer and vendor before it is exe-
cuted (see e.g., chapter by Huchzermeier, Iyer in this book).
Some retailers, notably Wal-Mart and Metro, are experimenting with radiofre-
quency identification (RFID) technology. Wal-Mart has mandated that by 2006 all
shipments to their distribution centers must have their cases and pallets fitted with
RFID tags – tiny computer chips that can automatically transmit to a special scan-
ner all the information about a container’s contents or about individual products.
The prospect of affordable tags is exciting the supply chain. If every item in a
store were tagged, RFID technology could be used to locate mislaid products, to
deter theft, and even to offer customers personalized sales pitches through displays
mounted in dressing rooms. Ultimately, tags and readers could replace bar codes
and checkout labor altogether.
A retailer or consumer goods maker using RFID could cut total warehouse la-
bor costs by nearly 3%, chiefly through more efficient receiving, shipping, and
exception handling. More promising still are the potential effects of RFID on ven-
dor-managed inventory systems. By exchanging the information gleaned from
RFID readers over the Internet, a consumer goods maker could manage its own
stock replenishment for key customers more efficiently, saving both parties 20–
40% or more in inventory and out-of-stock costs.
Purchase data is also the basis for advanced CRM (customer relationship man-
agement) programs. CRM is a business philosophy and set of strategies, programs,
and systems that focuses on identifying and building loyalty with a retailer’s most
valued customers. Loyal customers are the backbone of any successful retail en-
terprise, because they are the most profitable. CRM programs, or loyalty programs
as they are commonly called, can take forms as simple as the use of a punchcard at
a sandwich shop but can range up to very complex programs used by airlines and
high-end specialty shops and department stores such as Neiman Marcus and Har-
rods (see chapter by Reinartz in this book).
Retailers are experimenting also with physical technologies. Some stores, e.g.,
Staples, are utilizing in-store kiosks to help customers and store employees learn
about merchandise and order items that the stores to not stock. Metro’s Store of
the Future initiative includes self-scanning devices and innovative checkout sys-
tems enabling the customer to pay without a cashier and resulting in shorter wait-
ing periods at the check-out (described in chapter by Kalyanam, Lal, Wolfram in
this book). Customers will also carry small computers that will help them find
products and receive important information.
Retailing Challenges and Trends for the Future
A number of enormous challenges face retailers in the 21st century.
24 Dhruv Grewal, Ram Krishnan, Michael Levy, and Jeanne Munger
Trend 1: Consolidation in the Retailing Industry
Numerous retailers are facing imminent problems, since they are unable to deliver
high levels of value relative to their more astute competitors. As a consequence,
significant consolidation by large retailers is likely to take place, as seen in the
acquisition of Sears by Kmart and the merger of May Department Stores with
Federated Stores, Inc.
Trend 2: Value Is Key
Successful retailers are developing strategies that offer customers greater value
over competitors and are sustaining them over time. To do so, they are focusing
their energies on creating centers of excellence, such as connecting with their
customers, being a leader in terms of the merchandise and assortment that they
provide, and having excellent operations in place. Although retailers that provide
value do not always provide it at a low price, such extreme value retailers as Dol-
lar General are expected to continue to take share of wallet from the retailers that
have traditionally appealed to lower income, treasure hunting, and otherwise
value-conscious consumers.
Trend 3: Being Innovative
Retailers are experimenting with their store formats more and more. In addition,
they are effectively designing and managing the various strategic levels to en-
hance the overall customer shopping experience (see, e.g., chapter by Burke in this
book). The problem with being known as an innovative retailer is that it can only
remain innovative as long as its customers see the innovations as fresh and excit-
ing. Bear in mind that department stores were once thought of as an innovative
retail format. Thus, innovative retailers must continuously implement new ideas or
their customers will begin to view them as “old hat.”
Trend 4: Cost Controls
Successful retailers, particularly those competing in the low-price segment and
many in the Big Middle, are efficient and effective in integrating their suppliers,
manufacturers, warehouses, stores, and transportation intermediaries into a seam-
less value chain, in order to minimize system-wide costs while satisfying the ser-
vice levels required by its customers. They are seeking out and using innovative
technology throughout their supply chains, so as to reduce costs and provide value
for their customers.
In the last few years, some of the largest retailers in the US have invested in so-
phisticated merchandise optimization techniques that help them make decisions
Retail Success and Key Drivers 25
about planning assortments, initial pricing, buying, allocation of merchandise to
stores, promotion, planning replenishment (rebuys), space management
(planograms), and markdown pricing. These techniques enable retailers to do bet-
ter in controlling costs, buying, allocating, and promoting the right merchandise,
and pricing and marking down merchandise. By utilizing these techniques, they
ensure that customers get what they want, which translates into loyal customers
and, in many cases, a competitive advantage.
Conclusion
It is important to understand that we are not proposing value-cost tradeoff. On the
contrary, retailers who pursue cost control and value differentiation simultane-
ously are the ones who will be successful in the coming decade. Established retailers
must create diversified and innovative retail formats that retailers have never
offered. Profitability will come from their ability to deliver these innovative formats
efficiently from both the cost and the operational perspectives.
References
Baker, Julie, A. Parasuraman, Dhruv Grewal and Glenn Voss (2002): The Influence of
Multiple Store Environment Cues on Perceived Merchandise Value and Patronage In-
tentions, Journal of Marketing, 66 (April), 120-141.
Hau L. Lee and Seungjin Whang, Demand Chain Excellence: A Tale of Two Retailers,
Supply Chain Management Review, March 1, 2001, p. 40.
Hui, Michael K. and John E.G. Bateson (1991): Perceived Control and the Effects of
Crowding and Consumer Choice on the Service Experience, Journal of Consumer Re-
search, 18 (September), 174-184.
Levy, Michael, Dhruv Grewal, Robert A. Peterson and Bob Connolly (2005): The Concept
of the “Big Middle”, Journal of Retailing, 81 (2), 83-88.
A Concept that Makes Sense, MMR Annual Report, MMR, Vol. 21, No. 8, Business and
Industry, Gale Group, Inc., May 3, 2004, p. 125.
Meridith Levinson, Data Mining for Carbs, CIO Magazine, April 15, 2004; also see
www.tgifridays.com and www.cxo.com.
Spangenberg, Eric R., Ayn E. Crowley, and Pamela W. Henderson (1996): Improving the
Store Environment: Do Olfactory Cues Affect Evaluations and Behaviors? Journal of
Marketing, 60 (April), 67-80.
U.S. Department of Commerce News, Advance Monthly Sales for Retail Trade and Food
Services, issued November 12, 2004, http://www.census.gov/svsd/www/fullpub.html,
accessed December 12, 2004.
Retailing in the Global World:
Case Study of Metro
Zygmunt Mierdorf 1, Murali K. Mantrala 2, and Manfred Krafft3
1 CIO, METRO AG, Duesseldorf, Germany
2 University of Missouri, Columbia, USA
3 University of Muenster, Germany
At the end of 2004, Germany’s METRO Group had over 250,000 employees and
an annual turnover of over 56 billion Euro making it the third largest retailer in the
world behind Wal-Mart (a turnover of 213 billion Euro) and Carrefour (73 billion
Euro). Further, nearly half of Metro’s revenues came from outside Germany. The
story of the growth and transformation of Metro from its humble beginnings in the
Ruhr valley of Germany just 40 years ago to its present size and scope as a global
retailing group is an interesting and important case study, particularly from the
viewpoint of providing insights into successful international retailing and global
expansion. In this chapter, we describe and review Metro’s history and strategies
within and outside of Germany, drawing lessons and implications for retailers
interested in international growth.
The METRO Group today, whose management holding group is METRO AG
in Germany, is comprised of six major sales divisions: The “Cash & Carry”
(C&C) stores of the affiliated Metro and Makro companies which make this
Group the worldwide leader in self-service wholesaling, the Real chain of food
hypermarkets, the Extra supermarket chain, the nonfood specialty stores chains
Media Markt and Saturn which are the leading consumer electronics stores in
Europe, the Praktiker store chain which sells home improvement and DIY prod-
ucts, and the Galeria Kaufhof department store chain. Altogether, METRO Group
now has a presence in 30 countries and its six sales divisions together have over
2400 locations distributed as follows: 507 Metro and Makro Cash & Carry outlets
in 28 countries; 314 Real outlets in 3 countries; 436 Extra outlets in Germany; 503
Media Markt/Saturn outlets in 11 countries; 339 Praktiker outlets in 9 countries
and 147 Kaufhof outlets in 2 countries.
28 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
Metro History and Evolution
The Introduction of Cash & Carry Format
The history of the METRO Group began with the introduction of the fundamen-
tally new distribution concept of self-service wholesale, or more simply the
“Cash & Carry” concept, into Germany by Prof. Dr. Otto Beisheim. The first
Metro self-service wholesale store opened its doors in 1964 in Mülheim/Ruhr,
followed shortly by a second in Essen the same year. The “Cash & Carry” prin-
ciple means that the customers select their merchandize at the store, pay in cash
and transport it all by themselves. Further, the Cash & Carry concept is essen-
tially a B2B (business-to-business) wholesale format, aimed at supplying the
needs of “professional customers”, i.e., buyers of other organizations and insti-
tutional customers such as retailers, restaurant owners, service companies, canteens,
cafeterias or hotels. The aim was to sell products of any type required by pro-
fessional customers, on a permanent basis and in large quantities and formats,
all at a favorable wholesale price and of a high quality. The concept required
professional customers to become members before they could shop at Metro
Cash & Carry stores. Membership cards were issued to customers only after
they were authenticated as institutional buyers. “From professionals for profes-
sionals” was the company’s motto.
Prof. Beisheim’s idea and concept was distinctive, timely and appealing to in-
stitutional customers as traditional home delivery wholesale at the time was un-
able to meet the demands of the continuously growing medium-sized businesses
during this period of the post-World War II German “economic miracle”. Metro’s
first store in Mülheim had a much larger selling space (14000 sqm) than the tradi-
tional wholesale store at that time, enabling it to offer a distinctly more compre-
hensive and diverse assortment, over 20,000 food items and 30,000 non-food
products, under one roof. In particular, restaurant owners and food retailers among
its customers benefited greatly from the large assortment of fresh food products.
Also, being a “wholesaler” rather than traditional retailer, German regulations
allowed Metro stores to be kept open for longer hours (until 10 PM on weekdays)
than traditional retailers and grocers who had to close by 6:30 PM. The longer
hours were convenient for professional buyers who had more time to shop for
supplies after their own business day hours were over.
Metro Cash & Carry Expansion in Germany
Metro Cash & Carry opened another three stores in Germany in 1967 and con-
tinuously extended the network in the following years. Today, at least one whole-
sale store can be found in every major German city. Metro also does not face any
major competitors in the Cash & Carry trade segment. The only other significant
player in this domain is Fegro/ Selgros which is still a relatively small player (but
nonetheless taken very seriously by the METRO Group).
Retailing in the Global World: Case Study of Metro 29
Entering New Businesses in Germany
In the mid-1980s, motivated by the goals of growth, expansion and building big-
ger and better stores with more personalized service in other retailing sectors,
Metro management acquired two big retail companies in the food sector (Massa,
Meister) and a share in the Kaufhof department store chain. The latter acquisition
faced resistance from anti-trust authorities in Germany until the early 1990s when
consolidations in the retail industry became a trend. Subsequently, the anti-trust
opposition diminished and METRO AG finally acquired Kaufhof and integrated it
into their expansion effort.
In the remaining sections of this chapter, we focus on the international growth
history and strategy of Metro Cash & Carry’s operations.
International Expansion of Metro’s Cash & Carry Business
The overall success of the Metro Cash & Carry concept is not only demonstrated
by millions of satisfied customers but also by the business figures: At annual sales
of over Euro 26 billion in fiscal 2004 and a net operating profit (EBIT) of over
Euro 960 million, this is the largest sales division of METRO Group. Interest-
ingly, 78% of Metro Cash & Carry’s growing revenues now come from outside
Germany. Worldwide, in 2004, this sales division of Metro employed more than
83,400 people at 504 locations (a combined total selling space of 4.0 million
square meters) in 27 countries. Metro Cash & Carry operates in these different
countries with three store formats: Classic, Junior and Eco. With a selling space of
10,000 to 16,000 square meters, Classic is the predominant store format in Ger-
many while the smaller formats Junior and Eco are mainly found abroad.
Strategic Objectives of Metro Cash & Carry Internationalization
A primary goal of Metro’s internationalization effort is to attain and maintain a
leadership position in both the Western and Eastern European markets. Expansion
to the US is not on the cards yet as Metro sees the US market as intensely com-
petitive with some of the world’s oldest, biggest and strongest retailers operating
there. Further, compared to the US, Metro feels there is much greater untapped
potential left in Eastern Europe and in Asia. Next, Metro’s international expansion
strategy is to grow organically rather than via acquisitions of new retailing busi-
nesses as it earlier did in Germany. The company’s experience with those previous
ventures taught it that organic growth, i.e., growing from within, rather than new
company acquisitions is the way to go, because organic growth allows them to
keep their culture and closely adhere to their basic business concept, making it
easier for employees to understand and execute the growth strategy. In particular,
Metro has found it is much easier to replicate its Cash & Carry concept in other
30 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
countries than buy a new company, transfer knowledge, and manage a typically
painful process of change to Metro’s way of doing business. The latter usually
entails significant losses of people and time. In contrast, with the right people and
resources in place, Metro has found organic expansion of its operations to be
much more successful.
Internationalization History
Metro Cash & Carry started looking beyond its national borders quite early on.
The first step was taken in 1968 through the partnership with the Dutch business
group Steenkolen Handelsvereeniging (SHV), which was the basis for the found-
ing of Makro Zelfbedienigsgroothandel. The SHV group was very much interested
in the Cash & Carry concept and had built a similar structure in the Netherlands
under the name Makro. Metro and Makro shareholder groups arrived at an ar-
rangement under which they avoided going into head-to-head competition with the
same concept in the same country and coordinated their new market entry strate-
gies. The basic idea was that the Makro group would expand into markets where it
was stronger with holding a 60% stake and Metro having a 40% stake in the new
venture. Similarly, Metro would enter markets where it was stronger with 60%
stake and Makro holding 40% stake. This partnership arrangement between the
SHV and Metro Cash & Carry has continued essentially unchanged throughout the
subsequent international expansion of the Cash & Carry concept. The arrangement
has worked despite Metro and Makro having very different management philoso-
phies, e.g., Metro Cash & Carry’s concept management is much more centralized
compared to Makro’s.
By 1972, Metro Cash & Carry and Makro had expanded into Southern and
Western Europe. Table 1 shows how Metro’s Cash & Carry presence has grown
internationally. As indicated in Table 1, the group operates under the name of
Makro Cash & Carry in nine of these country-markets, while it is Metro Cash &
Carry in the other 19 countries.
Upon examining Table 1, it is evident that Metro Cash & Carry’s international
expansion has proceeded in three waves: Starting in 1968 in the Netherlands, the
first wave was essentially a period of expansion in Western Europe in the 1970s
that included entries into Belgium, France, UK, Spain, Austria, Denmark, and
Italy. The next wave of expansion took place in the 90s, starting with Portugal,
and countries around the Mediterranean Sea, namely Turkey, Greece, Morocco,
progressing through Eastern European countries, Hungary, Czech Republic, Bul-
garia, Poland, and Romania and then into China in 1996. Thus, Metro Cash &
Carry business expansion into Eastern Europe started long before people were
talking about adding these countries into the European Union leading to its slogan:
“Already operating in all places where the Euro is still to come”. This speaks to
Metro management’s foresight, willingness and ability to take a qualified risk, and
the transferability and strength of the Cash & Carry format concept to survive in
Retailing in the Global World: Case Study of Metro 31
Table 1. International Activities of Metro Cash & Carry (As of: 31/03/2005)
Country Brand Outlets Market Entry
Netherlands makro Cash & Carry 16 1968
Austria Metro Cash & Carry 12 1971
Denmark Metro Cash & Carry 4 1971
France Metro Cash & Carry 83 1971
Great Britain makro Cash & Carry 33 1971
Italy Metro Cash & Carry 42 1972
Spain makro Cash & Carry 30 1972
Belgium makro Cash & Carry 8 1973
Portugal makro Cash & Carry 10 1990
Turkey Metro Cash & Carry 9 1990
Marocco makro Cash & Carry 6 1991
Greece makro Cash & Carry 6 1992
Hungary Metro Cash & Carry 13 1994
Poland makro Cash & Carry 21 1994
China Metro Cash & Carry 24 1996
Romania Metro Cash & Carry 21 1996
Czech Republic makro Cash & Carry 11 1997
Bulgaria Metro Cash & Carry 7 1999
Slovakia Metro Cash & Carry 5 2000
Croatia Metro Cash & Carry 3 2001
Russia Metro Cash & Carry 14 2001
Japan Metro Cash & Carry 2 2002
Vietnam Metro Cash & Carry 4 2002
India Metro Cash & Carry 2 2003
Ukraine Metro Cash & Carry 4 2003
Moldova Metro Cash & Carry 1 2004
Serbia Metro Cash & Carry 1 2005
Total 392 -
Germany Metro Cash & Carry 115 1964
Total 507
32 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
countries with a low per capita income because of its self-financing dynamic. Fur-
ther, Metro Cash & Carry was the first international wholesale group to obtain a
license for country-wide expansion across China in the mid-1990s, opening its first
Cash & Carry store in 1996 in Shanghai, at a time when hardly any other western
trading or industrial company had ventured into this formerly isolated country.
Metro in fact is the only company with a national license for their format in China
giving it an important first-mover advantage. Barely ten years later, Metro Cash &
Carry is now operating 24 stores in the Middle Kingdom together with its Chinese
partner Jinjiang; and another 40 stores are scheduled to open in the mid-term in re-
gions where they will face no direct competition due to their pioneering advantage.
The third wave, starting in year 2000, continues Metro’s eastward expansion
and includes entries into Slovakia, Croatia, Russia, Japan, Vietnam, India, Ukraine,
Moldova and Serbia.
New Market Entry Strategy, Process, and Steps
Metro’s entry into a new country is always spearheaded by its Cash & Carry divi-
sion because of its broad experience and tried, tested, and standardized merchan-
dising concepts that have been found to work across different countries despite
their various structural, cultural and consumer differences. In these efforts, Metro
follows a very systematic international entry process that proceeds in several
stages described below.
Step 1: Country scoring. A preliminary market attractiveness scoring model is
applied to all countries being considered for the next foreign market entry and the
most promising candidates are identified.
Step 2: Environment and Market analysis. If a certain country appears to be a
viable candidate for market entry, a preliminary study of the country’s economic,
political, societal and legislative environments, its market potential and competi-
tive situation is conducted.
Step 3: Feasibility study. If the country-market is still rated as attractive after Step 2,
a more extensive feasibility study involving on-site research of all management
and operational processes required to support the venture is conducted by a team
of specialists from all relevant departments of Metro Cash & Carry, such as pur-
chasing, marketing, legal and human resource departments. Based on the results of
this study, the entry decision is made and if it is a “GO” decision, the locations,
sizes, types of stores are decided
Step 4: Entry management. The country management team selected to oversee
and manage the market entry refines the outlet concept and sets the merchandis-
ing, pricing and purchasing policies. This team also looks for real estate, selects
and concludes contracts with suppliers and begins the personnel recruiting proc-
ess. Typically, each new Metro Cash & Carry store requires three hundred em-
ployees. The local headquarters for the outlet chain are set up on the site of the
Retailing in the Global World: Case Study of Metro 33
first store. Customer marketing programs are also launched at the same time.
While Metro Cash & Carry endeavors to set up the stores according to a uniform
basic format concept in all countries, each individual case involves numerous
negotiations with local authorities as the tax and legal requirements differ mark-
edly from country to country. Thus, a key effort of the new country management
team is to understand the political environment and establish a good working
relationship with local government, politicians and tax regulators.
Step 5: Recruiting qualified local personnel. In this critical step, Metro Cash &
Carry initiates a search for local managers and staff (e.g. managing director, buy-
ing, sales and administration staff) to operate the stores according to Metro stan-
dards, supported by a number of expatriates. Metro Cash & Carry strongly be-
lieves it is advantageous to have managers and staff drawn locally, who are
familiar with the preferences and purchasing patterns of the local consumers and
can adapt the business to the country’s environment in an optimum manner. This
policy of relying much more on local employees than expatriates is very different
from other companies, e.g., Carrefour maintains all-French international opera-
tions. Metro’s approach thus contributes to the growth of the host country’s labor
markets, and in some countries, e.g., Poland, it took only a few years for the com-
pany to become one of the host nation’s largest private employers. Until suitable
local employees are recruited, however, the country management team, consisting
of senior Metro headquarters executives with previous international experience,
runs the business on an interim basis.
Step 6: Training. Local recruits are trained in intensive group programs so they
fully understand the Cash & Carry concept and Metro’s business philosophy and
culture, before taking over operations in their own country. Metro Cash & Carry
International in fact now has three training centers around the world , located in
France, Germany, China with different areas of competence (e.g. the fresh food
business is a competence of the training center in France). One more is planned to
be opened in Russia in 2006. Today, Metro’s headquarters training team is multi-
cultural, comprising of international coaches and about 280 people including 45
managers from different countries. Metro’s corporate language is English. More
specifically, training is aimed at developing an international spirit in the organiza-
tion, while remaining true to the basic concept of the business as it was originally
conceived in Germany, and empowering trainees to easily transfer Metro’s busi-
ness concept to their home offices, in their own or another country. (For example,
Metro now has a lot of managers from Eastern European countries working in
Western European countries.).
An illustration of Metro Cash & Carry’s international market entry process is
provided by its entry into Russia in November 2001 when it opened its first two
wholesale stores in Moscow. The streamlined and systematic country market entry
process that has evolved over the years made it possible to reduce the time required
34 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
for the development from the planning stage through to the opening of the first store
to as little as one year. The following summarizes the Russia entry timeline:
October 2000 – Based on the country scoring model, Russia is identified as a
market with good potential for Metro Cash & Carry.
November 2000 – A preliminary investigation of the main aspects of the eco-
nomic, political, commercial law conditions of the Russian market is conducted.
December 2000 – Following positive results of the preliminary study, a detailed
feasibility study of the Russian market is prepared by an experienced management
team that meets with and collects data from businesspeople, suppliers and politi-
cians. Important operational issues such as purchasing, sales, marketing, law and
personnel are fleshed out.
January 2001 – Based on the feasibility study, Metro’s Executive and Supervi-
sory Boards give the go-ahead to enter the Russian market and allocate the funds
for the first two stores. (After that, any further expansion in the country will have
to finance itself by way of organic growth.)
January 2001 – A search for suitable locations is initiated and two sites in Mos-
cow are selected.
February 2001 – The customer marketing programs/acquisition process begins.
March 2001 – Upon receipt of the building permit, construction of the two Metro
stores begins. Meetings with the local authorities, neighbors and political decision-
makers become part of the day-to-day business.
April 2001 – Locally recruited managers are prepared for their roles in the Mos-
cow stores at the Cash & Carry headquarters in Düsseldorf, Germany.
May 2001 – Recruitment of 800 staff for the Moscow outlet begins.
July 2001 – Metro Cash & Carry negotiates and concludes contracts with local
suppliers for the Moscow stores.
September 2001 – The merchandise assortment of 15,000 items per store is de-
veloped, and details are entered into a computerized database.
November 2001 – Metro Cash & Carry in Russia is opened with support from
Metro Cash & Carry Bulgaria. Such start-up assistance from sister operations
already operating in similar countries is a tried and tested method for supporting
Metro’s entry into new markets.
Key Challenges and Success Factors in International Expansion
Metro has faced many challenges in its international expansion drive. Some of the
key challenges are discussed below.
Retailing in the Global World: Case Study of Metro 35
People: The biggest challenge has always been recruiting the right people and
training them in the company’s business rules and standards in order to achieve
consistency in Metro’s offering across the globe (see chapter on Human Resource
Management in this book).
Culture: Years of internationalization and expansion have taught Metro that local
culture plays an important role and the German way is not always the right way.
Metro now sees respectful treatment of and adaptation to cultural differences in
shopping and consumption patterns across countries as a continuing challenge that
must be appropriately addressed by its country management. For example, in Roma-
nia and Bulgaria it was found initially that customers bought everything they could
possibly buy on one trip because they were not sure the same offering would be
available the next day. So, for some time, Metro had to engage in an education pro-
gram to make customers understand that the assortment and terms offered would be
the same consistently every day and customers would only have to buy what they
would need on any given shopping occasion. Thus, cross-cultural training and edu-
cation has now become a prerequisite for all Metro managers.
Product sourcing: Catering to and satisfying local customer preferences and tastes
is a hurdle to be negotiated in every new country market. Based on its early ex-
perience, Metro now buys up to 90% of its food product assortments from local
suppliers in the individual countries. This is especially true in fresh food and dairy
product segments. For example in China, fresh food could also mean alive ani-
mals, and a retailer has to adapt and add this assortment to its structure. Assort-
ment in the non-food segment is, however, much more standardized across
Metro’s country markets.
Local economic development and conditions: Another ongoing challenge is adapt-
ing to differences in countries’ economic conditions, e.g., adjusting pricing in the
face of high inflation rates in some countries, e.g., Turkey’s inflation rate was over
80% at one time, or creating a supply chain adapted to a country’s supporting
infrastructure (or lack thereof, e.g., India is far behind China in this respect).
So far, Metro’s track record suggests that it has developed the capability to suc-
cessfully address and tackle the above kinds of international retailing challenges.
Key factors that have enabled this success include:
(1) Uniqueness of the Cash & Carry concept: Metro does not have a true interna-
tional competitor in the modern Cash & Carry domain. The Cash & Carry concept
as developed by Metro is rather unique and there are no direct competitors barring
a few small players in Germany itself. Further, the Cash & Carry format’s “self-
financing” features allows it to adapt very well to countries with different eco-
nomic climates and levels of economic development.
(2) Transferability of the “blueprint” of the Cash & Carry concept: Metro has
perfected and refined the Cash & Carry concept, over several decades and across
many countries, into an easily understood and communicated business blueprint to
guide managers in new countries.
36 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
(3) Foresight and first-mover advantages: As already mentioned, Metro manage-
ment has shown foresight and willingness to take some calculated risks in entering
country markets in Eastern Europe, Russia, China, and most recently, India, well
before its competition. This has provided it important first-mover advantages,
especially in terms of cementing its relationships with the local labor forces and
governments.
(4) “Localized” merchandise assortment: A particular feature of the distribution
concept of Metro Cash & Carry is the range of goods it offers which is geared to the
needs of the respective regional customer habits and local customer expectations. In
fact, Metro Cash & Carry usually procures over 90 percent of its merchandise from
local manufacturers and suppliers in the respective countries. In addition, the stores
also offer international assortments of global brands and Metro private labels sought
by local customers, e.g., in Germany, Metro offers numerous Turkish food products
because of Germany’s large minority of Turkish inhabitants.
(5) Quality of product assortment: Worldwide, a special feature of the Metro and
Makro Cash & Carry wholesale stores is the freshness of the food on offer. This is
the result of efficient logistics systems, regional purchasing, and the group-wide
quality assurance guarantee that the food is always absolutely fresh. Further, through
its local sourcing, Metro Cash & Carry is actively supporting the local farmers,
manufacturers and suppliers in developing modern cultivation, production and dis-
tribution methods. This garners it tremendous goodwill and quality supplies.
(6) Systematic and deliberate market entry process: As already described, the sys-
tematic research preceding entry has helped Metro Cash & Carry avoid a number of
pitfalls that can overturn even an entrant with huge resources. A case in point is
Wal-Mart’s entry into Germany which is widely regarded as a major failure of the
world’s largest retailer because it attempted to convert local customers and employ-
ees to the Wal-Mart way rather than the other way around, i.e., researching how it
might have to adapt to the German culture, shopping habits and behaviors.
(7) Employing local management and human resources: Metro Cash & Carry
derives significant benefits from its policy of recruiting local managers and em-
ployees as well as the goodwill of the host country governments.
(8) Exploiting information technology and customer database management: The
exploitation of knowledge in customer data bases fosters transparency and permits
detailed understanding of customer purchase patterns, leading to optimized com-
munications, product assortment structure, promotions (see e.g., chapter by Burke;
Gedenk, Neslin, Ailawadi in this book ).
(9) Using flexible organization structure: In its new country ventures, Metro’s or-
ganization structure is such that it effectively localizes all the decisions which are
relevant for the business “front-end” and/or are customer-related, making them the
sole responsibility of country management or even store management. These deci-
Retailing in the Global World: Case Study of Metro 37
sions include: store location, people management, product assortment, pricing, cus-
tomer acquisition & management, and advertising. However, everything which re-
lates to the “back-end” e.g., IT, logistics, accounting, buying, tends to be centralized.
(10) Replication and learning from both success and failure: The repetition of the
same basic business model with little variation in its concept is a key strength. As
one senior Metro executive puts it: “We take a blue print of a concept and transfer
it to another country and then multiply it. I think one of Metro’s success factors is
the ability to multiply this format easily outside of the home country.” Thus, in
many respects, the most modern and best Metro stores are not found in Germany
but rather in Poland, Romania or Russia because they incorporate the latest con-
cept with all improvements from previous experiences built in.
Internationalization of Other Metro Businesses
There is no doubt that Metro’s global growth is led by its Metro Cash & Carry op-
eration which allows the Group to learn very quickly how to do business in each
new country, thereby providing it a solid competitive advantage and platform for the
expansion of Metro’s other retailing formats in that country. That is, Cash & Carry
permits Metro’s other businesses to hit the ground running while most of their direct
international competitors in those segments have to learn how to do business in that
country from scratch. Examples of exploiting the experience and equity from the
Metro Cash & Carry operation in new operations include the development of both
Real and Praktiker in Romania and Real in Russia. In each country, Metro has been
able to exploit business synergies, government relations, purchasing economies of
scale etc., to successfully grow its other lines of business after successful entry with
the Cash & Carry format. More generally, another key lesson gained from the inter-
national Cash & Carry expansion experience is the value of following an organic
growth strategy in which every new outlet is an outgrowth and replication of the
previous one. That is, the global growth strategy of all of Metro’s divisions like
Media Markt, Saturn, etc. is to advance along the same development path. They all
attempt to follow a tried and tested, easy-to-follow blueprint for the format, while
allowing for some local adaptation. Thus, every Media Markt store is basically the
same – whether it is located in Germany, Spain, Poland, Hungary, or Portugal. Simi-
larly, the same-style Praktiker store is seen in Poland or Turkey.
Conclusion
Overall, Metro’s international experience has informed its management that the
major long-run differentiatior in international retail competition is the way the
retailer’s people sell the business concept and manage their relations with local
customers in each country-market. This includes how the retailer adapts to the
38 Zygmunt Mierdorf, Murali K. Mantrala, and Manfred Krafft
local market’s culture and interacts with local customers. Competitive trends
suggest that customers can eventually buy the same product/s in all competing
store formats. Ultimately, therefore, it is the retailer’s people who will make the
difference, while the back-end systems will create cost efficiencies and econo-
mies of scale. However, competitive advantages due to the latter are temporary
as intelligent competitors will eventually copy successful systems. Indeed it is
possible, as one Metro executive puts it, that “25 years down the road we won’t
have our individual IT-system, but just buy it like we buy electricity or other
commodities from a service provider.” In addition to people, other key differ-
entiators are the set-up of the store, marketing communications, and the re-
tailer’s brand building process. In the end, retailers have to build store loyalty
among the customers to maintain their edge, e.g., make customers believe “if
you want to buy a TV-set, think Media Markt. Don’t think Samsung, Sony, LG
or whatever. Think Media Markt or Saturn. Whatever you want, will be there.”
Such global brand-building along with international growth is an important goal
and plank of Metro’s competitive strategy.
In closing,based on its experience to date, the METRO Group sees tremendous
potential for the Metro Cash & Carry concept and brand worldwide. Over three
billion people and thus more than half of the world’s population live in countries
where the company is represented today. Every year, new stores are opened and
new markets are tapped. The focus in the foreseeable future will remain on East-
ern Europe and Asia, as demonstrated by the Ukraine and India, that are among
the younger members of the Metro family. Two-thirds of all new stores opened in
2004 were established in the growth regions Asia and Eastern Europe. Future
expansion is expected to concentrate on China and Russia. China and India are
expected to become the centers of growth over the next 5 to 20 years as many
Western economies enter into economic decline. Metro is convinced that future
growth of its business will be in the East rather than in the West. However they
have learnt that sheer growth of the top-line in the retail industry does not mean
anything. It has to be profitable growth. “If you want to buy something you must
understand very clearly if this can create value in your own organization. If not,
better leave it.” Metro sees its tried and tested Cash & Carry “blueprint” combined
with important customer loyalty and brand-building activities as the key to its
long-term success.
References
http://www.metrogroup.de/servlet/PB/menu/1023871_l2/index.html
PART II:
Global, Environmental, and Market Trends
GLOBAL TRENDS
Retail Trends in Europe
John Dawson
University of Edinburgh, UK; ESADE, Barcelona, Spain; and UMDS Kobe, Japan
Since the early 1990s there has been a substantial re-structuring of the retailing
in Europe. Further, even greater re-structuring is likely in the immediate future.
The implications extend beyond Europe but they have had primary impact
within European markets. The restructuring involves not only changes in hori-
zontal competitive relationships amongst retailers but also involves new forms
of relationship with suppliers and an extension of the activities of West Euro-
pean retailers into Central Europe. The restructuring has occurred alongside
substantive changes in strategies, relationships and operations. These changes
have encouraged the emergence of an alternative perspective of the role of re-
tailing that places retailing as the initiator of added value activities in the econ-
omy rather than in its traditionally more passive role of building on the value
being added in manufacturing. The new role places retailing in a global frame-
work of international store operations, international sourcing of products, inter-
national flows of management and managerial know-how, and retailers as inter-
national brands. The aim of this chapter is threefold:
x to place the re-structuring in context,
x to consider its nature, and,
x to explore how the new global framework could affect Europe over the
next decade.
The chapter comprises five parts. First, the new role of retailing is explored. Sec-
ondly, there is consideration of what is changing in the retail sector of Europe.
Thirdly, some implications of the changes are explored. The fourth part considers
why the changes are taking place. Finally, there is consideration of the underpin-
ning nature of innovation in the changes and exploration of how future patterns
may develop.
42 John Dawson
The New Role of Retailing
Re-structuring into a global context is the most recent stage of a half a century of
change in European retailing that can be seen as comprising three major phases
(Dawson 1999). The first phase occurred during the years after 1945 when the
priority for the retail sector was the reconstruction of both the organizational and
physical structures of retailing. There was a strong American influence in manage-
rial developments, for example in the introduction of self-service into the food
sector. A number of American firms, for example JC Penney, entered Europe. City
and town centers were reconstructed across much of northern Europe and retailing
was used as a catalyst for the physical re-construction of cities such as Coventry,
Exeter, Köln and W. Berlin. Generally, consumers were seeking more products
after the several years of scarcity and retailers provided additional floor space to
meet these needs.
The development of the “common market” in Western Europe and the subse-
quent development into a more integrated European Union marks a second phase.
The retail markets across Europe started to consolidate and substantial growth of a
different type occurred. Marketing became accepted as a key activity for retailers
with different types of retailing being designed to satisfy different consumer
needs. As market segmentation developed, so retailers explored new formats. For
example, the large self-service single level superstore format, often located on the
edge or out-of-town, was developed through the 1970s and early 1980s in several
sectors, notably the hypermarket for general merchandise, and, superstores for
food, DIY, toys, electrical goods, furniture, etc. Consumers, during this second
phase, wanted different products and better quality products rather than simply
more products.
The third phase, which is the period of change presently evident, is character-
ized by a re-structuring of retailing with new roles and functions becoming evi-
dent. The convergence of information and communication technologies, the appli-
cation of new materials, and other applications of technology, such as RFID,
across the value chain are enabling retailing to take on more forceful roles within
the economy (Dawson 2001). Economies of scale of organizations associated with
global sourcing and international operation of stores are allowing retailers to be-
come some of the largest firms within Europe. By 2004, Metro, Carrefour and
Tesco are amongst the largest twenty firms by market capitalization in Germany,
France and UK respectively. Retailers have become major elements in the compo-
sition of European economies.
Ranked by sales in 20031, Carrefour, Metro, Tesco, Rewe and Royal Ahold are
in the list of the largest ten retailers in the world (Table 1). Wal-Mart and Costco
in the list, whilst being based elsewhere, have retail operations in Europe. The
1 Obtaining comparability of sales rankings is notoriously difficult. This ranking converts
figures to € at average rates over the year. By using conversion rates at other times, for
example year end, some difference in ranking would be present.
Retail Trends in Europe 43
Table 1. The Largest 12 Retailers Ranked by Sales FY 2002-3
Net Sales
in 2002-3
€ Billion1
CAGR2 Sales
1997/8-2002/3
Number
of stores3
Number
of coun-
tries
% of sales
in foreign
countries
ROE
%
1 Wal-Mart 226.8 14.5 4,906 13 18.6 20.3
2 Carrefour 70.5 20.8 10,378 31 49.3 24.7
3 Home Depot 57.3 16.5 1,689 3 7.1 19.9
4 Metro 53.6 2.7 2,370 28 47.2 12.4
5 Kroger 47.6 4.5 3,774 1 0 21.7
6 Tesco 44.5 12.1 2,318 13 19.6 16.4
7 Target 41.4 8.6 1,475 1 0 16.6
8 Royal Ahold 39.2 3.6 8,408 19 78.3 2.4
9 Costco 36.9 11.8 418 8 17.5 10.6
10 Rewe 36.2 2.3 11,295 13 26.0
11 Aldi 36.2 4.2 7,208 12 33.3
12 ITM 33.4 1.8 7,478 8 30
1 Average exchange rate for year used for non-Euroland retailers
2 Compound annual growth rate
3 Includes stores in total network
(Sources: MSCI Blue Book; Lebensmittel Zeitung; M+M EUROdata; Company reports)
European based retailers have spread beyond Europe. Carrefour in 2003 had store-
based operations in 31 countries and was purchasing from over 55. Metro had a
presence in 28 countries. Tesco with stores in 13 countries is less international at
an operational level but is equally international in its sourcing. There are many
consequences of the large scale and international activity of retailers. For example,
the choices available to consumers are increasing and as a result the choice proc-
esses that consumers use are changing. These changes are affecting the shopping
behaviors of consumers. This is one of several potential illustrations of the more
active role that retailers now have within the overall economy.
In establishing the new distinctive role for retailing, the leading firms have de-
veloped a distinctive European model of retailing and distribution (Eurostat,
2002). This European model, now emerging, is different from that of the USA. It
is a model that is internationalist, not domestic; compare for example Metro and
Tesco with Kroger and Target. The opening of Central Europe to investment from
West European retailers was a stimulus to the internationalist view (see, e.g., de-
scription of Metro’s European growth history in chapter by Mierdorf, Mantrala
and Krafft in this book). The European model also is structured around an inte-
44 John Dawson
Table 2. Comparison of Manufacturing and Distribution Within the UK Economy
Value added £bn Net capital
expenditure £bn
Employment
million: average
during year
1990 1994 1998 2002 1998 2002 1998 2002
Manufacturing 140 131 150 144 20.4 13.6 4.4 3.8
Distribution 75 72 107 129 12.5 13.0 4.7 4.9
(Sources: Office of National Statistics, UK Blue Book and Annual Business Inquiry)
grated demand chain, not a supply chain. And, it has market innovation, not copy-
ing, at its core. This stronger position of distribution generally is reflected in
macro-economic statistics, for example in 2005 it is forecast that in the UK econ-
omy the value added by distribution industries will be greater than the value added
by manufacturing. The gap between these two has closed steadily since the early
1990s when the value added contribution of manufacturing was almost twice that
of distribution. Table 2 shows some of the relative changes between manufactur-
ing and distribution in the UK through the1990s. The substantial increase in labor
productivity in distribution is seen with a large increase in value added with a
much smaller increase in labor input (Reynolds et al 2005). This pattern is re-
peated across much of Europe.
What Is Changing?
Managerial processes in the retail sector are changing within the overall re-
structuring. Four changes are particularly apparent.
The Large Firms Are Growing Faster Than the Sector As a Whole. Despite low
growth in the European economies in recent years large firms have been able to
increase their output through entering new markets, diversifying their retail offer,
acquisition and, importantly, like-for-like sales growth. Table 1 shows for the
largest firms their 5 year compound growth. In most cases the growth is well
above the general level of growth in the sector. Leading companies in other more
specialist sectors show comparable strong growth. For example, Zara, IKEA,
Douglas, H&M, Kaufland and others have all outperformed the market. The speed
of growth has quickened in many of the large firms. For example through the early
1990s Carrefour was opening fewer than 20 stores per year but by 1999 was open-
ing more than 50 per year, albeit with the majority outside Europe. The result has
been that by 2001 over 20% of the hypermarkets operated by Carrefour did not
exist three years previously.
Retail Trends in Europe 45
Within the European grocery market Clarke et al (2002) provide a review of na-
tional estimates of CR5 for the mid 1990s (the average was 61.7%) and calculate
CR5 estimates for 1993 and 1996. These suggest that CR5 has risen in all the Euro-
pean markets with the exceptions of Finland, Sweden and Netherlands. The aggre-
gate level of concentration in Europe measured as the share of the 50 largest firms,
they estimate, rose from 45.5 to 49.5 between 1993 and 1996. Anecdotal evidence
suggests that the overall level of concentration has continued to rise since 1996.
A More Strategic Approach to Managerial Decision Making. Across the sector in
the large and medium sized firms a strategic approach to management has been
adopted more consistently. Strategies vary considerably but there is a wider pres-
ence of a general business strategy that is then made operational through func-
tional strategies for marketing, merchandising, buying, branding, branding, logis-
tics, employees, finance, etc. Private and publicly quoted firms exhibit this trend.
Whilst short-term opportunistic development and reactive competitive moves
remain, these occur within a broader, formalized, strategic framework involving a
mission, market positioning and formalized approach to channel relationships.
Increased Complexity of Organizational Structures. With the new role of retailing
and the increased size of firm, organizational structures have become more complex.
The expansion of international operations, for example, has required retailers to
develop a structure of country “vice-presidents” and in several cases an international
Board of Directors. At store level the international moves have required different
organizational structures in different countries in order to respond to the different
consumer cultures. It was only in 1993 that Tesco began to operate stores outside the
UK in a way that required a different organizational structure to be devised2. Table 3
shows the international expansion of Tesco over the 12 years. This network of stores
now requires a very different organization than that needed to manage only UK
stores in 1993. It is not only international operations that require a more complex
organizational structure to the firm. International sourcing centers have to be ac-
commodated in organizations. The outsourcing of many previously in-sourced func-
tions also changes organizations. The diversification of retailers into financial and
leisure services provides further organizational complexities.
Moves Towards Retailer Coordinated Value Chains. In recent years the nature of
the value chain within the successful retailers has changed substantially. Retailers
have become increasingly involved in coordinating the relationships between re-
tailers and suppliers. Thus value is created at a variety of places in the value chain,
not simply at the point of final sale to the customer. In taking costs out of the
channel of distribution there is a redistribution of the locus of value generation.
2 Tesco entered Ireland in 1978 but withdrew in 1986. The UK organisational structure
was simply extended to Ireland and this is often quoted as one of the reasons for failure
of the international venture. The move into France in 1993, with withdrawal in 1997, is
generally regarded as the first move in the current strategy of internationalisation.
46 John Dawson
Table 3. The Store Network of Tesco in 2003 and 2004 and Planned Expansion for 2004-5
End FY 2002-3 End FY 2003-4
Store
number
Sales
area
‘000 sq.ft
Store
number
Sales
area
‘000 sq.ft
Net
change
in store
number
Planned
openings
2004-5
Planned
new net
space
2004-5
‘000 sq.ft
UK 19811 21,8291 1878 23,300 -103 822 1,3683
Ireland 77 1,703 82 1,864 5 8 230
Poland 66 3,351 69 3,621 3 10 408
Hungary 53 2,469 60 3,040 7 10 515
Czech Republic 17 1,608 22 1,998 5 3 163
Slovakia 17 1,379 23 1,736 6 6 297
France 1 16 1 16 0 0 0
Turkey 0 5 406 5 0 0
Europe non UK 231 10,526 262 12,681 31 37 1612
Thailand 52 4,820 64 5,418 12 57 897
South Korea 21 2,125 28 2,902 7 4 335
Malaysia 3 316 5 477 2 2 205
Taiwan 3 329 4 383 1 0 0
Japan 78 250 78 22 -17
Asia 79 7,590 179 9,430 100 65 1419
Total 2,291 39,944 2,32 45,402 28 184 4399
1 Includes 1,202 stores with total sales area of approximately 1,830,000 sq. ft associated
with the acquisition of T&S stores during the fiscal year
2 Excludes acquisitions underway at 2003-4 year end
3 Includes extensions and excludes disposal of Dillons stores acquired as part of T&S
(Source: Tesco company information)
Retail Trends in Europe 47
Table 4. Key Operating Ratios of Carrefour, Sainsbury and Tesco
Inventory value as a
percentage of sales
Working capital as
percentage of sales
Percentage return on
capital employed
2002 1999 2002 1999 2002 1999
Carrefour 8.7 13.2 -9.6 -13.5 10.0 11.0
Sainsbury 5.3 5.3 -6.1 -6.1 9.6 10.8
Tesco 3.9 3.4 -8.8 -9.4 14.7 15.5
Casino 8.5 8.9 -4.2 -8.2 13.5 11.6
METRO Group 10.7 11.2 -1.5 -2.3 7.5 11.9
(Source: company accounts)
An example of this is in the terms of trade that exist between retailers and suppli-
ers such that a retailer’s inventory is financed by suppliers. By providing a longer
number of credit days than the inventory turn of the retailer, the retailer operates
with negative working capital. Table 4 illustrates the degree of negative working
capital enjoyed by large European retailers.
These four changes illustrate the nature of the changes taking place in European
retailing during this third and current phase of major re-structuring. They are
clearly inter-related with the focus on strategy underpinning the rapid growth of
the large firms and the change in financial relationships with suppliers. The four
changes are illustrative of the totality of change and other changes could be high-
lighted. Nonetheless the conclusion that can be drawn is that the current phase of
re-structuring is resulting in an increase in the complexity of the sector, a quicken-
ing in the rate of development and a more global perspective being adopted by
management.
The Implications of the Changes
There are many implications of the changes in the role and structure of the retail
sector across Europe. A major implication is an increased level of governmental
intervention in retailing. Four particular aspects of change give rise to governmen-
tal intervention at various levels across Europe:
The Increase in Market Concentration. With the continuing growth of already
large firms and their acquisition activity, the competition agencies in individual
European countries and in the European Commission have become more active in
reviewing levels of market concentration. In the UK the inquiry in 2003 by the
Competition Commission into the proposed acquisition of Safeway by others in
the grocery sector highlighted the problems of defining the market for the pur-
48 John Dawson
poses of measuring market concentration. In some cases competition authorities
are now considering the competitive impacts of the acquisition of a single store by
a large retailer when this is thought to have an effect of reducing potential compe-
tition at the local market level. Although there are many unresolved issues associ-
ated with measurement of market shares, particularly at local levels, nonetheless
governments increasingly are involved in market interventions.
The Decrease in the Number of Small and Micro Firms. An aspect of long term
structural change has been the decline of small firms in retailing across Europe
(Eurostat 2002). This loss of small firms has become more acute in recent years
such that governments have been exploring ways to provide support to smaller
firms through different types of policy initiative. These include limiting the local
competition from large firms by restricting the establishment of new shops, pro-
viding direct financial help to the small firms to encourage investment and train-
ing, reducing the tax burdens on small firms, encouraging co-operative behaviour
amongst small firms, and providing special protection to particular sub-sectors, for
example pharmacists and small firms in rural areas and in the lowest income parts
of cities. Governmental intervention in the market in these cases is aimed at pro-
tecting smaller firms from the full rigor of the market.
The Change in the Balance of Competitive Power Between Retailers and Their
Suppliers. An implication of the changes in retailing is the growth of channel
power of retailers at the expense of their suppliers (Pilat 1997). Governments
have sought to intervene in the market to regulate the behaviour of the partici-
pants in the channel. This has involved policies on the nature of the contracts
between retailers and suppliers, the number of credit days allowed, the types of
discount that can be used, the ability of retailers to re-sell products at below
cost, etc.
The Increased International Activity of Retailers. In some European countries,
notably those in central Europe that attracted large amounts of foreign direct in-
vestment into retailing after 1989, the governments have been adopting policies to
limit foreign ownership of retailing. The rationale for such policies is to protect
local retailers and suppliers from the business practices used by the foreign, often
large, firms. Those foreign retailers that have a presence in the market, having
entered early, are in effect protected from peer-group competition and so may
benefit from the policies aimed at limiting them.
The extent of and types of intervention of governments in the retail markets is
generally increasing in Europe. The rationale for intervention is generally to ame-
liorate, in some way, the consequences of the structural changes in the sector. In
many cases the policies are instituted without a clear understanding of the nature
of the causes of the structural changes that generate the “undesirable” change but
there is growing awareness of the complexity of the distributive trade in respect of
the vertical relationships involved.
Retail Trends in Europe 49
Why Is Retailing Changing?
The reasons for the structural adjustments in this third current phase of major
change in European retailing can be presented as a process linking changes in the
environment to responses by retail managers. Retailing, as an activity linking con-
sumers to goods and services, operates in local markets. As such many of the
managerial decisions are a response to both the local culture of the consumers and
the local culture of consumption. Within Europe these local cultures are subject to
considerable social, economic, political and technological changes. This dynamic
cultural environment requires responses from retailers that seek success through
the close matching of their operations to consumer requirements. These responses
underpin the strategies of retailers. The strategies are executed through the for-
mats and formulae3 that the retailer creates. In creating these formats and formulae
the retailer enters into relationships with other groups, for example suppliers,
finance groups, consumers, etc. In the current context of activity in Europe all four
of these attributes of the retail sector – cultures, strategies, formats & formulae,
and relationships – are undergoing substantial change as they inter-act. It is the
changes in these attributes that provide the reasons why retailing is changing in
the ways that it is.
Culture. The changes in consumer culture in Europe after 1989 have been consid-
erable. The emergence of market economies in central Europe meant widespread
privatization of retailing. Perhaps of greater importance in terms of consumer
culture, however, has been the increased demand for products and services from
consumers in the former communist countries. Steady increases in consumer
wealth after the initial periods of high inflation have meant that from the mid-
1990s consumers have expected a more extensive range of price-quality combina-
tions in the retailing. In clothing for example distinct markets in street fashion,
work clothes, high fashion, discount apparel, etc emerged quickly to parallel the
market structures that have been developed, more gradually, in West Europe. As
these countries enter fully into the European Community, after May 2004, so these
cultures of consumption will develop more rapidly. In many cases it is the retailers
of the 1990s that have created the nature of the cultures of consumption in the
Central European countries.
Across much of Western Europe consumer cultures show apparent contradic-
tory trends of standardization and fragmentation. The fragmentation of demand is
evident in many ways with ever smaller segments of consumers having specific
patterns of demand. Consumers have translated their values into demands for
3 The formats are the generic delivery vehicles of retailers, for example, hypermarket,
department store, convenience store, mail order catalogue, vending machine, etc. The
formula is the branded version of the format that is created by a particular firm. Thus, a
hypermarket is the format and the Tesco Extra hypermarket, Casino hypermarket, Carre-
four hypermarket, Real hypermarket are the different formulae.
50 John Dawson
goods and services such that there are differing values, for example the ecologi-
cally responsive groups, vegetarian groups, designer brand groups, sport obsessed
groups, etc. These are in addition to the longer established groups associated with
age, educational level, income, etc. This fragmentation has been encouraged by
specialist media. The fragmentation has been extended even further with con-
sumer demands varying on a temporal dimension – by time of day or day of the
week. The consumer can no longer be considered as one person but has to be
viewed as many different “people” (Ziliani 1999).
In apparent contradiction to this fragmentation is a Europeanization of some
aspects of consumer demand. With the wide and faster availability of information
through satellite communication, the rapid diffusion of fashion, in clothes and
music particularly, has generated European-wide patterns of demand. The move-
ment of people through Europe particularly for leisure and tourism similarly has
generated a diffusion of cultures, often in food items, with consumers in Northern
Europe becoming familiar with foods from the South and vice-versa. The avail-
ability of international manufacturer brands, in electrical items, food, grocery,
toys, etc. stimulates this move to “sameness” or “Europeanization”. The euro-
integration of consumer infrastructures is often facilitated by common technolo-
gies in the home or mobile “close to body” technologies (mobile phones, pocket
computers, hand-held games machines, etc.). The driving force for much of this
integration is a combination of the aspirations European politicians and multi-
national manufacturers. Many European politicians have a vision of the future as a
single and more standardized European market. Multi-national manufacturers
wish to exploit economies of scale by producing goods for a large market, but
often consumers have a more local perspective.
The interplay of the opposing forces of Europeanization and fragmentation of
consumer cultures presents European retailers with a dilemma. In strategic terms
does a retailer provide specialist solutions to meet local needs and try to benefit
from local economies of scope or does the retailer exploit the economies of scale
that become available in addressing European-wide trends? Is it possible to de-
velop a strategy to address both the fragmentation of demand and the Europeaniza-
tion of demand? The resolution of this dilemma has encouraged retailers to explore
new approaches to strategy.
Strategy. The approach adopted to address the strategic dilemma resulting from
the changes in culture is to move away from the traditional approach to strategy
that contrasted either low cost or high service. Retailers have approached strategy
by having a wider perspective that considers co-operation and competition both in
a vertical dimension through the distribution channel and horizontally with other
retailers. There is a presumption of vertical co-ordination to increase horizontal
competitive ability but this basic model is subject to detailed interpretations by
firms. A greater emphasis is placed on innovation and the generation of knowl-
edge as key inputs into the development of strategy such that firms reject the idea
of a “generic” strategy and seek ones that are appropriate to their own knowledge
Retail Trends in Europe 51
base (Dawson 2001) and are flexible enough to accommodate the localization-
standardization dilemma.
There are several results of this new approach. Four serve to illustrate the point:
x Branding has become controlled by the retailer. The stores have become
brands, for example IKEA, Zara, Dia, Pimkie, Aldi and B&Q. Alongside
the branding of the store the retailers have also taken control of the brand-
ing of merchandise. Individual firms have adopted different strategies to
the branding of merchandise. Some use the name of the firm, some have
developed different brands for different merchandise categories and others
have developed different brands for different market positions. Although
the implementation varies from firm to firm the rationale for the strategy is
similar (Burt 2000). By controlling the brand offering inside the store it is
possible to co-ordinate the merchandise brand with the store brand to make
the total marketing effort more effective. Tesco, for example has increased
the share of Tesco branded merchandise in its UK stores with over 40% of
grocery sales in Tesco brand and a steadily increasing amount of Tesco
controlled brands in non-foods. Table 5 shows the different market posi-
tions of the Tesco brand merchandise in the UK. The three market posi-
tions for Tesco branded products are being extended into non-food catego-
ries with additional clothing brands “Cherokee” and “Florence and Fred”
being used and the Tesco Finest brand being extended to financial services.
The approach to branding has become considerably more strategic than was
the case 15 years ago when retail brands were seen as low price copies of
manufacturer items.
Table 5. Tesco’s Policy for Tesco Branded Merchandise
ExtensionBrand Launch
date
Market position
and target
Number
Skus Non-foods International
Tesco 1924 Mid-market 8,000 All markets
Tesco Value 1993 Discount 1,200 2001 C. Europe, Taiwan
Thailand, Malaysia
Tesco Finest 1998 Premium 1,100 2002 Poland
Tesco Organics 1998 Organic 1,000
Tesco Healthy
Living
1985 Additive free 600 2003
Tesco Kids 2002 Improved diets 100
Florence and Fred 2001 Office clothing
Cherokee 2002 Mid-price
fashion clothes
52 John Dawson
x A wider perspective on productivity. A more integrated view of the pro-
ductivity of assets emerged in the new strategic approaches. The tradi-
tional view was of productivity being related to employees and floor
space with sales per employee and sales per square foot being the key
metrics. In the new strategic approaches not only are these traditional
measures disaggregated, for example profit of checkout employee per
hour, shelf-space sales per cubic foot, but new assets are considered. The
“productivity” of customers, of suppliers, of in-store services for example
in-store bakeries, and coffee shops, of promotions, and of brands, are
now considered and attempts made to develop a more integrated view of
productivity of the firm. The importance of a coordinated view of pro-
ductivity has been realized (Reynolds et al 2005)
x Identification of the profit sources in the value chain. With a more strategic
approach to considerations of productivity so there has been greater aware-
ness of the nature of the value chain in retailing. This has resulted in shifts
in the balance between out-sourced and in-sourced functions. Retailers
have evaluated the functions they undertake and established which generate
value added to the retailer in respect of specific knowledge owned by the
retailer. These they have retained as in-sourced. Thus for example, mer-
chandising has been concentrated inside retailers. Where value added is
less in relation to the retailer’s knowledge then the functions have been
outsourced with contracts made with specialist groups. This is the situation
with most logistics activities.
Consideration of new markets. The ability to respond to the new cultures of
consumption has encouraged European retailers to move into new markets in
their home country and also to become more international in their operations. In
their home countries there has been category diversification with food retailers
moving into non-food categories. Clothing retailers have moved into new cate-
gories of home-wares, for example Zara Home. In many cases the large retailers
have moved into other service retailing sectors and provide financial services,
household services, etc. Movement into new international markets has been
extensive in all the large and successful retailers. Table 6 shows the develop-
ment outside Western Europe of hypermarkets by four major firms. In all four
cases they have moved into Central Europe and Asia and considerably more
expansion is expected in these markets. It is not only large firms that have
sought to expand internationally. Mintel (2003) identified 2,588 intra-European
cross-border retailers operating 74,160 stores in 2002. This represents approxi-
mately two-thirds of all cross-border retail operations by European based retail-
ers. The remaining third involve extra-European moves. The clothing sector is
most active with 51% of intra-European moves being accounted for by this sec-
tor. French firms are the most active in this respect.
Retail Trends in Europe 53
Table 6. International Expansion of Hypermarket Operations by Four Leading Firms
Central Europe 2002 2004 2005 (forecast)
Auchan 24 31 36
Carrefour 25 31 35
Casino 15 17 18
Tesco 83 110 139
Asia
Auchan 21 26 32
Carrefour 126 156 200
Casino 46 50 53
Tesco 69 84 105
(Sources: company data)
Formats and formulae. The new strategies of European retailers are executed
through formats and formulae. Retailers continually adjust their formulae to meet
the needs of consumers and to expand the customer base. Most of the formats
have been present for many years and the adjustments and innovations are intro-
duced through formula development. In recent years the only major new format
has been the internet web page but new formats have been introduced into coun-
tries where they were previously absent (see chapter by Ahlert Blut and Evan-
schitzky in this book for more information on changing retail formats in G-8 coun-
tries). The countries of Central Europe, for example, had no hypermarkets until
the early 1990s. New formulae are more common with retailers creating formulae
to target specific groups.
Tesco has moved strongly in the area of formula design over the last 5 years. In
their operations within the UK, Tesco operate several formats, all of which are
strongly branded as Tesco:
x Tesco Extra – a hypermarket format
x Tesco Superstore – a large mainly food store but with some non-food items
with sub brands of:
x Tesco Supermarket – a standard supermarket format
x Tesco Compact – a smaller supermarket for smaller communities
x Tesco Metro – a city centre supermarket targeted at walk in customers
x Tesco Express – a convenience store format
x Tesco.com – an Internet format
54 John Dawson
Tesco Express has been the most dynamic of the formats in recent years with or-
ganic development of the concept in 2000. On average there are approximately
2,500 merchandise lines, many of which are Tesco branded items. Acquisitions in
2002 and 2004 have expanded the chain to over a thousand local stores that will
be converted to the Tesco Express format. Average sales in 2002 were € 85,000
per week – four times higher than the sector average – with break-even profitabil-
ity in the stores being achieved at approximately € 45,000 per week.
The common feature of these new formats, not only in the food area but also
amongst non-food, including clothing, retailers, is the concept of “experience
space”. Thus formula design has moved beyond the traditional variables associ-
ated with the marketing mix to create stores in which the customer is more in-
volved. Customers help with the value creation exercise by being part of the for-
mula. In this approach to the design of the formula there is process of value
creation, as shown in figure 1:
x The retailer’s idea of the formula triggers an experience for the customer
x The formula has content and differences in content trigger different experi-
ences. This content is, in effect, the retailer’s execution of the formula.
x The involvement of the customer with the content adds to the experience
for the customer.
x This personalization of the customer’s experience and feelings results in
the in-store decisions of the customer
x These personal interpretations co-create value between customer and retailer.
The involvement of the customer in this way by trying to co-create an experience
and by involving the customer much more in the shopping activity has moved the
design of formulae into new areas.
Relationships. The final underpinning reason for success by European retailers is
the development of new relationships with other groups. Whilst the changes in
culture, strategy and format are important individually they interact thorough the
relationships of the retailer with customers, suppliers, employees and government.
Some examples of these new relationships that are now actively managed by re-
tailers are:
x Customer loyalty and reward systems.
x Supplier links through global sourcing arrangements.
x Co-operative brand development with suppliers.
x Team based performance related pay for employees often associated with a
distinction between the knowledge workers and sales workers in the firm.
x Joint initiatives with government to increase productivity in retailing.
Retail Trends in Europe 55
In-formula decisions
by customer that
co-creates value
with the company
Personal meaning
customer’s feelings
as response to
company’s operations
Formula
The company’s
operational interpretation
of a format
Content of
formula
The execution of
the operations
Customer involvement
The processes of interaction
of firm and customer
An event [the formula] triggers an experience for the customer.
The event [formula] has a content and different contents trigger different experiences.
The involvement of the customer influences the experiences.
The personal meaning is what determines the value to the individual customer.
Experience
Innovation
Fig. 1. The Concept of Co-Creation of Value with Formula Development (based on Prahalad
and Ramaswamy, 2003)
Synthesis and Conclusion
It has been argued in this chapter that the retail sector in Europe has been undergo-
ing, since the mid 1990s, a period of intense re-structuring. The reasons for this
restructuring lie in the changes in the culture of consumption in Europe, in the
resulting strategies of the retail firms, in the formats and formulae that have been
developed and in the relationships that the retailers have generated with various
other agents in the distribution channel. Retailers have been attempting to compete
by changing their operations. Innovation has been critical to retailer success in this
regard. Retailers have moved from traditional forms of innovation to undertake “ex-
perience” innovation. Figure 2 illustrates the differences between traditional product
or process based innovation and the approach through experience innovation.
This key importance of experience innovation is in acting as a catalyst for
growth in mature economies with little increase in consumer spending. The inno-
vation enables the growth in productivity that retailers then use as the basis for
obtaining more control over activity in the channel and also undertaking market-
ing initiatives to provide better experiences for customers. Both routes facilitate
increases in sales at a rate greater than growth in the overall economy. This
growth in sales as a result of innovation is illustrated in figure 3.
56 John Dawson
Supports fulfilm ent of
products and services
Fa cilitato r of fea tures and
functions
Technology and systems
inte gration
Firm creates value
Supply-chain-centric
fulfilm ent of products and
services
Supply push and demand
pull
Products and services
Products and processes
Tradition al Inn o vation
Experience network
supports co-construction of
personalised experiences
Function of
supply chain
Facilitato r of e xperiences
Experience integration
Function of
technology
Value is co-created
Experience environments for
individuals to co-construct
experiences in situations
Individual-centric co-creation
of value
Nature of
value
creation
Co-creation of environm ent
with custom ers, retailer an d
suppliers
Basis of
value
Experience environments -
formula and relationships
Focus of
innovation
Experience Innovation
Fig. 2. The Differences Between Traditional and Experience Based Innovation (based on
Prahalad and Ramaswamy, 2003)
Increased
sales
Productivity
growth
Better experiences
for customers
More control of
the channel
Power and trust
Consumer literacy
Technology
Managerial
abilities
[knowledge]
Marketing
Globalisation
EXPERIENCE
INNOVATION
Fig. 3. The Links from Experience Innovation to Increased Retail Sales (Dawson 2001)
Retail Trends in Europe 57
From this view of changes what implications may be drawn for future develop-
ments?
First, the forms of innovation that are proving so powerful are ones that draw
on the knowledge that exists inside the firm. This is not copying the activity of
others but is using the knowledge that resides in the firm. This requires an organ-
izational structure and culture for the retail firm that facilitates the harnessing of
the knowledge in the firm. Competition depends on constant innovation that uses
this knowledge. That the knowledge resides in the firm is important. The conse-
quence is that different firms will have different impacts on the societies into
which they move. Furthermore the nature of the changes resulting from the entry
of non-European retailers is controlled by the retailer and the knowledge they
choose to transfer to Europe.
Secondly, the issues of the retailer control of brands and formats & formulae
are central to the success of retailers. Developments are likely to result in retailers
not only exerting even greater control over brands but also more brand extensions
being developed by retailers. The nature of the relationships between retailers and
local suppliers will be very different from the existing relationships these suppliers
have with retailers. As the major retailers increase their sourcing from outside
Europe so local European based suppliers will have to change the service package
they offer if they are to remain as suppliers. The new roles for retailing in Europe
that were discussed at the start of this paper will become more widespread with
European economies exhibiting an increase in the proportion of GDP generated by
retailers.
Thirdly, retailers in their marketing activities will look beyond the traditional
issues of price and service and explore the ideas of “experience space” and “ex-
perience innovation”. This will mean involving consumers much more in the
shopping “experience” so that profit is co-created. The passive view of customers
as agents for transactions, even sometimes for exploitation, will not be appropriate
for retailers in the future (see also chapters by Uncles and Burke in this book).
This major change in the business model, already evident in the activities of major
retailers, will spread more generally through the retail sector. As the approach
becomes adopted more widely it will require some major changes in managerial
knowledge and adaptability. Some local retailers will find this change beyond
their capability and are likely to fail. Others will respond and themselves generate
new innovative ways to compete that are grounded in the local knowledge they
have of consumer culture. It is these adaptive and innovative local retailers who
will provide the strongest competition to the large retailers.
Fourthly, it is unlikely that the strong trend towards market concentration will
be reversed and in all sectors we are likely to see increased market concentration
at national, regional and local levels. The economies of scale of large firms, par-
ticularly from global sourcing, will drive price deflation, with the large retailers
then focusing on increasing sales volumes to maintain their profitability. Along-
side the scale economies obtained at firm level there will be economies of scope
58 John Dawson
obtained at establishment level. These scope economies will also generate in-
creases in market concentration.
Associated with these four likely changes there are two other considerations
relevant to a view of retailing in Europe over the next 5 years. Several of the
changes will require applications of convergent information and communication
technologies to facilitate the managerial processes that will generate the change.
The firms that will benefit most are those that are able to provide these facilitating
technological innovations. The big unknown consideration for the future is the
role that government will take in shaping and regulating retailing either directly
through policies of competition and rights of establishment and indirectly through
polices affecting the environment in which retailers operate. The four major trends
are likely to operate irrespective of governmental intervention. The speed at which
the trends will develop is what will be subject to government policies.
Acknowledgement
Work on the final version of this chapter took place whilst the author was in re-
ceipt of support from Ministerio de Educación y Ciencia, Madrid under award
SAB2003-0246. This support is gratefully acknowledged.
References
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Clarke, R, Davies, S, Dobson, P and Waterson, M (2002) Buyer power and competition in
European food retailing. Edward Elgar: Cheltenham.
Dawson, J (1999) The evolution and future structure of retailing in Europe. In: K. Jones
(ed) The Internationalisation of Retailing in Europe. Centre for Study of Commercial
Activity, Toronto, 1-13.
Dawson, J (2001) Is there a new commerce in Europe? International Review of Retail,
Distribution and Consumer Research, 11(3), 287-299.
Eurostat (2002) Distributive Trades in Europe 1995-1999. Data CD Eurostat: Luxembourg.
Mintel (2003) Cross border retailing. European Retail Briefing, 44, 5-11.
Pilat, D (1997) Regulation and performance in the distribution sector. OECD, Economics
Department Working Papers, 180
Prahalad, C K and Ramaswamy, V (2003) The new frontier of experience innovation. MIT
Sloan Management Review, 44(4), 12-18
Reynolds, Howard E, Dragun, D, Rosewell, B and Ormerod P (2005) Assessing the produc-
tivity of the UK retail sector. International Review of Retail, Distribution and Con-
sumer Research, 15(2), in press.
Ziliani, C (1999) Micromarketing. Egea: Milan
Trends in U.S. Retailing
Barton A. Weitz1 and Mary Brett Whitfield2
1University of Florida, Gainesville, USA
2Retail Forward, USA
Introduction
U.S. retailing is a highly competitive, dynamic industry. Consumers have a large
number of retailers that they can choose to patronize conveniently. Due to the
availability of information on the Internet, consumers are becoming more sophis-
ticated shoppers – more knowledgeable about retailers and the merchandise they
offer. Diversity in consumer needs is increasing across the population and specific
shopping situations and, given the number of alternatives, consumers are selec-
tively patronizing retailers that satisfy their specific needs.
In this environment, retailers are employing the classic competitive strategies of
low cost or differentiation. Retailers are either developing innovative approaches
for lowering their costs and providing lower prices or tailoring their offering to
better satisfy the needs of specific market segments.
In this chapter, we first outline the general trends in the U.S. retail industry and
then explore specific trends in the various retail sectors – food, general merchan-
dise and non-store retailing. The chapter concludes with a view into the future.
General Trends in U.S. Retailing
Trends in the retail environment are driven by the changing nature of the U.S.
consumer and competitive response to these changes. In the first part of this sec-
tion, we briefly discuss consumer behavior trends and the then review the impact
of these changes on the retail marketplace (Retail Forward 2003).
Consumer Trends
Three important consumer trends affecting retailers are: (1) the size and impor-
tance of two age cohorts – baby boomers and generation Y, (2) the growing ethnic
diversity of the U.S. population, and (3) the increasing sophistication of shoppers.
60 Barton A. Weitz and Mary Brett Whitfield
Baby Boomers and Generation Y Cohorts
No longer having to support their children, baby boomers have significant dis-
posable income: however, much of it is being and will be spent on services and
experiences rather than products. Wellness is one of the major interests for peo-
ple in this age cohort. Retailers targeting this age cohort are focusing on improv-
ing the convenience and quality of the shopping experience and emphasizing
wellness offerings.
Generation Y consumers are more knowledgeable and independent in their
choice of products to buy and retailers to patronize. Retailers targeting this seg-
ment are attempting to build honest, authentic, personal relationships with con-
sumers in this segment since they are not as responsive to conventional mass me-
dia advertising and branding as their parents.
Ethnic Diversity
One of the most dramatic U.S. demographic shifts is the growth of the Hispanic
population. In 2000, Hispanics became the largest minority at 13% of the U.S.
population. Rather than being assimilated in the dominant U.S. culture, the diverse
ethnic and racial groups are proud of their cultural identities and desire to maintain
a connection with their heritage. Thus retailers are tailoring their offering to the
needs of each of these diverse ethnic and racial groups.
Sophisticated Shoppers
In part due to the Internet, consumers are becoming more knowledgeable about
the products they buy. For example, more than 40% of consumers collect informa-
tion from the Internet before they go to stores for significant purchases, e.g., buy-
ing automobiles, consumer electronics, home improvement material (see also
chapter by Uncles in this book) .
These consumer trends suggest that retailers need to respond to varying con-
sumer needs and their growing diversity. Consumers are looking for more unique
and personally meaningful lifestyles and retailers need to tailor their offering to
these desires. One size no longer fits all.
In addition, consumers have different needs for different shopping situations.
For example, they want to be able to buy basic consumable goods (i.e., groceries
and household essentials) at a low cost. On the other hand, when faced with more
complex needs such as building a deck or redecorating a room, they are looking
for retailers that provide a complete solution involving services and information in
addition to the specific products needed. Then, at other times, shopping is driven
by desires rather than needs. This self-expression shopping mode is ego-intensive
and emotional.
Trends in U.S. Retailing 61
These different shopping situations and motivations result in an increase in
cross-shopping – a pattern of buying both premium and low-priced merchandise
or patronizing expensive, status-oriented retailers and price-oriented retailers.
Retail Industry Trends
Retailers have responded to the consumer trends by (1) reducing their costs to
increase value delivered, (2) targeting the needs of specific market segments and
(3) beginning to offer a personalized shopping experience (Retail Forward 2003).
Cost Reduction
During the last 20 years, largely driven by the efficiencies achieved and low prices
offered by Wal-Mart, U.S. retailers have focused on reducing their operating costs
through (1) developing scale economies, (2) increasing supply chain efficiencies,
(3) operating big box stores, (4) centralizing overhead functions and (5) beginning
to adopt more analytical management techniques. This emphasis on cost reduction
has increased the price differential between low service, low price retailers and
higher price retailers that don’t offer merchandise or customer service with mean-
ingful differences.
Scale Economies
Many U.S. retailers have realized scale economies through aggressive internal
growth and acquisition. This drive toward scale economies has greatly increased
concentration in various retail sectors. For example, in 2003, the top three chains
account for 30% of drug store sales; 85% of full-line discount store sales; and 36%
of consumer electronics store sales.
Supply Chain
Retailers are managing their supply chains more efficiently though collaboration
with their vendors. They are sharing information with vendors to effectively en-
gage in joint forecasting and planning (see, e.g., chapter by Huchzermeier and Iyer
in this book). The most recent activities to further improve supply chain efficiency
involve the desire to use RFID tags to track shipments.
Big Boxes
Many of the fastest growing U.S. retail sectors involve larger size stores – e.g.,
supercenters and category specialists – that have greater operating efficiencies.
Centralization
Retailers are also reducing costs by centralizing overhead functions. For example,
department store chains such as JCPenney, Belks and Nordstrom used to have
62 Barton A. Weitz and Mary Brett Whitfield
regional buyers and even store managers making merchandise assortment deci-
sions. These retailers now have centralized buying functions and use information
systems to tailor assortment to local tastes.
Analytical Methods
While many of these approaches to cost reduction (such as supply chain manage-
ment) have reached a point of diminishing return for the most sophisticated U.S.
retailers, a promising new era involving the use of analytical methods is just be-
ginning. These methods are directed at getting more sales and profits out of exist-
ing stores. By using analytical tools, retailers can optimize decisions that were
informally made using rules of thumb (see, e.g., chapter on applications of intelli-
gent technologies by Ravi, Raman and Mantrala in this book).
Targeting Needs of Specific Segments
While retailers have been focusing on reducing costs and prices, retailers also are
beginning to explore approaches for developing offerings directed toward the
needs of specific customer segments. National retail chains have long adjusted
assortments based on climate. Now retailers are adjusting store assortments and
services based on more sophisticated analyses of local markets (see, e.g., Grewal
et al chapter in this book).
Best Buy has developed specialized stores to focus on specific customer seg-
ments when there is significant customer-type representation in the local area. For
example, stores in areas with professional high income households promote high-
end entertainment systems; whereas stores in areas with busy suburban mothers
dedicate more inventory to merchandise like learning software and feature softer
colors, a children’s technology department, a children’s play area and personal
shopping services.
Another trend is the rise of specialty retailers focusing on a specific segment. For
example, Two Inc. targets the tween segment. Apparel assortments are fine tuned to
a younger body type and special fixtures are placed at eye level for younger girls.
Another example, Chico’s, with more than 300 specialty stores, sells apparel
that is fashionable but clearly designed for a woman aged 35 to 55, not a teenager.
Apparel is designed to flatter more mature women.
Personalizing the Shopping Experience
Retailers are just beginning to develop an understanding of what creates value for
individual customers for specific shopping occasions and personalize their offer-
ings at the point of contact. To move toward this personalization, retailers are
building and analyzing customer databases that integrate information about all of
the contracts the retailer has with a customer – contacts in stores (e.g., as discussed
elsewhere in this book by Burke), via the Internet and with call centers .
Trends in U.S. Retailing 63
Growth of Retail Sectors
These general trends are reflected in the growth of different retail sectors and re-
tailers with in the sectors as discussed in the following sections.
While U.S. retail sales have grown at a modest rate paralleling the 4% to 5%
growth in GDP, there are significant variations in the growth rates of different
retail sectors, and firms within each sector, as shown below. For example, reflect-
ing the attractiveness of a low cost strategy, supercenters, category specialists,
warehouse clubs, and limited assortment retailers are realizing high growth while
department and full line discount stores are experiencing limited growth. On the
other hand, Kohl’s, a department store chain, and Target, a discount store chain,
are experiencing high sales growth through their distinctive offerings.
Table 1. Estimated Compounded Sales Growth 2003-2008 (%)
Sales 2003
$ Millions
Estimated % Sales
Compounded Sales
Growth 2003-2008
Food Retailers
Conventional supermarkets 455.470 2,5
Supercenters 150.995 15,0
Warehouse clubs 76.341 6,0
Convenience stores 337.000 5,0
General Merchandise Retailers
Department stores 86.848 -1,0
Apparel and accesory specialty stores 129.790 4,4
Jewelry stores 26.848 5,8
Shoe stores 21.976 1,4
Furniture stores 52.129 4,9
Home furnishing stores 45.848 5,8
Office supply stores 24.345 3,8
Sporting goods stores 27.792 5,2
Book stores 15.180 4,5
Building material hardware, and garden supply
stores
321.134 6,2
Consumer electronics and appliance stores 95.380 5,7
Drug stores 163.929 6,9
Full line discount stores 131.013 1,0
Food and General merchandise extreme value 39.585 6,2
Nonstore retailers
Nonstore retailing 123.419 9,2
E-commerce 54.900 26,8
(Sources: U.S. Department of Commerce, company reports, National Association of Con-
venience Stores and Retail Forward, Inc.)
64 Barton A. Weitz and Mary Brett Whitfield
Trends in U.S. Food Retailers
The food retailing landscape is changing dramatically (Retail Forward 2004a).
Twenty years ago, consumers purchased food primarily at conventional supermar-
kets. As shown below, nearly four out of 10 shoppers report doing most of their
food shopping somewhere other than a conventional supermarket. The fastest
growing segment of the food retail market are low cost, low price formats – super-
centers, warehouse clubs and limited assortment supermarkets. However, tradi-
tional supermarkets and convenience stores are responding by differentiating their
offering.
Table 2. Food Shopping Formats
Format Where Most
Food Shopping Is Done
Average Annual Real
Sales Growth 1998-2003
Conventional supermarkets 61% 1%
Supercenters 19% 23%
Limited assortment supermarkets 6% N.A.
Warehouse clubs 4% 10%
Others including convenience stores 10% Varies
(Source: Retail Forward ShopperScape™, U.S. Department of Commerce, company reports,
and Retail Forward, Inc.)
Supermarkets
While conventional supermarkets still sell a majority of food merchandise in the
U.S., they are under substantial competitive pressure. Everyone wants a piece of
the food pie. Supercenters are rapidly attracting conventional supermarket cus-
tomers with their broader assortments of general merchandise at attractive prices.
Full-line discount chains like Target and dollar stores are increasing the amount of
space devoted to consumables. Convenience stores are also selling more fresh
merchandise.
Even though supermarket chains have reduced their operating costs through
consolidation, category management and better supply chain management, the
format continues to have higher operating costs than supercenters. To compete
successfully against intrusions by other food retail formats, conventional super-
markets are differentiating their offering by (1) emphasizing fresh perishables, (2)
targeting health conscious and ethnic consumer segments, (3) providing a better
in-store experience and (4) offering more private label brands.
Trends in U.S. Retailing 65
Fresh Perishables
Fresh merchandise categories, including dairy, bakery, meats, fish, produce and
coffee bars, are differentiators and profit generators for conventional supermar-
kets. Conventional supermarkets are building on this strength by devoting more
space to fresh merchandise.
Another example of emphasizing “fresh” is offering meal-solutions for time-
pressured consumers. At Wegmans (an upstate NY-based supermarket chain),
customers can eat lunch overlooking the European-style Market Cafe or buy pre-
pared meals to take home. Chefs in monogrammed white jackets and tall pleated
paper hats staff the separate pizza, deli and fresh-baked bread stations. Along one
wall, Caesar salads are made to order. At another station, customers have a choice
of Alfredo, marinara or vodka sauce on the hot pasta. Folks who keep kosher have
their own area for, perhaps, meat-stuffed cabbage and potato pancakes or a Wal-
dorf salad.
Targeting Specific Segments
Targeting wellness oriented baby boomers, conventional supermarkets are offer-
ing more natural, organic, low-fat, low-sugar and low-salt merchandise for the
growing segment of consumers who are health-conscious or have dietary restric-
tions. Sales at Whole Foods and Wild Oats, two national supermarket chains that
focus on natural/organic food, are growing at 20% per year.
Conventional supermarkets are also adjusting their merchandise mix to attract
more ethnic shoppers. Hispanics are more likely to prepare meals from scratch,
spend more on groceries, prefer stores with bilingual staff and signage and place
importance on fresh food. To address these specific needs, President Supermarkets
in Little Havana in Miami creates an appealing an environment for Hispanics
playing merengue or mariachi music plays over the store’s audio system , not
Moody Blues or Neil Diamond; offering unique produce such as “Haitian man-
goes”, “fresh cassavas” and “Jamaican yellow yams”; and employing Cuban,
Mexican, Haitian, Colombian and Peruvian grocery clerks.
Shopping Experience
Creating an enjoyable shopping experience through store ambiance and customer
service is a key approach that supermarket chains are using to differentiate them-
selves from low-cost, low-price competitors. Supermarkets are increasingly incor-
porating “food as theatre” concepts such as open-air market designs, cooking
classes, demos, and food tasting.
Private Labels
Private labels provide an opportunity for conventional supermarkets to increase
profit margins and differentiate their assortment. Presently private labels account for
only 15% to 20% of supermarket sales, far less than their penetration in Europe.
66 Barton A. Weitz and Mary Brett Whitfield
Supercenters
Supercenters, stores that combine a supermarket with a full line discount store, are
the fastest-growing store-based retail sector in the United States. While super-
centers are the fastest growing segment in food retailing, they face challenges in
finding locations for new stores. In the United States, there has been a backlash to
large retail stores particularly, Wal-Mart stores. These opposing sentiments are
based on the views that big box stores drive local retailers out of business, offer
low wages and nonunion jobs, have unfair labor practices, threaten U.S. workers
because they buy imported merchandise, and cause excessive automobile and
delivery truck traffic.
Limited Assortment Supermarkets
Another fast growing U.S. retail segment is limited assortment supermarkets. The
two largest chains in the United States are Sav-A-Lot and Aldi. While conven-
tional supermarkets typically carry 20,000 SKUs, limited assortment stores carry
about 1,000 SKUs. Stores are designed to maximize efficiency and reduce costs.
For example, merchandise is shipped in cartons that can serve as displays so that
no unloading is needed. Some costly services such as free bags and paying with
credit cards are not provided. Stores are typically located in second- or third-tier
shopping centers with low rents. While these stores target low-income consumers,
they are beginning to appeal to value-conscious, middle-income consumers.
Warehouse Clubs
Warehouse clubs are also experiencing good growth. Costco differentiates itself
by offering unique upscale merchandise not available elsewhere at low prices. For
example, Costco began selling fine art priced from $450 to $15,000 on its Web
site. Sam’s Club focuses more on small businesses, providing relevant products
and services such as group health insurance. Wholesale members typically repre-
sent less than 30% of the customer base but account for more than 70% of sales.
Convenience Stores
Convenience stores in the United States are facing increased competition from
other formats. Convenience store sales are affected by gasoline prices – increasing
during periods of rising gasoline prices. But the dependency on gasoline sales is a
problem because gasoline sales have low margins. In addition, supercenter and
supermarket chains are attempting to increase customer store visits by offering
gasoline and tying gasoline sales into their frequent shopper programs. Drug stores
Trends in U.S. Retailing 67
and full line discount stores are setting up easily accessed areas of their stores with
convenience store-type merchandise.
In response to these competitive pressures, convenience stores are taking steps
to decrease their dependency on gasoline sales, tailoring assortments to local mar-
kets and making their stores even more convenient to shop. To get gasoline cus-
tomers to spend more on other merchandise and services, convenience stores are
offering more fresh food and healthy fast food that appeal to today’s on-the-go
consumers, especially women and young adults. Finally convenience stores are
also adding new services such as financial service kiosks that give customers the
opportunity to cash checks, pay bills, and buy prepaid telephone minutes, theatre
tickets and gift cards.
Convenience stores are exploring the use of technology to increase shopping
convenience. For example, Sheetz, a Pennsylvania-based convenience store chain,
has self-service food ordering kiosks at its gasoline pumps. Customers can order a
custom-made sandwich while filling their tank and pick it up in the store when
they finish.
Trends in U.S. General Merchandise Retailers
Department Sores
Traditionally, department stores attracted customers by offering a pleasing ambi-
ence, attentive service and a wide variety of merchandise under one roof. They
sold softgoods (apparel and bedding) and hard goods (appliances, furniture and
consumer electronics). But now most department stores focus almost exclusively
on softgoods.
Department store chains can be categorized into three tiers. The first tier in-
cludes upscale, high fashion chains with exclusive designer merchandise and ex-
cellent customer service such as Neiman Marcus, Bloomingdale’s (part of Feder-
ated Department Stores), and Saks Fifth Avenue (part of Saks). The second tier of
department stores retailers is comprised of companies such as Macy’s (also part of
Federated Department Stores), May Company, and Dillard’s. Retailers in this tier
sell more modestly priced merchandise with less customer service. The value-
oriented, third tier – dominated by Sears, JCPenney, and Kohl’s – caters to more
price-conscious consumers. The retail chains in the first tier have established a
clearly differentiated position and are producing strong financial results. Chains in
the second tier have yet to define a clear positioning and differentiation, while the
value-oriented tier is facing significant competitive challenges from discount
stores, particularly Target.
Even though third tier department stores are facing intense competition, Kohl’s
has been growing rapidly. Kohl’s formula for success is offering shopping conven-
ience for time-pressured, “soccer moms” interested in buying national brand apparel
and soft home merchandise at reasonable prices. It sells national brands typically
68 Barton A. Weitz and Mary Brett Whitfield
available in department stores and has exclusive sub-brand arrangements with some
national brands sold at second tier department stores such as Estee Lauder cosmetics
and Laura Ashley home textile and bedroom accessories.
But the key to Kohl’s success is convenience. Its stores are located in suburban
neighborhood centers and they are easy to shop. The stores are smaller (80,000
square feet) than traditional, mall-based department stores and are on one floor.
The aisles and fixture spacings are wider than the typical department store so that
customers can easily navigate the store pushing a shopping cart or baby stroller.
Rather than having POS terminal at each department, the stores have centralized
cash wraps (checkout stations) near the store entrances so that customers can se-
lect merchandise from different areas of the store and pay for it all at once when
they are ready to leave.
Since Kohl’s does not carry designer brands that require “store within a store”
displays, merchandise is grouped by type of item rather than brand. It avoids the
cluttered look by positioning display racks in amphitheater style, making all the
merchandise visible. Colors are displayed from light to dark, a pattern that is most
appealing to the eye. And unlike most stores, which try to straighten up merchan-
dise all day, Kohl’s keeps presentations sharp with a daily 2 p.m. “recovery pe-
riod,” when everyone in the store – from secretaries to store managers – are called
upon to straighten up displays. Night crews do something similar. The total effect
is to allow sales clerks to concentrate solely on customers.
Consumers feel that department stores are not as convenient as discount stores
because they are located in large regional malls rather than local neighborhoods.
Customer service has diminished due to cut backs in labor costs. Department
stores have not been as successful as discount stores and food retailers in reducing
costs by working with their vendors to establish just-in-time inventory systems, so
prices are relatively high.
The performance of department stores is linked to the strengths of the brands
they sell – brands such as Liz Claibourne, Tommy Hilfiger, Ralph Lauren and
Estee Lauder. In light of the decline in department store patronage, many of these
brands historically sold exclusively through department are pursing other growth
opportunities. For example, Estee Lauder, a supplier of various cosmetic brands to
first and second tier department stores, has developed three exclusive private label
cosmetics lines for Kohl’s. Levi Strauss created the Levi Straus Signature line for
Wal-Mart and other discount stores (Marineau 2004).
Strategies
To deal with their eroding market share, department stores are (1) attempting to
increase the amount of exclusive merchandise they sell, (2) undertaking marketing
campaigns to develop strong images for their stores and brands and (3) building
better relationships with their key customers (Retail Forward 2004b). To differenti-
ate their merchandise offering and strengthen their image, department stores are
aggressively seeking exclusive arrangements with nationally recognized brands. For
Trends in U.S. Retailing 69
example, Macy’s negotiated with Tommy Hilfiger to launch its new H line exclu-
sively with supporting advertising featuring Iman and David Bowie. JCPenney be-
came the exclusive retailer for Bisou Bisou, a contemporary apparel brand that was
previously sold through better specialty stores and upscale department stores.
In addition, department stores are placing more emphasis on developing their
own private label brands. For example, Macy’s has been very successful in devel-
oping a strong image for its private label brands such as INC (women’s clothing)
and Tools of the Trade (housewares).
In recent years, department stores’ discount sales events have increased dra-
matically to the point that consumers have been trained to wait for the sale than
buy at full price. Department stores are now shifting their marketing activities
from promotional sales to brand building activities involving television advertis-
ing and specialty publications such as Saks Fifth Avenue’s S magazine.
Finally, department stores are using technology and information systems to im-
prove customer service in a cost effective manner. To improve customer service,
wireless devices are being used on the selling floor to provide sales associates
with customer and merchandise information. Department stores are collecting and
analyzing information to identify their best customers and target promotions to
these customers.
Full Line Discount Stores
Since Wal-Mart alone accounts for more than 58% of full line discount store retail
sales, the most significant trend in this retail sector is Wal-Mart’s conversion of
discount stores to supercenters (Retail Forward 2004c). In 2008, it is estimated that
Wal-Mart will be operating more than 2,300 supercenters and less than 1,200 tradi-
tional discount stores. With their full supermarket offer, supercenters attract shop-
pers more frequently. The conventional discount stores also face intense competition
from discount specialty stores that focus on a single category of merchandise, such
as Old Navy, Best Buy, Bed, Bath & Beyond, Sports Authority and Lowe’s.
While Wal-Mart is converting its full line discount stores, Target, one of the
most successful retailers in terms of sales growth and profitability, is still growing
its discount store base. Target’s success is based on offering fashionable merchan-
dise at low prices in a pleasant shopping environment. Target has developed an
image of “cheap chic” by teaming with designers such as Michael Graves, Isaac
Mizrahi and Giannulli Mossimo to produce inexpensive and exclusive fashionable
merchandise.
Specialty Apparel and Accessories Stores
Specialty stores’ success is based on offering assortments edited for a narrowly
defined target market (Retail Forward 2003b). For example, Hot Topics focuses
on selling licensed, music-inspired apparel to teenagers in mall-based stores. Its
70 Barton A. Weitz and Mary Brett Whitfield
sales associates know what’s new on the radio, in record stores, concert tours and
pop culture. Its licensing, design and sourcing processes are designed so that it can
move hot rock stars’ fashions and logos from the concert stage to store shelves in
90 days.
Because specialty retailers focus on specific market segments, they are vulner-
able to shifts in consumer tastes and preferences. Apparel and footwear specialty
retailers are capturing less of the consumer’s total spending because consumers
are spending more on necessities involving health and home as well as “everyday”
luxuries such as concert tickets and eating out.
Drug Stores
Drug stores, particularly the national chains, are experiencing sustained sales
growth because the aging population requires more prescription drugs. Although
the profit margins for prescription pharmaceuticals are higher than for other drug
store merchandise, these margins are shrinking due to government health care
policies, pharmaceutical benefit management services and public outcry about
lower drug prices in other countries, especially Canada (Retail Forward 2004d).
Drugstores are also being squeezed by considerable competition from pharma-
cies in discount stores and supermarkets, as well as from prescription mail-order
retailers. Wal-Mart is the third-largest pharmacy operator in the United States
(behind Walgreens and CVS). In response, the major drug store chains are build-
ing larger stand-alone stores offering a wider assortment of merchandise, more
frequently purchased food items and the convenience of drive-through windows
for picking up prescriptions. To build customer loyalty, the chains are also chang-
ing the role of their pharmacists from pill dispensers to health care information
providers, performing tasks such as explaining how to use a nebulizer.
Drug store retailers are using systems to allow pharmacists time to provide per-
sonalized service. For example, at Walgreens, customers can order prescription
refills via the phone. They are automatically called when the prescription is ready.
Based on the time they plan to pick up the prescription, a computer system auto-
matically schedules the workload in the pharmacy. The systems also monitor the
frequency of refilling prescriptions so the pharmacist can make phone calls or
send e-mails to ensure patient drug compliance.
Category Specialist
Category specialists continue to flourish and expand the format to new categories
such as musical instruments (Guitar Center) and outdoor activities (Bass Pro Shop
and REI). By offering a complete assortment in a category at low prices, these
chains can “kill” a category of merchandise for other retailers and thus are fre-
quently called category killers. For example, Bass Pro Shop has 25 stores that are
highly interactive and entertaining, catering to consumers who like to participate in
Trends in U.S. Retailing 71
outdoor activities. The 300,000 square foot store in Springfield, Mo. attracts more
than 4 million visitors, making it the number one tourist attraction in Missouri. It has
a four-story waterfall, rifle and archery ranges, four aquariums, an indoor driving
range, a putting green, and a 250-seat auditorium and conference room for fish-
feeding shows and workshops. Sales associates are knowledgeable outdoors people.
Each one is hired for a particular department that matches that person’s expertise.
All private branded products are field tested by Bass Pro Shops’ professional teams:
Redhead Pro Hunting Team and Tracker Pro Fishing Team.
Most category specialist chains started in one region of the country and satu-
rated that region before expanding to other regions. For example, Office Depot
started in Florida and expanded through the southeast and southwest, and Staples
started in Boston and expanded through New England and the midwest. During
this period of expansion, competition among specialists in a category was limited.
Now competition among specialists in each category is very intense as the firms
expand into the regions originally dominated by another firm. In most merchan-
dise categories, the major firms are now in direct competition across the nation.
This direct competition focuses on price, resulting in reduced profits because
the competitors have difficulty differentiating themselves on other elements of the
retail mix. All the competitors in a category provide similar assortments since they
have similar access to national brands. They all provide the same level of service.
In response to this increasing competitive intensity, the category killers continue
to concentrate on reducing costs by increasing operating efficiency and acquiring
smaller chains to gain scale economies. Due to this consolidation, two or three
firms dominate each category.
Category specialists are attempting to differentiate themselves with service. For
example, both Staples and Office Depot have specialized sales associates dedi-
cated to selling electronic office equipment. The Home Depot and Lowe’s hire
licensed contractors as sales associate to help customers with electrical and
plumbing repairs. They provide classes to train home owners in tiling, painting,
etc. to give shoppers the confidence to tackle their DIY projects.
Extreme Value Retailers
Extreme Value retailers are one of the fastest-growing segments in retailing (DSN
Retailing Today 2004). Like the limited assortment food retailers, the extreme
value full line retailers reduce costs and have low prices by offering a limited as-
sortment and operating in low rent, urban or rural locations. Many value retailers,
particularly Family Dollar and Dollar General, target low-income consumers,
whose shopping behavior differs from typical discount store or warehouse club
customers. For instance, although these consumers demand well-known national
brands, they often can’t afford to buy large-size packages. Since this segment of
the retail industry is growing rapidly, vendors often create special smaller pack-
ages for them.
72 Barton A. Weitz and Mary Brett Whitfield
Extreme value retailers follow a variety of business models. Dollar Tree,
Greenbacks and 99 Cents Only draw from multiple income groups and are gener-
ally located in suburban strip malls. They specialize in giftware, party and craft
items rather than consumables. Family Dollar and Dollar General are general mer-
chandise retailers also selling consumables.
In the past, extreme value retailers were considered low status retailers catering
to lower-income consumers. Today, however, higher income consumers are in-
creasingly patronizing dollar stores for the thrill of the hunt. Some shoppers see
extreme value retailers as an opportunity to find some hidden treasure among the
bric-a-brac. To capitalize on this attraction for unusual items, many supermarkets
and full line discount stores are adding dollar aisles to their stores.
Trends in Non-store Retailing
In the preceding sections, we have examined retailers whose primary channel is
their stores. In this section, we will discuss types of retailers that operate primarily
through non-store channels. The major U.S. non-store channels are the Internet,
catalogs and direct mail, direct selling, television home shopping and vending
machines. However, sales through vending machines, direct selling, and television
home shopping compared to the Internet are relatively small and not growing.
Thus we focus on the trends in Internet retailing.
Perspectives on electronic retailing have changed dramatically during the last
five years. In 1998, most retail experts were predicting that a new breed of high-
tech, Web-savvy entrepreneurs would dominate the retail industry. Everyone
would be doing their shopping via the Internet in the future; stores would close
due to lack of traffic; and paper catalogs would become obsolete. The prospects
for electronic retailing were so bright that billions of dollars were invested (but
ultimately lost) in Internet retail entrepreneurial ventures like Webvan, eToys, and
Garden.com – companies that are longer part of the retail landscape.
Even though online retail sales continue to grow much faster than retail sales
through stores and catalogs, store-based and catalog retailers now realize the
Internet is not a revolutionary new retail format that will replace traditional retail
outlets. While the Internet continues to provide opportunities for entrepreneurs in
the retail industry, it is now primarily used by traditional retailers as a tool, com-
plementing their store and catalog offerings, for growing revenues and providing
more value for their customers.
Online sales are growing at more than 25% per year, more than five times faster
than store and catalog sales, but Internet sales are expected to represent only 6%
of total retail sales by 2008 (Retail Forward 2004e). However, the Internet has a
substantial influence on consumer store choice and purchase decisions. For exam-
ple, more that 40% of U.S. consumers review information on Web sites before
buying automobiles, consumer electronics and books. The Internet has become a
place to search and compare, as well as buy.
Trends in U.S. Retailing 73
Multi-channel Retailing
The Internet offers traditional store-based and catalog retailers the opportunity to
expand the merchandise assortment that they can offer, the geographic markets
they can service and the personalization information they can collect. However,
U.S. retailers are slowly dealing with the challenges of providing an integrated
multi-channel offering.
Customers want to be recognized by a retailer whether they interact with a sales
associate or kiosk in a store, log on to the retailer’s Web site or contact the retailer’s
call center by telephone. However, to provide a consistent face to a customer across
multiple channels, retailers need to integrate their customer databases and systems
used to support each channel. In addition to the information technology issues, other
critical issues facing retailers that desire to provide an integrated, customer-centric
offering involve brand image, merchandise assortment and pricing.
When traditional U.S. retailers initially went on line, they simply displayed
products for sales on their Web sites. Now, to get ahead of the competition, multi-
channel retailers need to provide features and services that enhance the customer’s
experience across channels (see also chapter on electronic retailing by Weitz in
this book). The most integrated multi-channel retailers offer these things:
x A liberal return policy where the store accepts products purchased online
x Web sites that feature the retailer’s promotions and sales
x Store receipts contain the URL for retailer’s Web site
x Store associates direct customers to the Web site for out-of-stock items
x Customers can place orders online for store pickup
x Stores have kiosks enabling customers to access the retailer’s Web site.
x Web sites offer inventory information (what merchandise is available in lo-
cal stores)
x In-store kiosks allow customers to order merchandise not carried in stores
x Web site offers the ability to prepare and print out a shopping list for a
store visit
x Web site offers store coupons and other promotions
x Web site lists information about in-store events
x Store associates direct shoppers to the Web site for post-purchase information
x Retailer offers free shipping of product bought from Web site but picked up
at the store
x Shoppers can pay cash in store for products purchased from Web site
x Stores offer coupons for online purchases.
74 Barton A. Weitz and Mary Brett Whitfield
Most retailers are still struggling to integrate the shopping experience across all
their channels. Legacy systems and disconnected customer and inventory data-
bases hamper retailers’ ability to maintain consistency across channels. For some
large department stores with an array of inventory, it’s impossible to mirror online
exactly what is offered in stores. What’s more, the expensive technology upgrades
needed are a tough sell in today’s budget-conscious environment, especially when
online sales still account for such a small fraction of all sales. Many retailers are
finding it easier to offer integration one step at a time, rather than trying to link
everything from the start, which could be financially and technologically daunting
for them and alienate consumers if things don’t go right.
The Future of Retailing
As we have discussed, cost reduction has been and continues to be a major theme
in U.S. retailing. Since continued cost reductions are becoming more difficult to
achieve, retailers will shift their attention to developing customer loyalty through
increasing the personalization of their offerings. The following future scenario
describes how technology will be used to provide this more intimate shopping
experience.
It’s Tuesday morning. Judy Jamison is eating breakfast and flipping through a
catalog from her local department store chain. She sees some attractive dresses
and decides to buy a new dress for the cocktail party and dinner for the Cancer
Society she will be going to this Friday night. She goes to the department store’s
Web site to look at more dresses and then decides to go to the store after work.
Shortly after Judy walks into the store, a chip on her credit card signals her
presence and her status as a frequent shopper to a PDA (personal digital assistant)
held by the store sales associate responsible for preferred clients. Information
about items that Judy might be interested in, including the items she viewed on the
Web site earlier in the day, is downloaded from the store server to Judy’s and the
sales associate’s PDAs.
A sales associate approaches Judy and says, “Hello Ms. Jamison. My name is
Joan Bradford. How can I help you?” Judy tells the associate she needs to buy a
dress for a cocktail party. She has seen some dresses on the store’s Web site and
would like to look at them in the store. The sales associate takes Judy to a virtual
dressing room.
In the dressing room, Judy sits in a comfortable chair and sees the dresses dis-
played on her image. Judy’s image is drawn from a body scan stored in Judy’s
customer file. Information about Judy’s recent visit to the retailer’s Web site and
past purchases is used to select the dresses displayed.
Using her PDA, Judy is able to share this personalized viewing with her friend
who is still at work in California. They discuss which dress looks best on Judy.
Then using her PDA, Judy drills down more information about the dress – the
Trends in U.S. Retailing 75
fabrication, cleaning instructions, and so forth. Finally she selects and purchases
the dress with one click.
Using information displayed on her PDA, Joan, the sales associate helping
Judy, suggests a handbag and scarf that would complement the dress. These acces-
sories are displayed on the image of Judy in the dress. Judy decides to buy the
scarf but not the handbag. Finally, Judy is told about the minor alterations needed
to make the dress a perfect fit. She can check the retailer’s Web site to find out
when the alterations are completed and then indicate whether she wants the dress
delivered to her home or if she will pick it up at the store.
As Judy passes through the cosmetics department on the way to her car, she
sees an appealing new lipstick shade displayed on a digital sign – a message trig-
gered by the chip on her credit card. She purchases the lipstick and a 3-ounce bot-
tle of her favorite perfume and walks out of the store. The store systems sense her
departure, and the merchandise she has selected is automatically charged to her
account through the use of RFID.
References
DSN Retailing Today (2004), Dollar Formats Continue Food Expansion, DSN Retailing
Today, July 19, 2004, p. 10.
Marineau, Phillip, Fitting In: In Bow to Retailer’s New Clout, Levi Strauss Makes Altera-
tions, The Wall Street Journal, June 17, 2004, p. A1.
Retail Forward (2003a). Twenty Trends for 2010: Retailing in an Age of Uncertainty. Co-
lumbus, OH: Retail Forward, April 2003, p. 8.
Retail Forward (2003b) Growth Strategies for Specialty Apparel Retailers. Columbus, OH:
Retail Forward, August 2003.
Retail Forward (2004a). Industry Outlook: Food Channel. Columbus, OH: Retail Forward,
February 2004.
Retail Forward (2004b) Industry Outlook: Department Stores. Columbus, OH: Retail For-
ward, February 2004.
Retail Forward (2004c) Industry Outlook: Mass Channel. Columbus, OH: Retail Forward,
April 2004.
Retail Forward (2004d) Industry Outlook: Drug Channel. Columbus, OH: Retail Forward,
August 2004.
Retail Forward (2004e) Industry Outlook: Multi-channel Retailing: Benchmarks and Prac-
tices. Columbus, OH: Retail Forward, May 2004.
Trends in Retailing in East Asia
Roy Larke
ESADE School of Business, Barcelona, Spain and UMDS Kobe, Japan
Introduction: The East Asian Retail Market
East Asia is a region currently undergoing rapid retail development. There is little
mystery in this. It is by far the most densely populated region of the world, and,
with some important exceptions, remains largely undeveloped in terms of modern
retailing. This latter fact is changing as the world’s leading grocery retailers, notably
Carrefour, Metro, Tesco, and Wal-Mart, expand in the region, emphasizing East
Asian markets as a major pillar of their global strategies. In addition, and although
almost unrecognized in the Western press and academic literature, equally large
retailers from Japan are also aggressively building market share in all of the key
markets in the region.
Such factors make East Asia one of the most interesting regions in the world in
terms of how retailing will develop over the next few years. At the same time, East
Asia is not a homogenous entity. It does not have a common language, culture, relig-
ion or even a single race. There are wide disparities between countries in terms of
economic development and standards of living. The geography of the region ranges
from desert to jungle and from snowbound winters in northern Japan to constant 30
degree temperatures in Singapore and Indonesia. It is by no means a single market.
In contrast, Europe, which is also a large and diverse market, is still more uniform.
For these reasons, it is inappropriate to attempt to analyze East Asia as a single
market. At the same time, the development of retailing in the region shares two
important characteristics. First, local, domestic retail markets remain relatively
unsophisticated, and second, there are very few large, multinational retailers that
originate from Asia. Both of these characteristics are now in transition. As East
Asian markets grow, so too does the retail industry, and this has attracted a sig-
nificant number of international firms most of which originate from advanced
economies. These companies are already dominant in a number of East Asian
retail markets and their impact on the development of retailing locally is consider-
able. There have been few studies concerning such impact, but the accelerated
development of local retail markets as a result of foreign retailer entry is impossible
to deny (Davies 2000).
78 Roy Larke
Economic Background
The region of East Asia is so diverse that most major international bodies do not
define it in any convenient way. Asia is an area of 50 million square kilometers
and 4 billion people when considered in its broadest definition including India,
Pakistan, and countries in the centre of the Asian continent. As East Asia and
South East Asia are the areas where much of the retail development activity is cur-
rently taking place this chapter concentrates on this part of the region (see Table 1).
Even then, East Asia alone covers 15.6 million square kilometers and is home to
2.019 billion people.
Table 1 shows the basic demographics for this region. It consists of some 16
countries in total and the diversity in the region is obvious. China alone accounts
for more than 60% of both the total population and land area. While, in contrast, a
number of countries are relatively small, and population densities are high.
Table 1. Demographic Data for Region of East Asia
Country Area Population Population
Density
GDP Per
Capita
sq km 2002 per sq km 2003, US$
Cambodia 181,040 12,775,324 71 272
Indonesia 1,919,440 231,328,092 121 804
Japan 377,835 126,974,628 336 31,277
Laos 236,800 5,777,180 24 333
Malaysia 329,750 22,662,365 69 3,868
Mongolia 1,565,000 2,694,432 1.7 447
North Korea 120,540 22,224,195 184 492
People’s Republic of China (Mainland) 9,596,960 1,284,303,705 134 966
Philippines 300,000 84,525,639 282 980
PRC Hong Kong 1,092 7,303,334 6,688 23,800
PRC Macau 25 461,833 18,000 15,432
Republic of China
(Taiwan, Quemoy, Matsu) 35,980 22,548,009 627 12,666
Singapore 693 4,452,732 6,430 20,849
South Korea 98,480 48,324,000 491 10,013
Thailand 514,000 62,354,402 121 1,990
Vietnam 329,560 81,098,416 246 428
Totals (average GDP per capita) 15,607,195 2,019,808,286 129 7,789
(Source: World Bank 2004)
Trends in Retailing in East Asia 79
In terms of GDP per capita, the variation is large, running from Japan, the second
richest country in the world with an average GDP per head of $31,277 in 2003, to
just $272 per head in Cambodia. Five countries have GDP per head below $500,
and all of these have received little international retail development to date., but
ten of the remaining 11 countries are subject to considerable interest from interna-
tional retail conglomerates. They represent some of the most internationalized
retail markets in the world.
Retailing data is scarce for East Asia, and what does exist concentrates on the
largest countries and those seen as having the greatest potential for retail devel-
opment. Until the mid 1990s, only Japan, Hong Kong, and Singapore had ad-
vanced retail markets. Today, however, South Korea, Malaysia, Taiwan and Thai-
land have joined these three countries, and in each case the large overseas retailers
have been a major factor in the development of the retail industry.
China, with its population of more than 1 billion people, is almost a region it-
self. While the country lags a long way behind in terms of GDP per capita, the size
of the market and the potential it represents has drawn a number of international
retail companies there. At the same time, the Chinese market remains one of fu-
ture potential rather than significant current return. Many overseas retailers oper-
ate there, but consumer incomes remain low and only primary and secondary cit-
ies are important consumer markets. China is, therefore, a long-term proposition
for most companies.
Until recently, Japan was also a market that had received relatively less atten-
tion from international retailers. On the surface, Japan’s advanced economy and
large domestic retail market makes it unattractive to outsiders due to high costs in
competing with existing domestic firms. Entry into other East Asian markets is
seen as more cost effective. But Japan’s market remains highly fragmented. This
finally led to the entry of Carrefour in 2000, with Wal-Mart, Metro, and Tesco
following shortly afterwards.
Consequently, the Chinese and Japanese retail markets almost warrant their
own chapters. In terms of retail development activity, China is currently the most
active market in the world, and as government restrictions on cross-regional retail
activity were finally lifted under WTO rules in 2004, this activity is becoming
more intense. Japan, after undergoing more than 10 years of slow economic
growth and industrial restructuring, is finally emerging as a modern retail market.
International penetration remains low, but the situation is changing. Better Japa-
nese retailers are internationalizing and competing directly with Western firms
across the East Asian region and particularly in China. The influence and impact
of Japanese market entry is at least as strong as that of non-Asian retailers.
There are two key trends across the region as a whole. First, the size of markets
in East Asia are attracting increasing numbers of international retailers. China is
the most recent example but international retail development in Thailand, South
Korea, Taiwan, Malaysia, and Singapore are already at a far more advanced stage.
Other countries such as Vietnam, Indonesia, and the Philippines are also high on
the watch lists of international retail firms. Secondly, the modernization of the
80 Roy Larke
Japanese retail and distribution industries means that better companies are now
multi-regional players in their own right. As discussed below, Japanese firms al-
ready have a large presence in East Asia and are now quickly catching up with
Carrefour and Wal-Mart in China. This trend is set to continue and strengthen.
Retailing in East Asia
Table 2 offers a useful summary of retailing in the region. It clearly shows the
contrast between different countries in terms of the market size and the varying
degrees of development. Euromonitor (2002) surveyed 52 relatively advanced
countries to produce these data and the rankings refer to this sample.
While Japan is the largest market by a factor of almost three, China’s estimated
retail sales of US$390 billion are also significant, and ranked third in the world by
Euromonitor. South Korea is the only other market in the region that currently
comes close to the US$100 billion mark, and ranks relatively low as the twelfth
largest market in the world.
If we look at these figures in percentage terms (Figure 1), Japan alone accounts
for 58.7% of the total retail market in East Asia, and more than 82% of total retail
sales in East Asia come from Japan and China alone.
Japan also has the second richest market in the world in terms of retail sales per
capita at around $7,489 per person in 2002. In contrast, however, China’s per
capita retail sales in the same year were only $304, ranking forty-eighth in the
Table 2. Retailing in East Asia: Summary Data
Retail Sales Sales per capita Sales per store
US$ mill
World
Rank US$
World
Rank US$
World
Rank
China 390,303.0 3 304.5 48 19,238.9 52
Hong Kong (PRC) 24,568.8 33 3,476.0 17 432,534.1 18
Indonesia 31,219.1 27 147.0 51 144,084.6 30
Japan 950,996.0 2 7,489.1 2 778,188.4 13
Malaysia 12,350.5 45 546.6 37 80,860.7 40
Philippines 29,871.8 29 386.3 45 220,069.5 24
Singapore 9,685.7 48 2,943.0 19 539,954.3 16
South Korea 87,089.5 12 1,830.3 25 120,290.4 35
Taiwan 39,728.4 23 1,776.0 27 341,300.5 22
Thailand 26,972.5 32 436.9 42 75,456.0 42
Vietnam 16,171.8 39 199.5 50 21,836.1 50
(Source: compiled from Euromonitor 2002)
Trends in Retailing in East Asia 81
world and the third lowest even in East Asia with only Indonesia and Vietnam
poorer. Furthermore, retail sales per store were the lowest in China compared to
any country in the Euromonitor sample at only $19,238, indicating the huge num-
ber of very small stores in the country. In contrast, Japan, which also has a rela-
tively large number of small stores for such an advanced economy, had sales per
store of $778,188, ranking thirteenth in the world. This was closely followed by
Singapore at $539,954 per store, and Hong Kong at $432,534 per store. Taiwanese
retailing is also fairly advanced with stores averaging sales of $341,300.
Of course, these figures do not convey the detail of the market. As mentioned
above, even China alone should not be considered a single homogenous market
any more than East Asia as a whole is. The bulk of the Chinese population is con-
centrated on the eastern seaboard and around a small number of cities including
Shanghai and Beijing. The low sales per capita and per store are more an indica-
tion of the vastness of the country rather than the low potential of the market.
On the other hand, the figures relating to Japan do clearly indicate an advanced
and extremely rich market, making the low penetration of overseas retailers all the
more surprising. Carrefour only entered the market in 2000 (and announced its exit
in 2005), and was followed by Wal-Mart in 2002, and Metro and Tesco in 2003.
Japan has maintained an image of complexity and low reward that is no longer ap-
plicable, and this has meant that many of the retailers that have aggressively entered
the rest of Asia are only just beginning to consider the Japanese market.
Singapore
J
a
China
South Korea
Taiwan
Indonesia
Philippines
Thailand
Hong Kong (PRC)
Vietnam
M
a
l
ays
i
aSingapore
Japan
China
South Korea
Taiwan
Indonesia
M
a
l
ays
i
a
Philippines
Hong Kong (PRC) Vietnam
Thailand
Fig. 1. Relative Retail Market Sizes in East Asia
(Source: data adapted from Euromonitor, 2002)
82 Roy Larke
Despite the difficulties of obtaining comparable cross-regional data, the pros-
pects and potential of the market in East Asia are clear. For retailers considering
entry into these individual country markets there is a trade off between the diffi-
culty and cost of entry with the actual market potential. In some cases, notably
Hong Kong and Singapore, the small size of the overall market encourages only
minor interest to outside entrants despite the fairly sophisticated nature and rela-
tively rich consumers. Such markets are of interest to higher margin, niche re-
tailers such as apparel chains, but are of far less interest to mass-merchandise
retailers.
Then there are a number of countries where the market is only marginal in
terms of its wealth, despite the fairly large populations and reasonable ease of
entry. These include Vietnam, Philippines, and Indonesia. In each case, several
international retailers have established themselves, but none of these markets is
yet viewed as having enough potential to attract significant overseas interest.
The exceptions to this are Thailand and Malaysia. While fairly small, they have
proved relatively open markets and have seen both Western and Japanese firms
find some success there. Tesco is currently the leading retailer in Thailand with
both Carrefour and Aeon also prominent. Malaysia is led by Aeon, with both Car-
refour and Tesco also building their presence there.
Fig. 2. East Asia: Relative Market Positions by Retail Sales, Sales per Capita and Sales per
Store
(Source: data compiled from Euromonitor, 2002)
Trends in Retailing in East Asia 83
This leaves China, Taiwan, South Korea and Japan as the leading markets in the
region. All four countries have seen massive retail development during the last 10
years and all four will be the focus of internationalization in the near future. With
their overwhelming size and potential, China and Japan again stand somewhat
separate. Japan is the only modern retail system in the region with its own ad-
vanced domestic retail companies. China is seen by most as the single highest
potential market in the world, ahead of India largely due to far easier entry re-
quirements and, surprisingly, lower bureaucratic barriers.
Internationalization of Retail Markets in Asia
The penetration of retail companies from advanced nations into markets within
East Asia can be considered high. At the same time, the number of international
retail companies with a significant presence in East Asia is low with the same
firms appearing again and again as leaders within various East Asian markets.
Table 3 provides a summary of the situation and an indication of the extent of
internationalization in East Asian markets.
In the majority of countries in East Asia, the largest retailer is still a domestic
company. At the time of writing, however, the Philippines is the only country with
no clear overseas presence in the market, and Japan is the only other country that
does not have at least one majority owned overseas retailer ranking among its
leading 10 retail firms for 2003. In Japan’s case, the largest overseas company is
Toys R Us Japan.
In all of the other nine East Asian markets, overseas retailers rank very highly
indeed. Carrefour, Dairy Farm, Aeon, Wal-Mart, and Tesco are major players in
multiple markets throughout the region. Carrefour is clearly the most advanced of
these, being the largest overseas retailer in four of the markets in which it oper-
ates. Equally, Dairy Farm is the leading retailer in Malaysia and Singapore, as
well as being number two in its own domestic market of Hong Kong.
Even these general figures indicate the degree of interest that markets within
East Asia are generating and the relative ease that large international retailers have
had in establishing themselves. Furthermore, retail development in most of East
Asia is still at a fairly early stage in the majority of nations. China, for example,
while being seen as perhaps the world’s most important market in terms of its
overall future potential, only entered the WTO in 2002 and has still to fully re-
move regulatory restrictions on retail activity. The size of the Chinese market
alone is such that international retailers are prepared to invest massive resources in
developing their presence there despite the difficulties and the long-term nature of
the investment required (see, e.g., description of Metro’s expansion in East Asia
by Mierdorf, Mantrala and Krafft elsewhere in this book.).
The next decade will see further expansion of international retail interests in the
East Asia region. There is not a single country that can be said to be fully mature
84 Roy Larke
Table 3. Sales for Largest Retail Company and Largest Non-domestic Retail Company by
Country, 2003
Largest Domestic Retailer Largest Foreign Retailer
Sales 2003 Sales 2003
Country Rank US$ mill Company Rank
US$ mill
No. of C10
oveseas
retailers
China 1 3,534.0 Carrefour 3 2,425.0 2
Hong Kong 1 1,899.0 Aeon 3 390.7 2
Indonesia 1 652.1 Carrefour 3 390.9 1
Japan 1 28,644.7 Toys R Us 55 1,539.9 0
Malaysia 3 297.4 Dairy Farm 1 487.0 4
Philippines 1 1,123.0 – – – 2
South Korea 1 6,238.0 Carrefour 8 1,347.0 2
Singapore 2 793.1 Dairy Farm 1 914.4 6
Taiwan 1 2,292.3 Carrefour 2 1,477.4 2
Thailand 2 957.1 Tesco 1 1,366.0 5
Vietnam 1 63.4 Shiseido 5 43.9 1
Note: Foreign retailer is largest identifiable majority owned non-domestic retail company
(Source: compiled from Euromonitor 2002)
as a retail market. This includes the Japanese market where retailing is continuing
its rapid modernization and where, even here, overseas retailers are adding a sig-
nificant impact to changing the overall retail environment (Larke 2003). Else-
where, room for further expansion and market consolidation is tremendous with
only the demographically small markets of Hong Kong and Singapore being close
to saturation (Davies 2000). We will see development both in terms of interna-
tional retailers and new, modern domestic companies in all of China, Malaysia,
South Korea, Thailand, and Taiwan. Indonesia, the Philippines, and Vietnam are
likely to follow.
Eastern or Western?
The view that entry of overseas firms is detrimental to traditional distribution sys-
tems is a common one. For example, some argue that overseas entry is responsible
for the breakdown of traditional distribution systems in Japan (Takayama 2001), and
the same view is heard in Korea (Choi 2003) and Taiwan. At the same time, the
degree of international expansion by Japanese retailers has been largely overlooked.
In truth, Western firms have very little penetration in the Japanese market. The
largest non-Japanese retailer in 2003 by sales was Toys R Us, but even this was
only the 55th largest chain with roughly 0.14% of the total retail market. Even
Trends in Retailing in East Asia 85
Wal-Mart’s recent partial acquisition of Seiyu gave it control of only 0.8% of
retail sales in 2003.
In contrast, Japanese retailers that make the move overseas are lauded as heroes
by domestic commentators and generate huge public interest (Mukoyama 2003). In
1996, Mukoyama (1996) found almost 300 stores operated by Japanese firms out-
side Japan but even this did not include investment companies and other non-retail
companies operating retailing elsewhere. Significantly, more than 83% of the stores
found in the study were based in Asia, and two thirds had opened after 1990 (Table 4).
Table 4. International Spread of Japanese Retailers, Circa 1996
Year of Entry
Stores
% of
Total 1960s 1970s 1980s 1990s
By Store Format
Specialty Stores 135 46.2 0 3 25 107
Department Stores 81 27.7 1 14 30 36
Supermarkets 76 26.0 0 3 24 49
Total 292 100.0 1 20 79 192
By Region and Country
Asia 243 83.2
Hong Kong 82 28.1 1 3 25 53
Taiwan 51 17.5 0 0 6 45
China 35 12.0 0 0 2 33
Singapore 30 10.3 0 2 11 17
Thailand 18 6.2 0 0 7 11
Malaysia 17 5.8 0 0 8 9
Macao 4 1.4
Indonesia 3 1.0
Brunei 1 0.3
Australia 2 0.7
Europe 25 8.6
UK 10 3.4
France 8 2.7
Spain 2 0.7
Germany 2 0.7
Netherlands 1 0.3
Austria 1 0.3
Italy 1 0.3
North America 24 8.2
USA 22 7.5
Canada 1 0.3
Costa Rica 1 0.3
Total 292 100.0
No data reported
Based on content analysis of newspaper reports.
(Source: compiled from Mukoyama 1996: 75 – 81)
86 Roy Larke
Japanese retailers have the same competitive characteristics as retailers from
Europe and North America and have been making similar inroads into the rest of
East Asia. A second study in 2000 continued this trend (Kawabata 2000, Table 5).
In the period between 1995 and 1999, Japanese retail companies opened 22 de-
partment stores and 130 supermarkets overseas. Among these, however, only two
were opened outside Asia. Clearly, it was not just Westerners expanding into
Asian markets.
In Kawabata’s study it was suggested that once a Japanese firm opened a store
overseas, little additional investment or market development took place. It appears
that many companies viewed stores overseas merely as cash-generating opera-
tions, with profits being quickly repatriated back to Japan. There were few cases
of Japanese retailers becoming part of local East Asian markets, preferring instead
to target Japanese tourists. Many of these stores closed after a short period.
By the turn of the century, however, Japanese trading companies were increas-
ingly involved in retail development overseas. As Table 6 illustrates, the largest
Table 5. Stores Opened and Closed by Japanese Retailers by Region, 1995 – 1999
Department Stores Supermarkets
Total
1955 – 99
Stores
Opened
Stores
Closed
Total
1955 – 99
Stores
Opened
Stores
Closed
Asia 87 21 15 252 129 103
China 7 2 2 66 59 43
Hong Kong 12 1 7 20 6 9
Taiwan 23 10 99 40 24
Singapore 19 2 2 14 4 6
Thailand 9 2 23 12 8
Malaysia 14 4 2 24 6 8
Indonesia 3 2 2 1 2
Others 0 4 1 3
Europe 23 0 7 1 0 1
UK 4 2 1 1
France 8 3
Italy 2 1
Germany 4
Spain 4 1
Austria 1
Americas 12 2 19 1 14
Australia 3 1 0 0
Other 0 8 2
Total 125 22 24 280 130 120
(Source: compiled from Kawabata 2000: pp. 70 – 75)
Trends in Retailing in East Asia 87
trading houses (or sogo shosha), along with a small number of other consumer
goods wholesalers, have significant interests throughout Asia. These are mostly
manufacturing companies but also include trading, procurement, logistics, and
consulting businesses, all of which provide support for retail development.
In Japan, trading houses control the majority of imported brand licenses. As
master licensees, they facilitate production and distribution through subsidiaries
and intermediaries within the Japanese market. Similarly, in recent years the same
trading houses have begun to act as facilitators for Japanese companies, from all
industrial sectors, when entering markets in Asia. They provide financial, logis-
tics, and local knowledge support, and in some cases also organize license busi-
nesses. Similarly, there are numerous cases of trading houses becoming involved
more directly in retailing. For example, Itochu owns and operates 70% of the Paul
Smith operation in Hong Kong, is a major supplier to department stores, super-
markets, and convenience stores in Taiwan and Singapore, and is a major textile
and apparel manufacturer throughout the region for both local sale and for import
into Japan (Shukan Toyo Keizai 2003).
With such support, Japanese retail penetration in East Asia is considerable.
There were 97 separate, retailer-operated companies in Asia, of which 72 are store
or mail order operations (see Table 7). These are concentrated in China and Hong
Kong, with 12 in Singapore – a country where the Japanese retail presence is im-
mediately visible in through the Isetan and Takashimaya stores there. More recent
data suggests that there was considerable growth to 2005, particularly in China.
Table 6. Number of Companies Operated by Country in East Asia for Major Japanese
Trading Houses, 2002 – 03
Trading Co.
Taiwan
China
South Korea
Thailand
Malaysia
Indonesia
Singapore
Hong Kong
Vietnam
Philipines
Others
Total Companies
Itochu Shoji 7 62 2 16 2 16 9 18 2 3 6 143
Sumikin Bussan 19 1 4 1 1 3 1 30
Sumitomo Shoji 8 37 1 25 12 26 15 8 7 7 7 153
Marubeni 4 42 1 11 4 11 7 9 1 8 3 101
Mitsui Bussan 4 27 2 25 8 13 14 20 2 1 5 121
Mitsubishi Shoji 6 30 2 34 6 11 5 14 5 9 5 127
Yagi Tsusho 3 1 4
Totals 29 220 9 115 32 78 51 73 18 28 26 679
(Source: Toyo Keizai 2003: pp. 1190 – 1334)
88 Roy Larke
Table 7. Japanese Retail Companies with Operations in East Asia, 2003
Retailers
Taiwan
China
South Korea
Thailand
Malaysia
Indonesia
Singapore
Hong Kong
Vietnam
Philipines
Others
Total Countries
Aoyama Shoji 1 1 2
Akachan Honpo 2 2 4
Aeon 1 2 2 2 7
Ito-Yokado 2 2
Isetan 1 3 1 1 1 1 8
Cabin 1 2 1 4
Seiyu 1 2 2 5
Senshukai 1 1 1 3
Takasho 2 2
Daiei 4 1 5
Daiki 2 2
Takashimaya 2 1 1 4
Tokyu
Department Store 1 1
Tokyo Megane 1 1 1 1 4
Nissen 1 2 3
Nisshin Shoji 1 1 2
Parco 3 3
Hasegawa 1 2 3 1 7
Fast Retailing 2 2
Family Mart 1 1 1 3
Lawson 1 1
Best Denki 1 1 1 3
Belluna 2 2
Mycal 1 1 2
Mikimoto 1 1 2
Ministop 1 1 2
Paris Miki 1 1 1 1 1 1 6
Mitsukoshi 1 2 3
Meitetsu Pare 2 2
Ryohin Keikaku 1 1
Total companies 10 30 2 9 7 0 12 19 3 2 3 97
(Source: Toyo Keizai 2003: pp. 1334 – 1348)
Trends in Retailing in East Asia 89
Ito-Yokado and Lawson have both been active in store expansion, and a number
of specialty chains, such as Comme Ca, Narumiya, Daiso Sangyo, and others have
begun to open stores across the region.
Japanese companies are no stronger than other international competitors, but
the degree of penetration is much larger than previously recorded, and this pene-
tration is easily keeping pace with Western firms. Equally, the local view that
Japanese firms are somehow less influential compared to other overseas entrants
appears totally unfounded. The only Japanese retailers with the ambition and abil-
ity to operate overseas are the largest and most sophisticated firms. They are emi-
nently capable of success in the rest of Asia and may even possess certain com-
petitive advantages based on better cultural understanding as they originate from
Asia themselves.
Japanese Activity in China
Table 8 lists 21 retail companies established by Japanese firms in China. Due to
ownership and operating restrictions, several Japanese firms operate multiple com-
panies in the country. This development has been going on for some time, with Ise-
tan establishing businesses in Shanghai and Tientsin as long ago as 1993, but there
was an upsurge in activity from 2000 onwards. Ito-Yokado, while establishing its
Changdu operation in 1998, only opened its first store in 2000. Lawson, opened its
first store in 1996, but had fewer than 50 stores until 2002. Now it has close to 200
and is expanding at a rate of 100 stores a year in the Shanghai area alone.
In China, Japanese retailers remain smaller than Carrefour, Wal-Mart, Metro,
and Auchan for example, but they are expanding fast. While Chinese consumers
are not at all similar to Japanese in many ways, retailers insist that the Chinese has
relatively close consumer culture (Shukan Toyo Keizai 2003). Another key cata-
lyst is the strong link between Japanese manufacturers and retailers operating
within the market, and the use of Japanese consultants, and logistics and transport
firms when setting up in the country.
Available sales figures shown in Table 8 remain small, with the largest, Ito-
Yokado, generating only about ¥25 billion in sales, or about the same as one large
Japanese store. Carrefour is eight times larger, with Wal-Mart and Metro already
three times larger. Unlike Carrefour, which has spread stores in many locations in
China, Ito-Yokado is concentrating on Beijing and particularly on rapid store de-
velopment up to the 2008 Olympics. In addition to the first Seven-Eleven, Ito-
Yokado also introduced its supermarket subsidiary, York Benimaru, in 2004. With
these three store formats, Ito-Yokado will pursue the same local market saturation
strategy it has employed with great success in Japan.
Even for Japanese firms, there are still many pitfalls to avoid in the Chinese
market. Retailers complain bitterly about the “old fashioned” and “opaque” nature
of Chinese business practices, notably the use of long payment periods and large,
90 Roy Larke
Table 8. Japanese Firms Operating in China, Mid-2004
Share-
holing Entry date Sales
End sales
period
Net
Profit
Japanese
Retailer %
Loca-
tion
Retail
sector Yr.Mth ¥bn Yr.Mth ¥mn
Stores
Employees
Isetan 63.0
Shang-
hai
Depart-
ment store 1993.01 2.76 2002.12 -45.0 1 172
Isetan 75.0 Tientsin
Depart-
ment store 1993.01 4.12 2002.12 34.0 1 447
Isetan 80.0
Shang-
hai
Depart-
ment store 1997.03 5.48 2002.12 197.0 1 311
Ito-
Yokado 51.0
Chang-
du GMS 1997.11 9.00 2003.12 20.0 2 1,028
Ito-
Yokado 36.8 Beijing GMS 1998.04 16.00 2003.12 32.0 3 1,399
Aeon 65.0 SC 1995.10 5 2,144
Aeon 60.0
Tsing-
tao SC 1996.03
75.00 – P
2 896
Seiyu 42.0 Beijing SC 1996.06 1.60 2003.12 OK 1 546
Daiei 95.0 Tientsin
Super-
market 1995.05 3.60 2002.12 – 12 1,000
Heiwado 75.0 SC 1998.11 7.60 2003.12 55.0 1 1,134
Lawson 49.0
Shang-
hai CVS 1996.02 3.39 2003.12 L 153 149
Komeri 70.0 Luta
Home
center 1996.03 2.23 2002.12 L 2 29
Itokin 100.0
Shang-
hai
Women’s
apparel 1997.07
Itokin 97.0
Tsing-
tao
Women’s
apparel 1995.12
Itokin 100.0 Luta
Women’s
apparel 1993.10
Itokin 95.0 Tientsin
Women’s
apparel 1997.00
1 flagship per company, 67 conces-
sions, 66 franchise stores 216
Aigan 45.0 Beijing Eye wear 1994.10 0.26 – – 8 90
Paris Miki 100.0
Shang-
hai Eye wear 1993.08 89 133
Paris Miki 48.0
Shang-
hai Eye wear 2000.10 1.41 – P
Aoyama
Shoji 54.0
Shang-
hai
Men’s
wear 1994.09 0.18 2002.12 L 3 369
Fast
Retailing 71.4
Apparel
retail 2002.09 0.56 2003.06 – 680.0 6 –
Key: – : Not available, P: Profitable, L: Loss making, OK: Undisclosed by acceptable
Note: Net profit is after tax except for Ito-Yokado which is EBIT.
(Source: Shukan Toyo Keizai 2003: p. 57)
Trends in Retailing in East Asia 91
volume buying rebates. Interestingly, these are precisely the same practices so
bemoaned by overseas retailers and distributors entering Japan in the 1970s and
1980s (Czinkota and Kotabe 1993).
Three Stages of Expansion in Asia
The operation of Japanese retail firms overseas has passed through three distinct
phases. The first was one of department store expansion motivated by increased
numbers of Japanese tourists going overseas. The preference of Japanese consum-
ers to shop at Japanese retailers even when outside Japan was an important trend
in the late 1980s and early 1990s, but is now waning. As a result, only a few Japa-
nese department stores still operate outside the domestic market.
The second phase was a brief hiatus during the worst of the Japanese economic
slowdown in the second half of the 1990s.
The third and current phase is a new and rapid expansion overseas, again in line
with improved business confidence in Japan itself. This phase was described in
detail in this chapter.
Japanese firms have primarily aimed at East Asia and are now increasingly
concentrated on China alone. The key to the current phase is the establishment and
strength of logistics and supplier firms in the same East Asian region. Japanese
manufacturers have developed a solid base in East Asia to produce consumer
products for the Japanese market, and now retailers are in a unique position to
employ services offered by fellow Japanese logistics and transport companies and,
most importantly, by the powerful and knowledgeable trading houses.
Except in Malaysia, where Aeon is the largest retailer by sales, no single Japa-
nese retailer is prominent in the main markets of East Asia, but the overall number
of Japanese firms is significant. With various sources placing the number of sepa-
rate retail companies already operating in China alone between 20 and 40, and
with at least 97 overseas retail operations established by some 30 firms across the
East Asian region, Japanese firms are prominent and well ahead of any one West-
ern country. Quite correctly, managers in Japan emphasize the cultural proximity
of their business systems and their ability to supply consumer needs in other Asian
markets. The current expansion is ongoing, and Japanese retailers are set to further
expand in China and the rest of Asia.
Conclusion
East Asia is today the most rapidly developing retail market in the world. With its
large population and densely populated markets, along with strong population
growth and rapidly modernizing industrial economies, it has been a focus of atten-
tion for the world’s leading retail businesses for the past 10 years. Even so, the
92 Roy Larke
level of development within the region varies greatly, from advanced economies
such as Japan and Singapore, to agriculturally based economies such as Vietnam
and the Philippines.
Overall, all retail markets in the region have become important targets for in-
ternational retail firms. Hong Kong and Singapore are already developed to the
point of saturation due to their small size. Thailand, Malaysia, Taiwan and South
Korea all have proved fairly easy markets to enter, and with comparatively small
markets overall, have also received the greatest level of development. Much of
this development has been clearly led by overseas retailers entering the market
from outside. In some cases, for example Aeon in Malaysia and Thailand, this
development occurred over a long period, but with the entry of all of the leading
Western international retailers, retail development has become much more rapid in
these four countries.
Most important of all, however, is the situation in Japan and China which are
respectively the second and third largest retail markets in the world. Japan has
remained difficult to enter, but this is now changing as more overseas firms dis-
prove long held myths. China has been host to international retail firms for longer
than Japan, but political restrictions meant that the pace of development has re-
mained slow and is only now able to increase as regulations are dismantled.
The overall picture in East Asia, therefore, is one of a race just about to begin.
The main competitors are established and well positioned, but we are still at an
early stage. In some countries, the significance of outside influence is only just
being understood, and the possibility of government intervention to reduce the
impact of outside firms on domestic markets looms large. Such cases have already
arisen in Thailand, Malaysia, and Japan. Moreover, a much greater response from
domestic retail competitors can be expected in the near future. This is particularly
true in China where domestic companies have laboured under the same restric-
tions as foreign firms and will benefit from the same changes to regulations in
coming years. Local retailers are now undergoing significant development as a
result.
There is a serious need for more extensive work on distribution in East Asia
and particularly in relation to the impact of development by overseas firms. As the
region advances economically and consumers become more affluent, overseas
firms would say they are accelerating the pace of modernization and providing the
best retail options to consumers. Others would argue that this is happening at the
expense of local business and that there is a worrying level of global standardiza-
tion occurring with the breakdown of local consumer culture and business systems
(Choi 2003; Mukoyama 2003).
The overwhelming importance of China has skewed research to date, even
though China, along with Japan, is an anomaly among East Asian markets. Re-
search on China is, on the whole, applicable only to China. In addition, as China is
actually one of the least advanced nations in terms of retailing, the situation there
remains speculative with future possibilities unconfirmed and numerous interven-
ing factors both economic and political likely to have a major influence on the
Trends in Retailing in East Asia 93
future development of the market. The same is true in Japan and, to some extent,
in each of the other 11 main East Asian nations. It is impossible, therefore, to con-
sider the region as a single whole.
Undoubtedly the main focus of attention will remain on China, both in terms of
practical development of retail systems and academic interest. This is a pity, how-
ever, as there is still much to be learned from countries like Thailand, Malaysia,
South Korea, and Taiwan, that have developed so much in the past 10 years. It is
to be hoped that this gap in the literature will not become wider.
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ENVIRONMENTAL TRENDS
Future Store Technologies and Their Impact
on Grocery Retailing
Kirthi Kalyanam1, Rajiv Lal 2, and Gerd Wolfram 3
1Santa Clara University, Santa Clara, USA
2Harvard University, Boston, USA
3MGI METRO Group Information Technology GmbH, Duesseldorf, Germany
Introduction
Around 2002, as a participant of MIT’s Auto-ID center, the METRO Group saw
the need to test, prove, observe and experience the acceptance of RFID and
other new technologies in a real-life environment. The objective was to find
solutions entailing real advantages for both the retail industry and the consum-
ers. In the short run, the focus was on technologies that can increase the effec-
tiveness of logistic processes and make shopping easier and more convenient.
Longer run objectives include setting standards for retailing that can scale on an
international basis.
On April 28, 2003, METRO Group opened its first “Future” Store in Rheinberg
near Duisburg/Germany. The remodeled convenience store of METRO Group’s
Extra sales division was a novelty and a breakthrough for the development of
innovative technologies in retailing. What made the future store so special was
that it was not a sterile laboratory, but a future “workshop” where everyday
customers were able to experience the shopping of tomorrow. Many innovative
technologies are not only present in the future store, but also in use. The first
customer of the Future Store was Rheinberg born Claudia Schiffer who said, “I
am happy to fire the starting shot for a real novelty. Shopping will become
really exciting!”
This chapter provides an overview of the technologies deployed in the Future
Store. It describes the consumer and retailer use case scenarios supported by these
technologies. We assess the deployment of these technologies and describe the
Rollout decisions taken by METRO Group. The chapter closes with an assessment
of the expected impact on the future of grocery retailing.
96 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Personal Shopping Assistants and Interactive Kiosks
The Personal Shopping Assistant (PSA) is a touch screen equipped tablet PC
with built-in wireless connectivity to support mobility. Like a Tablet PC, the
PSA does not have a separate keyboard. Consumers affix the PSA on top of
their shopping cart and shop the store (Figure 1). One of the ongoing issues in
discount retailing formats is the challenge of cost effectively providing high
quality personalized customer service in the store. The PSA promises to change
this by providing consumers with a “personal shopper” that accompanies them
on their shopping trip and provides them with personalized assistance as and
when needed.
The Technologies in the PSA
The PSA itself is not a new technology but an amalgamation of existing ones. The
technologies include portable touch screen computers, UPC scanners, wireless
connectivity using Wi-Fi and content accessed through browsers using hypertext
transfer protocols (http).
The touch screen used in the PSA first appeared in kiosks in retail settings. In
some retail environments, employees accessed kiosks. In selected retail environ-
ments, they were available for consumer access. Walking into a big box store such
as a home improvement retailer not knowing where a particular product such as
specialized glue is located is an experience to which many consumers can relate.
Big box and warehouse retailers were always interested in the potential of kiosks
to solve this problem.
Initial attempts to deploy kiosks in retail stores involved a deployment at fixed
locations in the store. The hardware itself was a desktop PC or a modification
thereof. These initial deployments produced mixed results. Once the novelty effect
wore off, consumers mostly ignored these terminals. Keeping the kiosks clean and
in working order was a continuing challenge. One serious limitation was that the
kiosks displayed text in a “mainframe” format. Kiosks developed prior to the web
used proprietary software applications. Standard approaches to consumer self-
navigation and presentation had not yet developed.
With the Internet retailing boom in the late 90s and the development of multi-
channel retailing models, retailers once again attempted to deploy the web-based
technologies into the store in the form of a kiosk. This time around, store kiosks
were PCs with keyboards and access to the retailer’s web site. In some cases, they
provided additional capabilities such as layout and navigation of the store. These
deployments also had mixed results. Maintaining the kiosk was a challenge. Key-
boards were not connected, mice would disappear and kiosks were frequently
unplugged and moved to make way for special displays and seasonal merchandise.
Training sales associates was difficult because of a lack of clarity regarding in-
tended use.
Future Store Technologies and Their Impact on Grocery Retailing 97
Fig. 1. The Personal Shopping Assistant
UPC scanners are a staple item in the retail industry. Cash register terminals have
used these technologies for several decades. The development of bar codintech-
nology based on universal product codes (UPC) was a pre-cursor to the adoption
of UPC scanners. UPC scanning technology deployed at the point of sale has had
a wide-reaching effect in the retail industry. Apart from the hard benefits such as
savings in labor, UPC scanning technology also provided several soft benefits.
Notable among them include the ability to collect sales and marketing data such as
pricing and promotion at the point of sale. These data have provided the founda-
tion for improvements in promotional forecasting and deployment.
The PSA as deployed in the Future Store is a mobile device. Consumers walk
through the store with the device affixed to their shopping cart. The PSA is
equipped with wireless connectivity to ensure mobility. A radio built into the PSA
transmits a wireless signal based on the 802.11 standard to an access point. An
access point equipped with an antenna and connected to the regular wired network
transmits the wireless signal into a wired network. Wireless access points de-
ployed throughout the store ensure that the PSA can connect anywhere.
The basis of the wireless technology used in the PSA is the Wi-Fi standard and
equipment that has enjoyed considerable amount of grassroots popularity with
consumers. The typical home Wi-Fi user has broadband access provided by either
a cable or a phone company. Consumers deploy a wireless router or access point
to transmit the broadband signal around the home. Laptops, desktop PCs and
printers connect into this wireless network.
Past deployments of wireless technology have been primarily in the back-
room and for stock checking functions. Store associates use handheld wireless
devices to track inventory or conduct shelf audits in stores. These traditional
wireless devices are based on a specialized design incorporating hardware fea-
tures that support the required functionality. To the extent that a store already
has a compatible wireless network, the PSA can simply connect to the same
network infrastructure.
98 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Fig. 2. An Interactive Kiosk
The UPC scanner in the PSA leverages scanning technology used in the checkout.
A recent deployment of this scanning technology has been in the form of dedi-
cated price check terminals in discount stores such as Target and department
stores such as Macy’s in the U.S. market. The PSA is another such dedicated ap-
plication.
The last aspect of the PSA is the approach to content. Using standard browser-
based technology, the PSA can tap into much of the existing content that the re-
tailer has already developed for their web site. Manufacturers can also provide
content such as product descriptions and high quality images.
The PSA technologies extend to a web-based interactive information terminal
also called a kiosk (Figure 2). Many locations in the Future Store can accommo-
date a kiosk. These kiosks come with additional capabilities such as the ability to
print nutritional information or recipes.
As the discussion of the technology indicates, both the PSA and the interactive
kiosks amalgamate technologies that have been tried and tested in other environ-
ments. The mass-market consumer is very unforgiving. The availability of tried
and tested underlying technologies is crucial. This minimizes technical glitches
that can contribute to consumer disappointment.
Perhaps equally important is the use of standardized consumer facing software
interfaces borrowed from the web. This provides consumers with a familiar inter-
face. Research in human factors focusing on web usability (Nielsen and Tahir 2001)
Future Store Technologies and Their Impact on Grocery Retailing 99
argues that consumers evaluate usability based on expectations of look and feel.
These expectations may form on the set of sites where they spend most of their
time, e.g., many of the mainstream internet portals such as Yahoo! and MSN.
Consumer Use Scenarios
As noted in the introduction, the PSA assists the consumer on a shopping trip. In
the initial deployment at the Metro Future store in Rheinberg, consumers who
have a loyalty card can receive a PSA. PSA system recognizes them and logs them
in after the consumer scans a loyalty card. This enables the interaction between the
PSA and the consumer to be “personalized”. The consumer can immediately re-
trieve a shopping list based on their previous shopping trips and stored on a central
server. The PSA can provide the location of each product to the consumer and
hence provide a “route map” for walking through the store. This type of feature
can reduce shopping time and increase convenience. These benefits are of interest
to the time-sensitive shopper.
The availability of a UPC scanner provides an additional convenience. As the
consumer picks up each item in the shopping list, they can scan it with the PSA.
This “scan as you go” feature has multiple benefits. It provides a “check off” against
the shopping list. For promotion sensitive shoppers it confirms whether the item is
on deal and the discount level from the regular price. Finally, it provides a running
total of current purchases. This running total of the basket cost should appeal to
shoppers in EDLP environments who are more sensitive to the basket price.
An additional set of benefits and use cases pertain to the provision of product
information such as recipes. A very basic system might provide a set of recipes
that a consumer can look up when they are buying a product. The scenario might
evolve in the following manner: A consumer finds Pasta on promotion. This trig-
gers an interest in making pasta for dinner and the consumer looks for a pasta
recipe at the web-based terminal. The recipe indicates additional ingredients such
as a particular type of pasta sauce. The consumer prints the recipe and adds the
recommended type of pasta to the shopping basket. As this scenario suggests,
printing capabilities can be an important feature in kiosks in these contexts.
It is easy to envision advanced capabilities that provide information that is
more precise based on either the product or the consumer’s preferences. For ex-
ample, instead of searching for all past recipes, the consumer can scan the pasta
that is on sale and ask for only recipes that explicitly match this type of product. A
further refinement can make the search more personalized. For example, the con-
sumer might be allergic to shellfish and might have indicated that in their profile.
The recipe search can now exclude any recipes that incorporate shellfish.
A final and perhaps significant benefit accrues at checkout. Since the basket is
pre-scanned, the actual checkout process can be very short. At the checkout, the
PSA transfers the details and total amount of the shopping to the cash system. The
checkout prints out the sales slip and the customer pays the amount shown.
100 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Through this system, consumers save time because they need not take their shop-
ping out of the trolley and place the articles on the conveyor belt (see also chapter
by Litfin, Wolfram in this book).
In addition, the Extra Future Store also offers a completely novel self-checkout
where the customers themselves act as cashiers. They draw their articles across a
scanner and record prices. The customer then places the products in a bag, on a
weighing scale. When the weight of the bag varies from the expected weight of
the scanned goods, the system alerts an employee. The customer pays as usual,
either cash or with EC/credit card.
The Intelligent Weighing Scale
The intelligent weighing scale, illustrated in Figure 3 is another technology intro-
duced in the Future Store. The idea underlying the scale is straightforward. Con-
sumes use the scale to weigh produce, obtain a price and a bar-coded label. The
scale uses weighing and printing technologies that are available in scales deployed
at retail checkouts.
In addition to these basic technologies, the scale has an integrated camera that
recognizes the product. This feature is crucial in that it enables self-service by the
consumer in a product category where products tend to be less standardized. Al-
ternative approaches to self-service are costly. They involve prepackaging or pre-
labeling many types of produce.
With respect to a consumer’s shopping trip, there is interplay between the PSA
and the intelligent scales. Without the intelligent scale, the automated shopping
experience enabled by the PSA is not complete. The consumer would have to get
produce weighed at the checkout and incur the time involved in the checkout
process.
To summarize, the PSA, the web-based terminals and the intelligent weighing
scales collectively enable an efficient and personalized self-service shopping trip
Fig. 3. Intelligent Weighing Scale
Future Store Technologies and Their Impact on Grocery Retailing 101
that provides some personalized assistance to the consumer. They save con-
sumer’s time and retailer’s labor. The PSA also helps consumers with product
information and can potentially affect the basket size by providing additional rec-
ommendations. The intelligent weighing scale works in conjunction with the PSA
to complete the self-shopping experience.
Digital Advertising Displays
The Future Store tested several types of digital advertising displays. Figures 4 and
5 provide examples. The digital signs consist of flat screen displays connected to
the local area network. In some cases, there is the potential to connect using wire-
less technologies.
Fig. 4. Digital Shelf Talker
Fig. 5. EndCap Digital Signage
102 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Figure 4 shows an example of a digital sign placed at eye level on the shelf. In this
type of deployment, the digital sign can play the role of a “shelf talker”. Since the
sign is not static, it has the potential to attract considerable attention from the
shopper. Barcode reading capabilities are a potential enhancement. By scanning a
barcode, the consumer can conduct a price check or look up information on the
product.
Interactive shelf talkers might allow retailers to expand private label offerings
in some product categories. National brands sell themselves without the need for
extensive in-store merchandising. Private label products in certain product catego-
ries require in-store education and information. Traditionally the only approach to
do this was through trained sales associates in the store – an approach that does
not fit into the economics of discount food retailing. Interactive shelf talkers might
allow retailers to cost-effectively merchandise and communicate the specialized
benefits such as healthy ingredients or the value proposition of private labels.
Digital sign placement can also be at the end of an aisle (e.g., Figure 5). Several
factors contribute to the potentially high impact of digital signs. The high resolu-
tion and bright screens make these signs distinctive. Animation and high quality
graphics can also enhance the visual appeal. An end-of-aisle sign can work in
conjunction with an end-cap, highlighting the products on display.
Research on promotions has documented the existence of “big bang” effects
(Blattberg and Neslin 1989). A big bang effects occurs when multiple aspects of
retail promotion such as a price cut, an endcap and a feature advertisement in
the flyer, have an interactive effect that is greater than the sum of the parts (for
more information on such effects, see chapters on retail sales promotions by
Gedenk, Neslin, Ailawadi and integrated marketing communications by Raman,
Naik elsewhere in this book). A digital sign on top of an endcap featuring a
product that is on promotion may contribute to the big bang. On the other hand,
because of their distinctiveness, they might have a strong effect all by them-
selves (a strong main effect).
The extent to which retailers co-ordinate the display on the digital signs with
their promotional planning will depend on the relative magnitudes of the main
effects and the interaction effects. An issue for manufacturers is the extent to
which they should re-allocate trade promotion dollars into this type of advertis-
ing. Many aspects of digital signage have the potential to evolve. One is the
nature and types of creative content in these signs. Current approaches include
simple rendition of product images highlighting prices. This can evolve in a
number of ways including the use of animation. Since the message can change
instantly, in principle an electronic advertising sign can rotate through a large
number of messages. The rotation schedule of messages is also a feature that
requires additional research. Consumer attention and shopping mode (browsing
versus goal-directed) when they are in the aisle might limit the number of rota-
tions. Finally, a potential limiting feature for some of these signs is that some
deployments might not be in the field of vision of shoppers. Additional research
should provide insight into these issues.
Future Store Technologies and Their Impact on Grocery Retailing 103
Fig. 6. An Electronic Price Tag
Elecronic Price Tags
Electronic price tags (as illustrated in Figure 6) as the name indicates are replace-
ments for current paper price tags which are placed manually and changed every
so often during the course of the business.
Implementing such a technology is completely in the hands of the retailer.
Consumers have been waiting for this technology for a long time. They are tired
of reaching the checkout counter and facing a surprise regarding the price they ex-
pected to pay for the item. Some estimates of price inaccuracy suggest that prices
may be incorrect on 2-3% of the items. The stores have also been waiting for this
technology for three reasons: first, having the ability to display the correct price and
not have any errors at the checkout counter in favor of either the stores or the con-
sumer. Second, and more importantly, it is very frustrating for the cashier to hold up
a long line while somebody has been sent to verify a price that is either not on the
item or is under contention by the consumer. Finally, changing prices manually is
very costly and this technology can lead to significant cost savings after the initial
investment. Therefore, electronic price tags can contribute to price accuracy in
stores, eliminate possible unpleasant exchanges between the consumers and store
personnel, and ensure the consumer is charged the correct price. Hence, both the
consumer and the stores are likely to benefit from this technology.
Another potential benefit of electronic price tags is the ability to change prices
with a higher frequency. Here the literature on price discrimination comes to
mind. With the ability to change prices through a stroke of a key, one can imagine
prices changing frequently, and higher (lower) prices set for those willing to pay a
higher (lower) price. For example, stores can potentially charge different prices
for items during the morning, afternoon, and evening of each day. In addition to
price, stores can also change the quality of service by time of day. Therefore, if
consumers who are more affluent visit the stores in the evenings, higher prices and
more staff in the evening can be an appropriate strategy for the store. Similarly, if
104 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
older and less affluent consumers are likely to visit the stores in the morning,
lower prices at that time may be the appropriate strategy. However, it is useful to
evaluate these ideas in a broader context. Stores spend a lot of money in commu-
nicating the price image of the store. This is especially true in case of grocery
stores where more than 50% of the communication effort through weekly free-
standing inserts reinforces the correct price perception of the store. Thus, frequent
changes to the prices in the store may undermine any effort to maintain a low
price image (see also chapters by Simon, Gathen, Daus and Bolton, Shankar,
Montoya in this book for more insights into effective retail pricing).
A second issue is consumer reaction to such price changes. If a beverage com-
pany’s experience in Latin America is any barometer for such ideas, these ideas
are likely to fail. In December 1999, the Wall Street Journal reported that the
company might be considering the possibility of changing prices at its vending
machine depending on the time of the day, the outside temperature, and the
amount of stock in the machine. This experiment faced widespread ridicule in the
press to the extent that the company had to issue a statement that it was not plan-
ning any such changes at the vending machine. Hence, it is fair to say that any use
of this technology to price discriminate between consumers with higher and lower
willingness to pay should take into account the social context. Consumers do pay
different prices depending on when they choose to make an airline reservation and
the time of travel. Similarly, the consumer is happy to pay $5 for a glass of beer
on the beach, in the restaurant, or at the airport. Thus even though consumers are
accustomed to paying different prices for the same good on different consumption
occasions, the idea of charging different prices at different shopping occasions has
to be evaluated within the context of the operating social norms.
Hence, we see the benefits of electronic price tagging technology accruing to
the stores in the form of cost savings in making price changes as well as benefits
from better customer service at the cashier. Consumers are also likely to be happy
with electronic price tags as they would have less frequent surprises at the check-
out counter.
RFID
RFID is a new technology that has the potential to revolutionize the retail industry.
Just as the Universal Product Code had a big impact on the industry, RFID is the
next generation of technologies in this series that has the potential to have an even
bigger impact on the industry.
Radio Frequency Identification technology has been around for a while. A
RFID reader can remotely identify a small transponder attached to a product and
communicate that information through a computer network. A RFID system (see,
e.g., Figures 7, 8, 9) therefore consists of three parts: a reader, a transponder and a
computer network to process the data. RFID readers are devices that send out
radio signals on a continuous basis and look for a response from one or more
Future Store Technologies and Their Impact on Grocery Retailing 105
transponders. A computer network transmits the information from the transponder.
Readers can accept responses from many transponders at any given point in time.
However, given the current state of technology, the transponders need to be within
a particular range of the reader to make a connection.
As of today, there are two types of transponders: active and passive. Passive
transponders consist of a microchip that stores a digital code, and an antenna.
When the antenna receives a radio signal from the reader, the transponder converts
that radio signal into energy and then sends a digital code back to the reader. Be-
cause these transponders do not have their own source of energy and use the radio
energy provided by the reader, they are limited in their ability to transmit a lot of
information over long distances. The weakness in the power of the signal allows it
be effective within a working range of 1-3 feet. These passive transponders cost
less than a dollar – closer to 20 cents. The more expensive active transponders
cost closer to 10 dollars if not more. However, these transponders use a battery as
their active source of energy. They transmit more information and previously re-
corded information, on a continuous basis.
How revolutionary is RFID? One can imagine what life was like in the days be-
fore the UPC, the 12-digit bar code now available on every SKU that passes through
the checkout counter. A portion of the code identifies the producer/manufacturer and
the remainder identified the product using a standard format used by all participants
in the industry. It is easy to imagine the difficulty in developing the comprehensive
understanding that is necessary for every business decision for the retailer, the
manufacturer and every one else involved in the physical distribution of the goods.
While the Universal Product Code allowed firms to track the flow of goods as they
were scanned, RFID adds a very different dimensionality to the nature of the data
availability. In essence, it presents a current view of what goods are present at any
Fig. 7. RFID Gate
106 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Fig. 8. RFID Tag
given location. In other words, goods are unlikely to get lost in any particular loca-
tion. A UPC when scanned helps us conclude that the product should be in a par-
ticular location. RFID, however, helps locate the product in a warehouse or a large
store. This difference is most evident in bookstores where the reference clerk
knows that a particular book should be available on the rack but is unable to locate
it because it has been mis-filed or not been filed. In contrast, RFID can provide the
exact location of the book in the store.
Another big difference is that UPC data collection requires a scan, whereas
RFID information does not. In other words, when a truck is driving into a ware-
house, the transponders can communicate with the receivers without having to
scan individual items. This is true even during checkout. Currently, a checkout
requires scanning each item separately. This process consumes significant amount
of labor and consumer patience. RFID, however, allows the consumer to checkout
by passing through a doorway activated by appropriate receivers. A third salient
difference is in the dimensionality of the information captured by this new tech-
nology. While the information embedded in the Universal Product Code is static,
RFID captures and stores information over time that is downloaded when needed.
For example, RFID can record the temperatures to which product are exposed to
when transiting from the manufacturing plant all the way to the grocery store.
Variations in temperature encountered in transit severely affect the taste and effec-
tiveness of many products. Another piece of information that can be stored
through this technology that would be of great benefit to the consumer is tracing
the origins of the food we consume. In many countries, retailers are already using
this information to differentiate their products and often find an increased con-
sumer willingness to pay for the same.
It is easy to envisage several economic benefits accruing to producers, retailers
and consumers from RFID technology. For producers, improved efficiencies and
lower costs would be possible because knowing the exact location of all merchan-
dise in the long, winding supply chain should lead to reduced inventory levels.
Future Store Technologies and Their Impact on Grocery Retailing 107
Fig. 9. RFID Scanner
RFID reduces the labor currently used in tracking the movement of goods. At
the retail level, beyond the efficiencies of lower inventory levels, stock-outs
should be less frequent, leading to higher customer satisfaction. Retailers who
attempt to create differentiation through freshness should find a new arrow in
their quiver, as they can remotely verify the expiry dates of all items without
fault and costly human intervention. The grocer should also be able to change
prices remotely and especially those for merchandise nearing the expiration
date. Automation of all in-store activities that require significant labor in count-
ing or changing the nature of information associated with a SKU can lower
costs. The technology should reduce human errors at the checkout and elsewhere
throughout the store. All these changes should enable the retailer to reduce the
cost of operations.
Another big issue for retailers is shrinkage. Shrinkage should come down as re-
tailers and manufacturers install these systems in their warehouses and stores and
program a computer to sound an alarm when stock moves in an inappropriate way.
Finally, RFID can enhance food safety. Recent events with outbreaks of mad
cow disease, foot-and-mouth disease, other forms of food poisoning, and the furor
over genetically modified food, have elevated public sensitivity to this issue. By
being able to track food all the way from the producer to the user, with the ability
to recall if necessary, all actors can have more control over what they deliver and
consume. The beef industry, which often lacks most healthy conditions according
to many reports, may benefit the most from being able to track the complete sup-
ply from an unhealthy cow as soon as events necessitate actions.
108 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Many believe that these possible benefits from RFID are just the tip of the ice-
berg. Some argue that the technology makes it possible to re-think all the proc-
esses in the supply chain. Cross-functional collaboration with the help of RFID
can significantly improve the movement of goods to create a faster, cheaper,
leaner and more accurate supply chain.
Is RFID really that novel? At Jacobi Medical Center in the Bronx in New York
City, this technology has been in use for a while to get accurate and up-to-date
patient information to the attending doctor without disturbing the patient. While
the patient is asleep, the doctor uses a tablet PC equipped with the RFID reader to
send signals to the transponder embedded in the patient’s hospital bracelet. The
bracelet integrated with the hospital information systems provides the doctor in-
formation about the patient’s name, drugs administered to-date, recent vital infor-
mation such as blood pressure, temperature and the like, and any other test results
made available since the last visit. All this allows the doctor to do complete their
rounds without disturbing the patient.
There are other examples of RFID applications to transmit information quickly
and rapidly in a closed loop system. It is the most recent mandates by companies
like Wal-Mart to start using these systems for transmitting information in an open-
loop system up and down the supply chain that has created a big brouhaha in the
industry. Press reports indicate that Wal-Mart is already requiring its top 100 sup-
pliers to tag cases or pallets of products shipped to three particular distribution
centers with RFID tags. By October 2005, this experiment will expand to include
3 more distribution centers, 900 stores and 200 largest suppliers. In the case of
METRO Group, the application of RFID technology is on a pallet basis in 20
stores/Distribution Centers. These involve different product categories ranging
from paper to washing powder to candies.
The METRO Group does not use RFID at the item level except for three items:
Gillette Razorblades, Pantene Pro V Shampoo, and CD’s /DVD’s. The smart chips
are still too expensive. Several technical problems need to be solved including the
tagging of metallic and liquid products.
Assessment of Technologies
High-Tech Supermarket Boosts Customer Satisfaction
Six months after opening its Extra Future Store, the METRO Group has reported
findings from a customer survey. The findings clearly show a high level of satis-
faction from customers using new cutting-edge retail technology that has led to
higher sales. Use of the Personal Shopping Assistant (PSA) is much higher than
anticipated.
The customer survey has revealed several interesting findings, according to
METRO Group executives. Above all, it shows that customers appreciate innovative
IT retail systems such as the PSA. In fact, shoppers are incredibly impressed with
Future Store Technologies and Their Impact on Grocery Retailing 109
the intelligent scales, information terminals and self-checkouts in particular. Per-
haps most important, the study has shown that the new technology can boost sales.
Nearly 55 percent of polled customers said they were “very satisfied” with Ex-
tra Markt´s services. Prior to the revamping of the store with the new technology,
its customer satisfaction rating was only 34 percent. METRO Group attributes the
store´s double-digit sales growth not only to a higher level of customer satisfaction
but also to an increased customer shopping frequency, as the company was some-
what surprised to discover. Customers have shown an overwhelming interest in
using the new technology, prompting them to visit the store more often than be-
fore. The data indicate that retailers can use technology as a tool to increase cus-
tomer loyalty and sales.
PSA Customers Buy More
The detailed survey shows that 24 percent of the shoppers at the Extra Future
Store use the PSA, and as many as 48 percent use the information terminals. Us-
age is increasing daily. As usage grows, so are customers´ shopping baskets.
While a “normal” shopping trip amounts to 9.7 articles worth € 18, the average
shopper using the PSA purchases 13,6 items worth € 30,80. PSA usage is greatest
on Fridays and Saturdays. High PSA usage supports the thesis that customers use
the shopping assistant to pass through checkout more quickly.
Around 80 percent of PSA users see benefits from using the system. In fact, 36
percent see “very big” advantages in using it. Their assessment of the benefits of
the information terminal is just slightly lower. Shoppers see the following advan-
tages of the PSA.
x Running tab and price information: Shoppers are informed continuously of
their purchases and costs.
x Faster and more convenient checkout: Customers can scan their purchases
directly with the PSA so that cashiers only have to retrieve this information
at checkout.
x Store Orientation support and search functions: Shoppers can use the PSA
as a guide to locate products or obtain more information about a particular
item. Non-regular shoppers tend to take advantage of these functions.
x Display of discounts: The PSA shows shoppers which products are on dis-
count and informs them of other special offers.
x Payback points: The PSA can inform customers about the status of their
payback account at any time.
Customers praise the support they receive from the information terminals to find
products and obtain specific information about a select product, in addition to
prices. Some have become particularly fond of the recipe service. The high use of
the terminals proves that the systems have firmly established themselves in the
retail sector.
110 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
Further, elderly people use the technical gadgets more frequently. While until
July 2003, only 16 % of the consumers over 60 years old had tested the PSA, the
following year the usage rate went up to 27 %. Also, the usage of the self-
checkout system increased tremendously from 16 % to 28 %. Over half of elderly
customers used the intelligent scale.
In addition to the positive findings of the customer survey, market research by the
Boston Consulting Group has delivered further suggestions for improving technol-
ogy in the METRO Group’s Future Store Initiative. In particular, customers want a
still simpler user interface and, in general, the system should become even more
easy to use. One example is a simpler scanning process with the PSA and additional
functions with the information terminal. Feedback from customers has been essen-
tial in the development of the Extra Future Store´s technology solutions.
The extent of the benefits are likely to change as retailers more comprehen-
sively advertise the positioning of these technologies and incorporate them in their
market positioning strategies. In this context, the work of Hoch and colleagues
(1994) comes to mind who in analyzing the results of a field experiment of change
in retail positioning argue that the lack of a systematic advertising campaign
communicating the change might have had an impact on the measured results.
The Next Steps
Because of the very positive consumer reactions and the positive business bene-
fits, METRO Group will rollout the self-checkout systems into 50 other stores.
Intelligent scales will appear in other stores as well. Finally, the in-store informa-
tion terminals have the potential to create more consumer interest and retain cus-
tomers better.
Digital price tags are still being tested in the Future Store. METRO Group
expects to introduce some improvements. These improvements are already in all
Metro Cash & Carry stores, but not yet in the food retailing stores.
In November 2004, RFID was rolled out to 20 stores with 20 suppliers. It has
expanded to nearly 30 suppliers and by the end of 2005 should grow to 100 sup-
pliers. The next stage of the rollout will be case-level RFID tagging from the cur-
rent pallet level. A precondition for the case-level is the availability of Generation
2-tags and equipment, expected to be available in the first quarter of 2006.
METRO Group is continuing to test different kinds of in-store digital signage,
like plasma screens, normal flat screens, gondola solutions, shelf solutions. In the
meantime, more and more sales lines of METRO Group are doing their own tests.
In addition, METRO Group is developing the content management infrastructure
for starting the rollout on a broader scale.
After testing different new software and user interface options, METRO Group is
now confident with the PSA software. METRO Group is also looking for different
alternatives for the hardware that improves the mobility in the store. The company
expects to make final decisions on the PSA rollout by the end of this year.
Future Store Technologies and Their Impact on Grocery Retailing 111
Conclusions and Discussion
METRO Group’s Future Store offers a number of lessons. Primarily, it shows the
power of testing technologies in a practical working environment as opposed to a
sterile lab setting. The public interest around this unique test creates excellent
visibility for the retailer and the associated partners. A second lesson from the test
is regarding the availability and use of tried and tested underlying technologies.
This allows them to be robust for use by end consumers. It also helps to have sev-
eral enabling technologies such as web-based shopping take root.
Another set of learnings are with respect to the impact on discount retailing
formats. The ability of these technologies to enhance consumer convenience and
timesaving suggest that retailers can use them to attract the time-sensitive con-
sumer. The ability to provide more personalized service might enable retailers to
reach more service-oriented consumers, at the same time appealing to the price-
oriented shopper. The breadth of the assortment might limit the scope of such an
expansion. Technologies such as RFID will continue to lower costs and improve
the efficiency of retailing. Consumers should benefit from these efficiencies.
Will these technologies affect the structure of the retail industry? The answer
depends largely on which sector of the retailing industry successfully deploys
these technologies and the nature of the resultant shift in consumer value
perceptions. As the race heats up, one thing is for sure: it will not be business as
usual!
For some technologies such as self checkout and RFID, it is very likely that
most retailers will adopt these technologies as they lead to reduced costs as well as
enhanced customer satisfaction. Therefore, even though many retailers and their
competitors will incorporate these technologies, it is unlikely to lead to a competi-
tive advantage in the long run. However, the cost savings should lead to increased
profitability for all retailers.
In terms of competition across formats, different retailers might approach
these technologies differently. When a technology helps lower costs to the re-
tailer, it is likely to be adopted by all retailers and particularly those that offer
low prices as their prime value proposition. It is therefore not surprising that
retailers like Wal-Mart and METRO Group are at the leading edge of experi-
menting with these technologies. In contrast, other implementations of these
technologies that lead to an enhanced customer experience are most likely to be
adopted by retailers that focus on delivering a better customer experience. This
is likely to reinforce their strategic intent and provide more differentiation rela-
tive to deep discounters.
Finally yet importantly, we believe that retailers need to look beyond the bene-
fits offered by these individual technologies on a standalone basis. They need to
develop a more integrated perspective and offer solutions to consumers’ some-
times-difficult store experience. Retailers that have the ability to integrate these
technologies to launch new strategies to enhance the customer experience will be
the biggest beneficiaries.
112 Kirthi Kalyanam, Rajiv Lal, and Gerd Wolfram
References
Blattberg, R. C. & S. Neslin (1989): Sales Promotion: The Long and the Short of it, Mar-
keting Letters, 1:1, 81-97.
Hoch, Steven J., Xavier Dreze and Mary Purk (1994): EDLP, Hi-Lo, and Margin Arithme-
tic, Journal of Marketing, 58, (October), 16-27.
Jakob Nielsen and Marie Tahir (2001): Home Page Usability: 50 Websites Deconstructed,
New Riders Press, 1st Edition.
The Third Wave of Marketing Intelligence
Raymond R. Burke
Kelley School of Business, Indiana University, Bloomington, USA
Introduction
During the last 25 years, marketing research in retail settings has been transformed
by technological change. The first wave of change occurred when retailers
adopted point-of-sale (POS) systems with UPC barcode scanning. This provided
companies with real-time data on purchase transactions and accurate estimates of
product sales and market share. Retailers used this information in combination
with shelf space allocation and product inventory information to measure the pro-
ductivity of their stores. By modeling these data as a function of causal variables,
such as product price, display activities, and feature advertising, marketers were
able to assess the performance and profitability of their marketing investments
(e.g., Blattberg and Neslin 1990). UPC scanning served as the foundation for syn-
dicated research services such as A.C. Nielsen and Information Resources, and led
to the development of brand and category management. Scanner data are in wide-
spread use today and support many critical business decisions.
The second wave of change occurred when retailers started to track and analyze
the purchases of individual shoppers. Some retailers, especially in the grocery
industry, launched frequent shopper and customer loyalty programs to collect
these data (see, e.g., chapter by Reinartz in this book). Shoppers who participate in
such programs typically identify themselves with loyalty cards at the point of sale
in exchange for price discounts or other incentives. Companies can also identify
repeat customers by requesting their telephone numbers, capturing information
from credit and debit cards, reading “cookies” stored on their computer disk
drives, etc. This information is often combined with geodemographic and behav-
ioral data from other public and private sources to create a profile and purchase
history for each customer or household. These data can be used to estimate cus-
tomer value and loyalty, measure individual-level response to direct mail and
other targeted promotions, and conduct shopping basket analyses to identify prod-
uct complementarities among other applications (Berson, Smith, Thearling 2000;
Ravi, Raman, Mantrala this book). Once again, innovation led to the emergence of
114 Raymond R. Burke
new industries (data mining, data warehousing) and new practices (customer rela-
tionship management, or CRM).
Both types of data collection and analysis only became practical with the advent
of the computer. With UPC scanning, the digital representation of aggregate con-
sumer purchases, broken down by time and region, made it possible to measure the
impact of temporal and geographic changes in marketing activities (e.g., product
price, promotion, assortment, and advertising) on sales. With CRM, the digital rep-
resentation of individual customer characteristics and purchase patterns allowed
marketers to analyze shopper preferences and tailor marketing activities on a one-to-
one basis. In both cases, the analyses that could be performed depended on the accu-
racy and detail of the representation of stimulus and response conditions.
The third wave of change is just beginning to take hold in retail stores. The tech-
nology drivers are the digital representation of the shopping environment and the
real-time tracking of customers as they enter the store, walk through the aisles, and
select and purchase products. Like the earlier innovations, it provides the capability
to capture variations in consumer behavior over time and across people, but it adds
to the mix the critical element of context. This new wave of marketing intelligence
provides marketers with the tools to measure consumer response to the in-store envi-
ronment and manage the shopping process. It is the foundation for customer experi-
ence management.
Each generation of marketing intelligence has enhanced our understanding of
how marketing, customer, and environmental factors affect consumer behavior
and store performance (see Table 1). In the following sections, this chapter re-
views the genesis of customer experience management, describes the tools
available for tracking customer behavior and measuring store performance, and
discusses two case studies conducted by the author. The paper concludes with a
discussion of the challenges in conducting computer-based observational research
and future directions.
The Advent of Customer Experience Management
Marketers have discovered that the retail context has an impact on consumer
behavior that goes beyond product assortment, pricing, and promotion issues. The
shopping environment is the medium through which consumers connect with
products. It affects the time consumers spend in the store, how they navigate
through the aisles, and how they allocate their attention and money across depart-
ments and categories. It affects whether they notice a new product or promotion. It
influences their framing of the purchase decision and their likelihood of buying
complementary products. And it determines their shopping enjoyment and inten-
tion to return in the future. Manufacturers and retailers have found that it is to their
mutual benefit to design shopping environments that effectively engage consum-
ers and help to convert demand into purchase (see Burke 2005).
The Third Wave of Marketing Intelligence 115
Table 1. The Evolution of Marketing Intelligence in Retail Settings
Wave I Wave II Wave III
Brand and category
management
Customer relationship
management
Customer experience
management
Enabling
technologies
UPC barcode
scanning
Customer loyalty cards,
credit/debit cards
Real-time customer
tracking (RFID, GPS,
video, clickstream,
portable shopping
devices)
Causal
variables
Product assortment
Shelf space
Price
Promotions
Displays
Feature advertising
Wave I, plus:
Customer attributes
(geodemographics)
Purchase history
Targeted promotion
Wave II, plus:
Store layout
Store atmosphere
Navigational aids
Product adjacencies
Service levels
Queues/crowding
In-store events
Performance
measures
Sales
Market share
Gross margin
Sales/square foot
Turn rate
GMROII
Customer retention
Customer loyalty
Share of customer
Lifetime value
ROC curves
Store traffic
Shopping path
Aisle penetration
Dwell time
Product interaction
Conversion rate
This new focus on the shopping process has fueled two recent trends in retailing
research. The first is the increased use of observational and ethnographic research
(see, e.g., Underhill 1999). Merchants have found that, by watching how customers
shop in their stores, they can isolate points of friction in the shopping process
and identify opportunities to improve the convenience and enjoyment of the ex-
perience. This research is usually executed by setting up one or more video cam-
eras within the store, recording consumer shopping activity for several hours a
day, and then manually coding shopper behavior at a later time. Video observation
is often combined with intercept interviews to identify both how and why con-
sumers buy.
This research provides a number of important insights. By noting the domi-
nant pathways and directions that shoppers take through the store, retailers can
position signs and displays to catch the customer’s attention. By recording how
long consumers spend at various locations (“dwell time”), they can identify
points where shoppers will be most receptive to communication. By tracking the
shopper’s path through the store and monitoring which areas are shopped to-
gether, merchants can identify cross-sell opportunities. Video observation can
pinpoint crowding conditions and bottlenecks in traffic flow that suggest the
116 Raymond R. Burke
need to widen aisles or reposition product displays. It can be used to measure
queue lengths and waiting times to flag problems with customer service. Obser-
vational research can also capture customer characteristics (age, gender, ethnic-
ity, group composition) and shopping habits: use of shopping aids (carts, bas-
kets, circulars, shopping lists), reading signs and packaging, taking product
literature, and interacting with salespeople.
The second trend in retailing research is the increased use of computer hard-
ware and software tools to track customer behavior in both online and conven-
tional retail shopping environments. Unlike traditional ethnographic research,
which can be very time consuming and subjective, computer tracking provides an
efficient and reliable means of collecting and analyzing data on the consumer
shopping process.
The first attempts at computer-based tracking used simple counters at the en-
trances of stores to measure incoming and outgoing traffic (Robins 1994). Various
technologies have been employed for this application, including pressure-sensitive
mats, infrared light beams, door-closure switches, and ceiling-mounted video
cameras. These devices provide hourly traffic counts that can serve as a rudimen-
tary measure of consumer demand or sales potential. When these counts are com-
bined with transaction data from POS systems, retailers can calculate purchase
conversion rates, a key indicator of store productivity. Store traffic and conversion
information has been used for a variety of applications, including the evaluation of
store promotions and sales force scheduling (Lam, Vandenbosch, Hulland, and
Pearce 2001).
Over time, these counting methods have evolved into sophisticated customer
tracking solutions. In online environments, detailed records of website usage be-
havior (“clickstreams”) allow retailers to analyze the path that shoppers take
through a site and assess how consumer and marketing variables affect click-
through rates and purchase likelihood (see, e.g., Montgomery, Li, Srinivasan,
Liechty 2004). In conventional retail stores, sophisticated RFID, GPS, and video-
based customer tracking solutions have recently been developed that permit retail-
ers to track how shoppers navigate through stores and respond to changes in the
store environment (Gogoi 2005; Pereira 2005). Other methods of customer sens-
ing, including the use of kiosks and the provision of personal shopping assis-
tants, provide additional information on in-store customer behavior and con-
sumer response.
Customer tracking is now in widespread use in online environments, but it has
been somewhat slower to gain acceptance in conventional retail stores. This is
largely due to the significant capital investment and technical complexity of in-
stalling a whole-store tracking solution. RFID, infrared, and GPS tracking systems
require an infrastructure of sensors and tags to locate shoppers, carts, and hand
baskets. Machine-vision-based tracking solutions require that a set of cameras be
installed throughout the store. While existing security cameras may be used to
collect these data, most surveillance systems do not provide adequate coverage or
video fidelity. Fortunately, once a system is installed, the incremental costs for
The Third Wave of Marketing Intelligence 117
collecting and analyzing the computer tracking data are much lower than for hu-
man observation. Customers can be tracked through the entire store, 24 hours a
day, 7 days a week.
Computerized tracking provides retailers with the information necessary to
measure and manage the shopping process. By counting the number of customers
who enter the store and walk through each aisle, department, and product cate-
gory, retailers can create thermal maps showing the percentage of customers who
penetrate each section of the store. If some sections are visited infrequently, this
may suggest the need to provide navigational aids, reposition product displays and
merchandising, run traffic-building promotions, and/or revise the store layout to
improve traffic flow.
When traffic data are combined with transaction log data, retailers can calculate
overall and category-specific purchase conversion rates, reflecting the store’s abil-
ity to turn consumer demand into purchase. These conversion rates can be com-
pared across product categories, time periods, and geographic regions to evaluate
the store’s performance and identify opportunities for improvement. If, for exam-
ple, many shoppers are observed to enter a category and examine merchandise but
then leave without buying, this may indicate a need to adjust the product assort-
ment, pricing, or presentation. Because the tracking data are collected and ana-
lyzed in real time, this information can be used to dynamically adjust staffing
levels, the content of digital signs, and other aspects of the shopping environment
in response to momentary changes in store conditions.
Other research tools may be used in conjunction with electronic tracking to
provide a more complete understanding of the shopping experience and consumer
response. Customers are often interviewed after the shopping trip to gain insight
into their attitudinal and emotional reactions (Donovan et al. 1994). Shoppers may
also be contacted at home and asked to remember the last time they went shopping
for a particular product (e.g., Kerin, Jain, Howard 1992). Consumers recall the
positive and negative aspects of the shopping experience and offer suggestions for
improvement.
Once the retailer has identified opportunities for improving the shopping ex-
perience using customer interviews and observational research, the next step is
to make changes to the store environment and measure how shoppers respond.
While it is possible to jump directly to implementation, a better approach is
often to test several different concepts in the laboratory and choose the alterna-
tive that performs best. Recent innovations in computer graphics permit re-
searchers to create highly realistic simulations of the retail shopping environ-
ment (Burke et al. 1992; Burke 1996). These simulations provide tremendous
flexibility, allowing retailers to go beyond existing conventions and explore new
approaches for improving the shopping experience. Like in-store tracking solu-
tions, computer simulations can record detailed information about consumers’
shopping patterns and purchasing behavior, and the results can be used to fore-
cast future sales and profitability.
118 Raymond R. Burke
Research Applications
Two case studies are now presented to illustrate the power of customer tracking
research for measuring and managing the customer shopping experience.
Measuring Retail Productivity During the Holiday Shopping Season
Retailers slash prices on popular products and spend heavily on advertising to draw
consumers into their stores during the holiday season. But how do shoppers behave
once inside the store? Are the legends about the customer stampedes for one-of-a-
kind bargains and the last-minute shoppers on Christmas Eve really true? And how
effective are stores at transforming high levels of consumer demand into purchase?
For many retailers, sales during this period drive profits for the entire year.
To address these issues, Indiana University’s Kelley School of Business part-
nered with a major consumer electronics retailer to study shopper behavior during
the 2003 holiday shopping season. The research team selected two stores in the
Midwest U.S. that reflected the demographics of the national population, and in-
stalled digital video recorders to capture images from four surveillance cameras
positioned throughout each of the two stores.
The study observed how customers shopped during the entire holiday season –
from before Thanksgiving through Christmas. The video images were analyzed
using a combination of computer vision software (to count the numbers of shop-
pers and track their path through the store), supplemented by human judgment (to
classify shoppers into demographic groups and record their use of shopping aids).
The findings confirmed many of the stereotypes about holiday shoppers, but also
suggested several opportunities for retailers to improve the customer experience
and retail performance during the holiday season. For simplicity, the following
discussion will focus on just one store, but shopping patterns were similar across
both stores.
The season kicked off with “Black Friday,” the day after Thanksgiving and one
of the busiest shopping days of the year. Consumer shopping patterns on that day
were unlike any other during the holiday season. Despite the cold, rainy weather,
shoppers arrived at the store before dawn and lined up around the building waiting
to buy $20 DVD players, $130 video cameras, and $200 computers. When the
doors opened at 6:00 a.m., 650 people poured into the store in the first 10 min-
utes. In the first hour, over 1,400 shoppers entered the store. To put this in per-
spective, traffic on a typical Saturday afternoon might be in the range of 200 to
300 shoppers per hour, and numbers can approach 600 shoppers per hour on the
weekend before Christmas and on Christmas Eve.
The people entering the store during those early hours were clearly destination
shoppers who were anxious to buy. They traveled light, leaving kids, heavy coats,
and handbags behind. Most were familiar with the store layout and walked quickly
to the desired products. In some cases, they used team shopping techniques, one
The Third Wave of Marketing Intelligence 119
partner holding a place in the checkout line while the other rushed from aisle to
aisle looking for hot specials. The level of activity was especially frantic during
the morning, as people hurried to complete their purchases before the noon dead-
line on early-bird specials. Despite the commotion, people were generally polite
and even tempered.
Given the huge numbers of customers, it is not surprising that the transaction
volume during Black Friday was the highest for the holiday season, with hourly
sales rates that were two to three times those on other shopping days. The number
of products purchased per buyer was also significantly higher on Black Friday.
People appeared to be stocking up on hot promotional items and gifts for the holi-
days: the average basket size peaked at 5 items for those early risers who com-
pleted their purchases before 8:00 a.m. Most buyers during the day purchased two
or three items.
One would expect that any shopper who made the effort to visit a store on Black
Friday would buy something. Surprisingly, many people left the store empty handed.
The average purchase conversion rate (the percentage of adult shoppers who bought)
on Black Friday did not exceed 44% in the first few hours, and averaged only 31%
for the entire day. A lower percentage of shoppers bought on Black Friday than on
the Saturday before Christmas (44%) or Christmas Eve (48%). In fact, the percent-
age of buyers was even lower than on a pre-holiday weekend, when an average of
33% of adult shoppers made purchases. From customer observation and personal
interviews, it appears that the low purchase conversion rates on Black Friday were
due to several factors, including long checkout lines, an overwhelmed sales staff,
crowding, and out-of-stock conditions. In some cases, shoppers with only one or two
items gave up and left rather than waiting in line. These issues were typical of many
other retail chains during the holiday weekend.
The volume of shopping activity subsided somewhat after the Thanksgiving
weekend, but picked up again as the number of shopping days counted down to
Christmas, with a steady increase in customer traffic and sales. Purchase conver-
sion rates peaked on 23 and 24 December as people rushed to complete their
shopping. While the total number of people buying products was quite high, many
of these were “fill-in” purchases of just one or two last-minute items. Not surpris-
ingly, most people waited until after Christmas to make returns.
Creating a great customer experience is of critical importance throughout the
year, but is a special challenge during holiday periods when the stores are crowded
and shoppers are rushed. The findings suggest several ways in which retailers
could provide a more pleasant and productive shopping environment:
x Make the Experience Enjoyable. Shoppers who arrived early on Black Fri-
day were forced to wait in a cold, dark parking lot during a rain shower for
the store to open. Customer interviews suggested that this had a negative
impact on their perceptions. Retailers could keep shoppers in a positive
mood by providing hot coffee, umbrellas, and entertainment. As Walt Dis-
ney once said, “People spend money when and where they feel good.”
120 Raymond R. Burke
x Streamline the Shopping Process. When consumers entered the store, they
rushed to specific departments and categories to find the desired items, but
were often blocked by large aisle displays and frustrated by out-of-stock
conditions. Retailers should streamline the process by keeping aisles free of
obstacles, positioning “hot” items in convenient and well-marked locations,
and using demand forecasting systems to insure sufficient inventory.
x Manage Human Resources. A few puzzled customers would sometimes tie
up all of the available salespeople in a department, leaving other shoppers
stranded. To address this issue, retailers could provide preprinted materials
and automated resources to answer frequently asked questions, and allow
salespeople to deal with unique customer concerns.
x Provide Sufficient Time and Space to Buy. When customers shopped for
complex products (such as laptop computers) during busy periods, crowd-
ing conditions caused people to shop quickly and leave without buying ac-
cessories (e.g., cases, batteries, extended warranties). Retailers should con-
sider expanding the promotional period for these items to balance the
volume of traffic in corresponding sections of the store and encourage
browsing and impulse purchases.
x Tailor Product Assortments by Time Period. Surprisingly, purchase con-
version rates declined during the day on Christmas Eve, dipping below 50
percent in the afternoon. Clearly, these last-minute shoppers were looking
to buy, but there were no products available to meet their needs. Retailers
could do a better job of understanding their requirements and providing an
attractive assortment of products at reasonable prices for these time-pressed
shoppers.
x Accelerate the Checkout Process. Long checkout lines were an obstacle for
customers navigating through the store and an inconvenience for shoppers
attempting to pay for their purchases. Retailers could speed up the checkout
process by simplifying complex transactions (e.g., scheduling home deliv-
eries and buying service agreements), opening more registers, and using
remote checkout stations and handheld “line-buster” devices (see, e.g., Lit-
fin and Wolfram in this book).
And what about that old saying that men wait until Christmas Eve to shop? All
true! Over 70 percent of the lone shoppers on Christmas Eve were men.
Measuring the Effectiveness of Digital Signage
In the Fall of 2000, Indiana University and a major specialty apparel retailer con-
ducted one of the first controlled tests of the impact of electronic signage on con-
sumer behavior and store performance (see Coleman 2000). Four retail stores
participated in the study: one test store and three demographically-matched control
The Third Wave of Marketing Intelligence 121
stores. The research team installed four 50-inch plasma display screens in the front
windows of the test store. The screens were mounted in vertical pairs, and dis-
played four channels of high-definition video and still images. The control stores
used conventional 6×8 foot paper signs with similar (static) content. Tracking
devices were installed to count the number of shoppers who walked past and into
each store. These data, along with the transaction log data from the POS system,
allowed the researchers to calculate the volumes of mall and store traffic, the aver-
age purchase conversion rates, as well as sales per customer.
The results of the test were encouraging. When the digital displays were in-
stalled, customer traffic in the test store jumped 30 percent above the level ob-
served during the previous seven-week period. Part of this increase was due to
seasonal fluctuations in mall and store traffic, and the three control stores were
therefore used as a baseline for comparison. The actual increase in traffic attribut-
able to the electronic signs was estimated to be about 23 percent. The displays
attracted a somewhat greater proportion of browsers, as evidenced by a 10 percent
drop in the purchase conversion rate. However, the digital signs still produced a
significant net gain of over 10 percent in store sales.
To evaluate the impact of the displays on consumer perceptions, attitudes, and
purchase intentions, the research team also conducted short interviews of 356 mall
shoppers. Of the 70 percent of mall shoppers who reported walking past the re-
tailer’s store, 23 percent recalled seeing the plasma display screens in the store
windows and 9.6 percent correctly recalled the specific product being advertised.
These percentages were even higher (30 and 12 percent, respectively) for people
who had shopped at the retailer’s store during the last year. Of those people who
correctly recalled the message, an impressive 46 percent said they would consider
buying the product.
While the test results indicated that the digital displays were generally effective
in increasing store traffic and sales, several additional insights emerged from the
research.
x Message content is critical. The digital displays produced the greatest gains
over conventional signage when the advertising featured innovative prod-
ucts that were unique to the retailer, appealing to the target audience, and
consistent with the retailer’s brand image. The research also revealed that
the content had a diminishing impact on store traffic and sales over time
and must be regularly refreshed to maintain shopper interest.
x Visibility and aesthetics are also important. The performance of digital
displays depends on the retail context. For example, a pilot test in one store
was unsuccessful because sunlight from windows facing onto the street
washed out the digital displays. The technology must have sufficient
brightness, resolution, and color fidelity for ambient lighting and viewing
conditions. Aesthetics and customer traffic patterns are also important con-
siderations in selection of the size, position, and viewing angle of the dis-
plays.
122 Raymond R. Burke
x Communication should be adaptive. Observational research and customer
interviews revealed that people shop differently at different times of the
day. Shoppers who visited stores early in the day were older and tended to
be more mission focused, more price sensitive, and less brand conscious. In
the evenings, shoppers were younger and enjoyed browsing through the
latest fashions with their friends. When the electronic messages were tai-
lored to the unique interests of these groups there was a consequent lift in
store traffic.
x Reliability and security must be high. When digital signage is prominently
featured in the store it becomes a key point of contact with the customer.
When the technology fails, there is a significant negative impact on cus-
tomer traffic and sales. It is critical that the digital signs are reliable, net-
work connections are secure, and backup systems are available in case of a
problem.
x Measure and manage costs. The total cost of digital signage includes the
hardware and software costs, installation and maintenance, and employee
training, as well as the costs of creating and managing the digital content.
An important part of the testing process is value engineering; measuring
whether the same communication benefits can be delivered with less ex-
pensive hardware and message content. Customer tracking technology al-
lows retailers to assess the relative performance of these alternatives.
When these issues are borne in mind, retailers and manufacturers are more likely to
achieve success in their applications of digital signage.
Challenges and Opportunities
For computer-based observational research to be widely adopted in retailing, sev-
eral technical and behavioral challenges must be addressed. The first and most
critical issue concerns the accurate collection of tracking data. Each of the avail-
able technologies has certain advantages and limitations that affect its suitability
for different retail channels. For example, several companies have developed
tracking systems that use RFID, GPS, or infrared sensors attached to shopping
carts, hand baskets, or hand-held shopping devices to track the customer’s path
through the store. These systems can provide reliable information on the shopping
process, and the data are easily linked to individual-level customer transaction and
loyalty information. However, they are not effective in environments where cus-
tomers do not use shopping carts, leave their carts to shop in the store aisles, or
otherwise choose not to use the tracked devices. Also, the cart-based technologies
provide no information on the size or composition of the shopping party.
One way to address this problem is to set up a panel of consumers who agree to
carry an RFID tag or other tracking device in exchange for compensation. This
The Third Wave of Marketing Intelligence 123
allows the researcher to collect information from a representative sample of con-
sumers, but at the expense of sample size.
An alternative approach is to use video cameras and machine-vision tools to
track customer behavior. With this method, it is possible to track the path of every
shopper who enters a store, and not just those who use a shopping cart or carry a
special card. In practice, this requires a large number of cameras, with each cam-
era positioned directly overhead to limit occlusions. Consequently, video tracking
solutions tend to work best in smaller stores.
Another benefit of video tracking is that – with a suitable camera view – the
technology can classify shoppers electronically into demographic groups (gender,
age, ethnicity) based on visual appearance (Pereira 2005). If certain demographic
groups have different average transaction sizes, then the retailer can weight the
demographically classified traffic by these purchase rates to produce a more accu-
rate estimate of sales potential. This technology can also be used to code the facial
expressions of shoppers, capturing their emotional reactions to the in-store envi-
ronment.
A second challenge in computer-based tracking concerns the digitization of the
store environment. The spatial tracking information collected by video cameras or
other location-sensing devices must be mapped onto the physical locations of
product departments and categories, and then linked with the associated transac-
tion data to calculate department- and category-specific penetration and purchase
conversion rates. Existing store floor plans and planogram files can be used to
facilitate this mapping process, but retailers must confirm that these electronic
representations accurately reflect the actual store layouts. An additional level of
complexity is introduced when the same products are merchandised in several
locations throughout the store.
A third major issue is consumer privacy. Shoppers have expressed concern that
retailers may violate their right to privacy by linking their shopping patterns to
their personal identities. For example, the MIT/Cambridge Auto-ID Center con-
ducted a series of international focus groups and one-on-one interviews which
revealed that people have consistent, negative opinions about the use of RFID tags
on consumer products, especially when these tags are not disabled or removed at
the time of purchase (Duce 2003). To address this issue, most customer tracking
studies do not attempt to identify individual shoppers, but rather focus on aggre-
gate shopping patterns. In addition, these projects limit tracking to the in-store
environment.
Conclusion
The third wave of marketing intelligence will significantly enhance the practice of
retailing, allowing manufacturers and retailers to manage the shopping experience
in response to the unique needs of customers and the characteristics of the shop-
ping environment. In the future, the focus will be on measuring unfulfilled con-
124 Raymond R. Burke
sumer demand, tracking the shopping process, measuring consumer response to
changes in marketing activities, and analyzing returns and customer feedback.
This information will be used to spot trends in consumer tastes, identify and ad-
dress points of friction in the shopping process, and create product assortments,
prices, and promotions that will attract consumer attention and stimulate purchase.
Exceptional retailers have always paid close attention to customers’ needs. Mod-
ern technology allows this to be done on a much larger scale and at a lower cost.
How is retailing likely to evolve in response to these innovations? From the
customer’s perspective, the biggest change will be the increased transparency and
convenience of the retail shopping experience. Store layout, signage, and product
organization will improve. Product selections will provide greater real assortment
with lower levels of duplication. Consumers will be more likely to find the prod-
ucts they seek. The items will be in stock and offered at a fair price. Product in-
formation will help reduce consumer confusion and highlight important new bene-
fits. New and complementary items will be featured in attractive and engaging
ways. Sales associates will be available to assist shoppers when and where they
need help. Checkout and returns will be quick and convenient. In general, stores
will do a better job of connecting supply and demand for the benefit of both con-
sumers and retailers.
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Applications of Intelligent Technologies
in Retail Marketing
Vadlamani Ravi1, Kalyan Raman 2, and Murali K. Mantrala 3
1 IDRBT, Hyderabad, India
2 Loughborough University, Leicestershire, UK
3 University of Missouri, Columbia, USA
Introduction
Over the last two decades, various “intelligent technologies” for database analyses
have significantly impacted on the design and development of new decision sup-
port systems and expert systems in diverse disciplines such as engineering, sci-
ence, medicine, economics, social sciences and management. So far, however,
barring a few noteworthy retailing applications reported in the academic literature,
the use of intelligent technologies in retailing management practice is still quite
limited. This chapter’s objective is to acquaint the reader with the potential of
these technologies to provide novel, effective solutions to a number of complex
retail management decision problems, as well as stimulating more research and
development of such solutions in practice.
The great opportunity and scope for productive use of intelligent technologies
in the retailing industry today derives from the tremendous expansion in comput-
ing power and in data captured for decision-making in various domains of retail-
ing, including inventory and supply chain management, category management,
dynamic pricing, customer segmentation, market basket analysis, and retail sales
forecasting. The universal adoption of barcode technologies over the last two dec-
ades has generated much of the data concerned (e.g., see chapter by Burke in this
book). For example, as early as 1990, typical supermarket database sizes ranged
from 1 million records for a store audit to 10 billion records for store-level scanner
data (McCann and Gallagher 1990). Now, in the first decade of the 21st century,
data availability is poised to explode further with the advent and adoption of RFID
(radio frequency identification) technology in retailing management.
There is little doubt that RFID technology is a discontinuous innovation, with
attributes that make it likely to eventually replace the older barcode technology.
For example, unlike barcodes, which have to be scanned manually and read
128 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
individually, RFID tags do not require line-of-sight reading and one RFID scan-
ner can read hundreds of tags per second. Stimulated by Wal-Mart’s plan for all
its leading suppliers to adopt RFID technology in 2005, other large retailers,
such as Metro in Germany, Tesco in the UK, and Carrefour SA in France, are all
currently studying uses of RFID technology in areas ranging from inventory
control to loss prevention. For example, an exciting aspect of the “Future Retail
Store” set up by Metro in Rheinberg, Germany, is the deployment of RFID for
the automation of a number of retailing processes (see chapter by Kalyanam, Lal
and Wolfram in this book). However, the tremendous amounts of data that even
rudimentary RFID systems (i.e., read-only, serial-number, license-plate model
technology) can generate are already overwhelming analysts (Schuman 2004).
One major challenge is that of adapting archaic legacy systems to handle the
influx of data and integrating RFID into existing retail IT systems, such as
warehouse management systems, enterprise resource planning, and supply chain
execution. The second challenge looming is the meaningful analysis and extrac-
tion of information from the flood of data.
An early warning that the knowledge extraction and application process may
simply breakdown in the face of huge databases was sounded by McCann and
Gallagher (1990). Those concerns remain true today. A recent report from analyst
firm VDC (Venture Development Corp.) indicates that many large retailers are as
yet “ill prepared” to handle the large volumes of data expected from RFID imple-
mentations and that indeed many have not even mastered their current barcode
systems (Schuman 2004). Thus, we anticipate that barcode and RFID technology
will co-exist for quite some time in the future as retailers’ capabilities to extract
intelligence from such voluminous data evolve.
Currently, most large retailers are engaged in efforts to create data warehouses
that combine the massive databases formed by barcode and/or RFID systems with
the data coming from their typically disparate online transaction processing
(OLTP) systems (e.g., finance, inventory, and sales) at a single location. However,
deployment of a data warehouse alone is not sufficient to guarantee retailers a
good return on investment. This also requires smart technologies for “Knowledge
Discovery in Databases” (KDD), which uncover meaningful patterns and rules in
the data to support an organization’s operational processes. Such knowledge can
become an important strategic resource or source of competitive advantage for a
company.
The extraction of meaningful and actionable knowledge from very large data-
bases is termed data mining, a discipline that encompasses a variety of techniques,
including several intelligent technologies such as fuzzy logic systems (Zadeh 1994)
and neural networks analysis (Zahedi 1991) as well as traditional statistical mod-
eling of predictive relationships between outcome and explanatory variables of
interest, e.g., multiple regression analyses. However, intelligent technologies other
than neural networks and machine learning can also thrive in data-poor environ-
ments. Fuzzy logic, case-based reasoning, and collaborative filtering fall in this
category.
Applications of Intelligent Technologies in Retail Marketing 129
Key Characteristics of Intelligent Technologies
Technologies used for KDD are termed “intelligent” if they are adaptive, i.e., react
to and learn from changes in inputs (i.e., the data sets) from their environment.
According to Voges and Pope (2000), the hallmark of an adaptive system is that it
“…[U]ndergoes a progressive modification of its population of component struc-
tures. The rate and direction of this modification is controlled by feedback indicat-
ing how well the structures are explaining the available data.” Examples of com-
ponent structures commonly used in data organization and analyses are rule-based
structures, e.g., “if-then” rules used in marketing expert systems, weight-based
structures used in traditional regression models and also artificial neural networks,
and the binary-coded structures used in genetic algorithms. Intelligent technolo-
gies all involve a process whereby the basic units of the computational structure
(e.g., neurons in artificial neural networks, chromosomes in genetic algorithms,
rules in classifier systems) adapt themselves to the information contained within
the data set, i.e., “self-organize” toward better solutions by following an adaptive
plan (Voges and Pope 2000). In addition, intelligent technology-based decision-
making systems accommodate managers’ expert judgments and their experience-
based subjective understanding of market forces.
The adaptive structures of intelligent technologies differ in important ways
from the traditional form of mathematical and statistical structures used in classic
marketing research and multivariate data analyses, e.g., variations on the general
linear model such as multiple regression, multiple discriminant analysis, structural
equation models, or conjoint analysis. While not “intelligent,” these traditional
approaches have the advantages of relative simplicity of interpretation, a well-
developed literature on theory and applications, and easily mastered computer
tools for practical data analysis. To achieve these advantages, however, they also
have the major disadvantage of making a number of simplifying and/or restrictive
assumptions and an inability to handle very complex problems with very many
inputs and outputs. Intelligent technologies overcome many of these limitations
and expand the range of structures considerably. For example, unlike classic
statistical methods, which make specific distributional assumptions, e.g., normally
distributed random disturbances, that may or may not hold in different applica-
tions, intelligent technologies are nonparametric techniques, i.e., they do not as-
sume any specific statistical distributions for the data.
Retailing Applications of Intelligent Technologies
Table 1 provides a summary description of the basic idea, analytical advantages,
and disadvantages of each of five classes of intelligent technologies with interest-
ing and burgeoning retailing applications. Below we provide a brief overview and
a few examples of retailing applications of these methods, to give readers a sense
of their power and potential.
130 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
Table 1. Five Classes of Intelligent Technologies
Technology Basic idea Advantages Disadvantages Evolving areas of
application
Future areas
of application
Fuzzy logic Models impreci-
sion and derives
human-compre-
hensible “if-then”
rules for a fuzzy
controller.
Good at
embedding
human expe-
riential knowl-
edge; low
computational
requirements.
Arbitrary choice
of membership
function skews
the results.
Modeling man-
ager’s perceptions
on sales; customer
segmentation;
predicting predict
customer churn;
developing quick-
response reorder
systems for sea-
sonal apparel.
Fuzzy rule-
based classi-
fiers rather
than fuzzy
controllers find
more applica-
tions when
RFID use
triggers more
data.
Neural
networks
Learn from
examples using
several con-
structs and
algorithms just
as a human
being learns
new things.
Good at
function
approxi-
mation, fore-
casting and
classification
tasks.
Determination of
various parame-
ters associated
with training
algorithms is not
straightforward.
Need a lot of
training data and
training cycles.
Forecasting retail
sales and market
share; segmenting
customers for vari-
ous purposes, such
as direct marketing;
modeling repeat
purchase in mail-
order retailing.
On-line neural
networks can
be used to
make deci-
sions on the
fly in all these
scenarios.
Soft
computing
Hybridizes intel-
ligent tech-
niques such as
fuzzy logic,
neural net-
works, genetic
algorithms, etc.
in several forms
to derive above
stated advan-
tages of all of
them.
Amplifies
advantages
of the intelli-
gent tech-
niques while
simulta-
neously nulli-
fying their
disadvan-
tages.
Apparently has
no disadvan-
tages. However,
does require a
good amount of
data, but this is
not exactly a
disadvantage
nowadays.
Modeling apparel
retail operations;
competitive retail
pricing and adver-
tising; repeat pur-
chase modeling;
configuring co-
operative supply
chains; customer
targeting in direct
marketing; fore-
casting retail share.
Customer
churn predic-
tion; real-time
problem-solv-
ing.
Case-based
reasoning
Learns from
examples using
the k-nearest
neighbor
method, similar
to human deci-
sion making.
Good when
data appears
as cases and
when dataset
is small.
Cannot be
applied to large
datasets; poor in
generalization.
Can be used as a
forecasting system
for retailers in plan-
ning periodic pro-
motions.
Again, can be
used to build a
forecasting
system for
consumer
products.
Collabora-
tive filtering
Learns from the
most similar
users and gives
recommenda-
tions.
Can be used
to generate
personalized
recommenda-
tions for
users.
User profiles are
required; when
new products
are launched no
ratings from
users are avail-
able.
Retailers can use
this technique to
recommend various
users who like to
buy things over the
internet by looking
into the profile of
similar customers.
Though cur-
rently re-
stricted to
buying books
and movie
titles, it can be
extended to
consumer
products also.
Applications of Intelligent Technologies in Retail Marketing 131
Fuzzy Logic-Based Methods and Applications
Overview
There are already many fuzzy logic-based commercial products, ranging from
self-focusing cameras to computer programs for trading successfully in the finan-
cial markets. An important feature of fuzzy logic systems is that they model and
facilitate the analyses of uncertainty caused by vagueness attributable to linguistic
imprecision and ambiguities in human judgment rather than just random factors.
Such uncertainty is conceptually quite different from that attributed to missing,
omitted, uncontrolled, or extraneous variables in traditional econometric tech-
niques. More specifically, fuzzy logic recognizes that objects, events, people, and
phenomena in the real world cannot always be sensibly categorized into conceptu-
ally clear and unambiguous classes, as is assumed in traditional formal logic.
Thus, fuzzy logic allows us to quantify concepts that do not fit into “either/or”
categories but rather form fuzzy sets, such as the set of “tall men,” “warm days,” or
“small crowds.” These sets or concepts are fuzzy because they cannot be precisely
defined.
For example, how meaningful is it to say some man is “tall” when there is no
specific height at which a man becomes tall but rather a continuum of heights,
ranging from short to tall? Further, the assessment lies in the eyes of the beholder.
The fuzzy logic approach, however, accepts this and provides a framework to
assign some rational, numerical value (that can be used by a computer) to intuitive
assessments of individual elements of a fuzzy set. This is accomplished by assign-
ing the fuzzy evaluations of conditions a value between 0 and 1.0. For example,
the relationship between height and degree of “tallness” perceived by an individual
can be captured by that assessor rating anybody over 6 foot as 0.9 or even 1.0 and
anybody below 5 foot as 0.2 or lower. (This type of numerical evaluation is called
“the degree of membership,” which is the placement in the transition from 0 to 1
of conditions within a fuzzy set.) These types of assessments of fuzzy concepts
provide a basis for analysis rules of the fuzzy logic method.
Objects of fuzzy logic analysis and control may include: physical control, such
as machine speed, financial and economic decisions, and production improvement.
In fuzzy logic method control systems, degree of membership is used in the follow-
ing way. A measurement of speed, for example, might be found to have a degree
of membership in “going too fast” of 0.8 and a degree of membership in “no
change needed” of 0.4. The system program would then calculate the weighted
average of between “too fast” and “no change needed” to determine feedback
action to send to the input of the control system, e.g., amount of pressure on a
vehicle’s accelerator. That is to say that a fuzzy logic control system could be as
simple as: “If the car’s speed feels as if it is going too fast, relax the pressure of
your foot on the accelerator.” In more complex systems, controllers typically have
several inputs and outputs, which may be sequenced.
To summarize, the fuzzy logic analysis and control method is, therefore:
132 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
1. Collecting one, or a large number, of assessments of conditions existing in
the system to be controlled.
2. Processing all these inputs according to human-based, fuzzy “if-then” rules
in combination with traditional non-fuzzy processing.
3. Averaging and weighting the resulting outputs from all the individual rules
into one single output decision or signal, which informs a controlled sys-
tem what to do. The output signal eventually arrived at is a precise, hard
value (see e.g., Thomas Sowell, http://www.fuzzy-logic.com/Ch1.htm for a
primer on fuzzy control).
Retailing Applications
Fuzzy Market Segmentation. In retailing, there are many variables of interest,
such as consumer judgments about store price image, that can vary continuously
from, say, value-oriented, e.g., Wal-Mart, to status-oriented, e.g., Nordstrom’s.
Inherently, the meanings of such linguistic labels and their measurement are
vague and imprecise. Such linguistic vagueness is not fully addressed by classic
marketing research scaling methodologies, but can be handled in a fuzzy analy-
sis framework. The ability to do this has proved particularly useful in the do-
main of market segmentation studies, which attempt to cluster customers into
groups such that individuals within groups are similar to each other and different
from individuals in other groups. In practice, it is difficult to partition customers
into completely nonoverlapping groups – especially on the basis of attitudinal
variables and market characteristics, which are often linguistically imprecise in
nature. Given such “fuzziness” in segmentation variables, standard clustering
applications have not been very satisfactory. Consequently, a number of fuzzy
logic-based clustering algorithms for market segmentation have been proposed
over the years.
Fuzzy Control-based Quick Response (QR) Reorder Schemes for Seasonal Apparel.
A cursory glance at the prerequisites for successful implementation of Quick Re-
sponse (QR) reorder schemes for apparel retail reveals that many of these require
subjective evaluation, experiential knowledge, and domain expertise. This is ex-
actly where one can formulate several heuristic “if-then” rules that can later be
used to build a powerful fuzzy controller or fuzzy inference system. For example,
Hung et al. (1997) employed a fuzzy controller to develop a novel and intelligent
QR reorder scheme. More specifically, Hung et al. (1997) use the fuzzy controller
to specify the size of the current reorder for each SKU on a week-by-week basis
beginning at the end of the first week of the selling season and ending with any
week chosen by a buyer.
Fuzzy Intelligent Agents for Targeted E-Tailing. Consumers’ searches for online
retailer information, services, and products can be greatly facilitated by the use of
linguistic descriptions and partial matching, both of which are hallmarks of fuzzy
Applications of Intelligent Technologies in Retail Marketing 133
technologies. For example, Yager (2000) has demonstrated that fuzzy controller-
based intelligent agents can autonomously and instantaneously personalize the
display of advertisements on the basis of the viewer’s characteristics.
Fuzzy Logic-based Prediction of Customer Churn (Defections). The retailing indus-
try has become extremely competitive, and customers have become more demand-
ing than earlier. In such a scenario, retailers need to continually discover new ways
of retaining existing customers, because acquiring new customers is several times
more expensive than retaining existing ones. Casabayo et al. (2004) employed a new
fuzzy logic-based classification model to predict whether a customer is going to
defect (switch) when a new retailer opens an outlet. In a study involving data gath-
ered from a Spanish supermarket chain, the classifier achieved a very high accuracy
of 90% in identifying the customers who would defect. This is because churners’
behavior is modeled with the help of fuzzy sets, using retailers’ experiential knowl-
edge of the behavior of potential churners and nonchurners. Such heuristic knowl-
edge can be used to build fuzzy inference systems. Further, fuzzy systems are non-
statistical in that they are insensitive to the severe imbalance in the distribution of
churners and nonchurners in the data, which is typically the case.
Neural Network Methods and Applications
Overview
A neural network represents knowledge implicitly within its structure and attempts
to apply inductive reasoning to process this knowledge (Zahedi, 1991). Neural
networks are capable of learning, detecting, and storing databases now available
for retailing management. Neural networks exploit analogies with the information-
processing operations performed by human brains. Thus, a neural network is a
network of massively parallel interconnected computing units called neurons,
which are arranged in layers. Each neuron receives signals from other neurons and
passes on a weighted combination of these signals to the next layer of neurons,
generally after transforming the output signal in a nonlinear manner. The power of
neural networks is intimately related to their ability to function as the fundamental
logic gates that underlie all computing. That is, each of the logical operations
needed to compute can be realized by connecting neurons in different ways and
changing the weights between their connections. The relevance of neural networks
in data-rich situations is already evident in the extensive number of applications of
this technique in the financial services industry, such as the identification of good
and poor credit risks in large customer populations.
In retail marketing, the central issue in many problems is predicting the behav-
ior of customers. Neural networks provide a key tool for forecasting purposes. The
forecasts are often based upon a considerable amount of available data that can be
used to train the relevant models. The technical word “train” refers to the calibra-
tion of an intelligent system so that it can “learn” relationships and interactions in
134 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
the data and thereby generate subsequent predictions. This is analogous to parame-
ter estimation in classic statistical techniques. Training is accomplished by updat-
ing the connection weights iteratively according to a mathematical algorithm, in
such a way that the error between the output of the network and the actual output
given in the training data is minimized. Training generally requires considerable
amounts of data, but is now quite feasible given today’s large retailing databases
and computer hardware and information technologies.
Retailing Applications
Retail Market Segmentation. Explosive growth in the use of loyalty schemes, per-
sonal shopping programs, scanners, cookies, and electronic data collection meth-
ods has led to the generation of an “embarrassment of riches” as far as the avail-
ability of customer data is concerned. As a direct consequence, market segmentation
and target marketing have become complicated, because retailer databases are
constantly becoming larger and noisier. Typically, such databases contain hun-
dreds of variables, and it is not uncommon to find many outliers and clusters of
unequal sizes. Furthermore, retailers usually use segment-specific marketing
mixes. Against this backdrop, Boone and Roehm (2002) proposed using a Hop-
field-Kagmar clustering neural network (HKNN) for segmentation purposes. The
real-world dataset used for demonstration consisted of 4317 customers and six
major purchase behavior variables obtained from major retailer databases.
The HKNN turned out to be less sensitive to initial guesses on centroid loca-
tions and more accurate in segmentation accuracy than the traditional hard K-
means algorithm and mixture models (Boone and Roehm, 2002), for the following
reasons. (i) Unlike K-means clustering, HKNN partially reassigns segment mem-
bership. Therefore, the skewing effect of an outlying customer on any segment is
reduced because all customers are partially assigned to all segments. Only when
the HKNN terminates does segment membership becomes unambiguous. (ii)
HKNN does not require prior segment memberships to sum to one making it less
sensitive to initial starting conditions (poorly specified seeds) and less likely to
yield suboptimal solutions when unstructured datasets are analyzed. (iii) HKNN
does not require a priori rational information (seeds) to perform well, because
initially it randomly and partially assigns customers to all segments and updates
segment memberships after processing each customer.
Retail Forecasting Using Neural Networks. It is clear that accurate demand forecast-
ing is important for profitable retail operations, because a bad forecast results in
either too much or too little stock, which eventually has a deleterious impact upon
revenues and profitability. Agarwal and Schorling (1996) employed a neural net-
work approach to forecast brand shares for household products and concluded that
it outperformed the traditionally preferred multinomial logistic regression in terms
of accuracy, for the simple reason that their model is, in essence, a massively par-
allel system of several logistic regression functions acting simultaneously.
Applications of Intelligent Technologies in Retail Marketing 135
Neural networks have also been successfully used in industrial forecasting. Big
retailers with large market shares find industrial forecasts very useful. Tradition-
ally, larger retailers have used time series methods and smaller retailers have re-
lied on judgmental methods to make industrial forecasts. Better forecasts of the
aggregate sales can improve the forecasts of the individual retailers, because
changes in their sales levels are affected by systematic patterns. For instance,
around Christmas time, most retailers’ sales increase. Furthermore, models used to
forecast individual store sales often include assumptions about industry-wide sales
and market share. Thus, “aggregate retail sales” is used as a predictor variable in
many of these models.
There are many statistical methods available for forecasting aggregate retail
sales, such as Winters’ exponential smoothing, Box-Jenkins’ auto regressive inte-
grated moving averages (ARIMA) model, and multiple linear regression. Neural
networks offer an alternative to these methods. Alon and Sadowski (2001) have
observed that the neural network solution is better able to capture dynamic nonlin-
ear trends, seasonal patterns, and their interactions and can thereby outperform the
traditional statistical models across different forecasting periods and forecasting
horizons, especially when economic conditions are relatively volatile.
Modeling Repeat Purchase in Mail-order Retailing. In the mail-order response-
modeling literature a critical issue is whether or not a customer will purchase dur-
ing the next mailing period. Typically, the “RFM” framework that uses recency,
frequency, and monetary value variables to predict repeat purchase is utilized.
Viaene et al. (2001) approached this problem by applying a neural network model
that isolated the most relevant RFM variables and eliminated a number of redun-
dant or irrelevant variables without compromising its predictive power. In particu-
lar, they observed that the frequency variables dominated the recency and mone-
tary values.
Soft Computing and Applications
Overview
The third class of technologies featuring in Table 1 is soft computing, which refers
to the seamless integration of different, seemingly unrelated, intelligent technolo-
gies such as fuzzy logic and neural networks to exploit their synergies. This term
was coined by Lotfi A. Zadeh in the early 1990s to distinguish these technologies
from the conventional “hard computing” that is inspired by the mathematical
methodologies of the physical sciences and focused upon precision, certainty, and
rigor, leaving little room for modeling error, judgment, ambiguity, or compromise.
In contrast, soft computing is driven by the idea that the gains achieved by preci-
sion and certainty are frequently not justified by their costs, whereas the inexact
computation, heuristic reasoning, and subjective decision-making performed by
human minds are adequate and sometimes superior for practical purposes in many
contexts.
136 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
Soft computing views the human mind as a role model and builds upon a
mathematical formalization of the cognitive processes that humans take for
granted (Zadeh, 1994). For example, an important member of the soft computing
group, namely neuro-fuzzy techniques, can endow products such as microwave
ovens and washing machines with the capability to adapt and learn from experi-
ence and thereby determine the best settings for their tasks independently. Within
the soft computing paradigm, the predominant reason for the hybridization of
intelligent technologies is that they are found to be complementary rather than
competitive in several aspects such as efficiency, fault and imprecision tolerance,
and learning from example (Zadeh, 1994). Further, the resulting hybrid architec-
tures tend to minimize the disadvantages of the individual technologies while
exploiting their advantages.
Retailing Applications
Fuzzy Neural Network for Modeling Apparel Retail Operations. Wu et al (1995)
developed a “fuzzy control neural network” (FCNN) for modeling the relationship
between key inputs (e.g., product assortment and season length) and outputs (e.g.,
service level and lot sales) of an apparel retail operation. Here a fuzzy controller
was proposed to fine-tune the selection of “learning rate,” a key parameter that
determines the speed and accuracy of neural network training. The model provides
the retailer with a rapid, easy-to-use visual tool to aid in understanding and predict-
ing the impact on system performance of several “what-if” scenarios such as:
x What will happen if the retail season inventory is reduced?
x What will happen if we use a poor forecast of stock-keeping unit mix
and/or demand volume?
x What will be the impact if selling seasons are made shorter?
x What cost/benefits will result if reorder lead times are reduced?
The FCNN outperformed the traditional neural network in terms of speed, whereas
both performed equally well in terms of accuracy.
Soft Computing-based Multi-agent Retailing Decision Support System. Aliev et al.
(2000) developed a soft computing-based marketing decision support system rele-
vant to retailing within the framework of multiple agents (decision-makers). The
architecture consists of a set of contending agents that receive the same input infor-
mation and generate different solutions to the full problem. These individual agents
are autonomous and perform fuzzy rule-based inference. In the second stage there is
a solution estimator, whose task is to estimate the expected values of the outcome of
the system on the basis of the solutions provided by the contending agents. This
solution estimator is a fuzzy neural network with crisp and fuzzy inputs and fuzzy
weights represented as fuzzy numbers. The inputs to the fuzzy neural network con-
sist of the current total input of the system and of the solutions produced by the
Applications of Intelligent Technologies in Retail Marketing 137
agents. This fuzzy neural network transforms the data into the value of the outcome
of the system. A genetic algorithm performs the training of the fuzzy weights of this
network. The fuzzy-neural-genetic estimator produces a set of fuzzy values of the
system’s outcomes. Finally, there is an evaluating agent that performs ranking of the
fuzzy solutions obtained in the second stage and determines the “winner” agent
whose solution will finally be taken as the total solution of the system.
Aliev’s decision support system was successfully applied in a company that
was determining its own average price and average advertising spending based on
the average price and average advertising spending of its competitor.
Bayesian Neural Network for Repeat Purchase Modeling in Mail-order Marketing.
Mail-order retailers send out catalogues to a selected number of prospective buy-
ers. It is necessary to assess an individual buyer’s propensity to buy in order to
decide whether or not to include him/her in the mailing list. The prospects or pro-
spective customers to be mailed are typically selected on the basis of advanced
analytics, including such customer-profiling predictors as demographics, behavior
and psychographics. Commonly used target or output variables for these mail
response models are purchase incidence, purchase amount, and interpurchase time.
In a study by Baesens et al. (2002), only purchase incidence is considered.
Conceptually, this problem of repeat purchase modeling boils down to that of a
binary classification with two classes: repurchase and not. A feed-forward neural
network can be used for solving the classification task. However, in this work a
Bayesian learning-based neural network is proposed for this problem. Initially,
only the standard RFM framework incorporating recency, frequency, and mone-
tary values is used to supply predictors for the Bayesian neural network model.
Later, the RFM variables are augmented by non-RFM customer-profiling vari-
ables, such as length of relationship and credit usage. This extended model yielded
a significant increase in the accuracy of predictions.
Further, it was observed that the Bayesian neural network outperformed the
standard statistical classifiers, namely, logistic regression, linear discriminant
analysis, and quadratic discriminant analysis, on a dataset of 100,000 customers
obtained from a major European mail-order company. This dataset describes the
past purchase behavior of customers at the order-line level, i.e., it consists of such
data as date of purchase, quantity of purchase of particular product, price of prod-
uct, and order number. This information together with the knowledge of domain
experts and extensive literature was used in deciding the type of predictor vari-
ables for this study. Moreover, it was noted that the inclusion of non-RFM vari-
ables significantly augmented the predictive power of the RFM classifiers.
Soft Computing for Customer Targeting in Database Marketing. Kim and Street
(2004) present a novel method for direct marketing campaigns in database market-
ing, in which a genetic algorithm and a neural network are used together for the
purpose of selecting important predictor variables to score customers. Here the
problem of selecting important predictor variables, also called feature selection, is
138 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
formulated as a combinatorial optimization problem with the help of a classifier.
A genetic algorithm is used to solve this combinatorial optimization problem and a
feed/forward neural network performs the task of a classifier. Given the power of
these technologies discussed elsewhere in the chapter, this hybrid is expected to
produce the optimal subset of predictor variables. Then another neural network
that takes these selected predicted variables as inputs is used to predict the pros-
pects. The efficacy of this soft computing system is demonstrated on a dataset
taken from 9822 European households who buy insurance for a recreational vehicle.
Table 1 also includes two other classes of data analysis technologies, namely
case-based reasoning (CBR) and collaborative filtering (CF), that can be viewed
as “intelligent.”
Case-Based Reasoning and Collaborative Filtering
Overview
In case-based reasoning, an analyst remembers or retrieves from the database previ-
ous situations or “cases” that are similar to the current one. This is typically done
using the “k-nearest neighbor” technique that classifies any record in a database
based on a combination of the classes of the k-record(s) most similar to it in a his-
torical dataset. The history of these old cases is utilized to solve the new problem.
More specifically, case-based reasoning can mean adapting old solutions to meet
new demands; using old cases to explain new situations; using old cases to critique
new solutions; or reasoning from precedents to interpret a new situation or create an
equitable solution to a new problem (much as lawyers or labor mediators do). In
contrast, collaborative filtering systems aggregate data about customers’ purchasing
habits or preferences and make recommendations to other users based on similarity
in overall user profiles. For example, in, say, a music recommender system, users
who had expressed their musical preferences by rating various artists and albums
could get suggestions of other groups and recordings that others with similar prefer-
ences also liked. The use of collaborative filtering by Amazon.com to make book
purchase recommendations to potential buyers visiting their site is well known. (In-
terestingly, in recent years there is a growing school of database analysts who view
automated collaborative filtering as a form of case-based reasoning, given that enti-
ties such as previous “users” can be regarded as previous “cases”.)
Retailing Applications
CBR-Based Promotion Response Forecasting. Case-based reasoning has been used
to develop a forecasting system for retailers to enable them to plan periodic pro-
motions (McIntyre, Achabal and Miller 1993). Typical for any case-based reason-
ing application, this system (i) selects those promotions from historical data that
are most similar to the planned promotion, (ii) adjusts the sales of each analogous
promotion to account for any difference between the analogous and the planned
Applications of Intelligent Technologies in Retail Marketing 139
promotion, and (iii) finally combines the forecasts given by the multiple cases to
arrive at a single sales forecast. It has been observed that the system developed
here compares favorably with an expert buyer in a large retail organization in
performance.
CF-based Market Basket Analysis. Retail managers have long been interested in
understanding the cross-category purchase behavior of their customers, or “market
basket analysis.” Collaborative filtering is an approach that is frequently used to
perform market basket analysis within recommender systems incorporated in online
retailing environments. For example, Mild and Reutterer (2003) developed an im-
proved collaborative filtering (CF) approach for situations in which only the binary
pick-any customer information in terms of choice/nonchoice of items is available.
Future Research Directions
In view of the foregoing review of selected applications of various intelligent
technologies (both stand-alone and hybrid architectures) in retailing, it is clear that
the future promises many additional exciting developments. Since many of the
retail problems discussed above can be conceptualized as data mining problems,
several other neglected technologies of data mining can be employed effectively
to address them. For instance, there remain many potential applications of ma-
chine learning algorithms, such as decision trees (e.g., C5.0, CART).
Furthermore, since the problems of customer churn (attrition) prediction, repeat
purchase modeling, etc. are essentially classification problems, another promising
research stream could be the construction of “ensemble” classifiers. In “ensemble”
classifiers, a set of intelligent technologies solve the same problem independently
and separately, but there is an “arbitrator,” which combines the predictions given
by different intelligent technologies by means of either simple or weighted voting
schemes. Another direction of research could be to exploit the emerging paradigm
of evolving connectionist systems, which comprises a set of neuro-fuzzy architec-
tures that are trained online and are powered by one-pass training algorithms, as
against the current technology that taken several iterations to converge. Given that
retailing is becoming more and more technology driven and competitive, decisions
will have to be taken almost instantly. The technology of evolving connectionist
systems can greatly assist managers in making real-time decisions on customer
segmentation, retail sales forecasting, or customer churn prediction.
Conclusions
This chapter has focused on several kinds of decision-making problems that com-
monly arise in retail marketing. A common characteristic of many of these retail
problems is that they pose serious threats to the cognitive ability of decision mak-
140 Vadlamani Ravi, Kalyan Raman, and Murali K. Mantrala
ers to handle large quantities of data, which in turn is a development occasioned
by great advances in information technology systems. Powerful computer soft-
ware, driven by the availability of cheap, massive computing power resulting from
the exponential increase in memory available, coupled with dramatic shrinkage in
size of computers, now enables storage and manipulation of extremely large data-
bases. The size of these retail databases is increasing exponentially, thanks to the
advent of new sophisticated hardware, the most prominent of which is RFID tech-
nology.
The rationale behind the deployment of a data warehouse in retail outlets is that
the very use of RFID technology in retail chains generates comprehensive data re-
lated to both inventory and customers’ demographic and psychographic profiles.
Since a prodigious amount of data is collected, it is difficult to discover relationships
among variables and derive managerially interesting conclusions without the help of
powerful and sophisticated data mining, which in turn employs intelligent technolo-
gies, in both stand-alone and hybrid mode (also known as soft computing).
Several applications of these technologies to solving various retail marketing
decision-making problems have been surveyed in this chapter. In each case, the
advantages of adopting these technologies vis-à-vis using the traditional statistical
methods are evident. Further, some interesting future directions of research in all
these problem areas are also suggested. We have tried to convey a sense of the
cornucopia of retail applications awaiting creative adaptation and implementation
of the exciting new technologies created by soft computing. In light of the oppor-
tunities, it is appropriate to close on Drucker’s far-sighted prophecy that “Retail-
ing – rather than manufacturing or finance – may be where the action is now.”
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New Automated Checkout Systems
Thorsten Litfin1 and Gerd Wolfram 2
1 University of Applied Sciences Osnabrueck, Germany
2 METRO Group, Duesseldorf, Germany
Introduction
Customers are becoming more and more familiar with self-service systems. They
are used to checking in without assistance at the airport and to using automated
teller machines at the bank. Self-service is a trend that is extending to more and
more aspects of daily life. The triumphal procession of self-service systems seems
to be extending to the supermarkets. New automated self-checkout systems enable
shoppers to scan, bag, and pay for their purchases without or with very limited
help from store personnel. Although this technology has existed for more than a
decade, it is still in the early stages of its diffusion process. Retailers expect to
reduce their costs and to gain more flexibility by introducing self-checkout sys-
tems. One cashier can now serve multiple customers simultaneously, so that staff
time is used efficiently. Displaced labor could be used to improve the service in
areas where they really help the customers. But are customers really willing to use
the new automated self-checkout systems? The vendors of these systems assert
that customers benefit from it too. Shorter checkout queues, a faster checkout
process, more privacy, and greater control for the customers are the key arguments
being used to convince the retailers to introduce the new self-checkout systems.
But past introductions of new products and systems have shown that customer’s
acceptance is crucial for their success.
This article uses an empirical basis to discuss the factors that influence the ac-
ceptance of self-checkout systems and how vendors of these systems and retailers
could encourage customer acceptance. In order to relate these ideas, the techno-
logical basis and the principle function and operation of such self-checkout sys-
tems are first described. The expected benefits for supermarket operators and cus-
tomers are specifically addressed. However, the installation of such systems will
fail if the customer does not use them and prefers to use traditional checkouts. The
theory of acceptance provides a sound basis to evaluate the prospects of success
for self-checkout systems, and can also be used to enhance acceptance by customers.
144 Thorsten Litfin and Gerd Wolfram
The acceptance theory serves as a theoretical frame for the empirical survey and
produces recommendations that can be given to managements for the successful
introduction of self-checkout systems on the market.
New Automated Self-Checkout Systems
The economic situation of the retail trade is characterized by decreasing – at best
stagnating – margins together with challenges from steadily growing international
competition. At the same time, customers’ cost consciousness has increased, while
their loyalty to particular stores has declined. In order to maintain competitiveness
under these circumstances in the long term, the call for “lean shops” is becoming
louder and louder. The aim is to organize all the processes of the entire value adding
activities of the trade in a faster, more transparent and more effective way (METRO
Group Future Store Initiative 2003) by using advanced technology. For example,
efforts are being made to use radio frequency identification technology (RFID) to
track the transport and whereabouts of goods along the entire delivery chain from
production to point of sale. Moreover, RFID allows businesses to store and retrieve
product information such as price, best-before date, and producer identification
codes. This facilitates ordering, deliveries, storage, and sales (see also chapter by
Kalyanam, Lal, Wolfram in this book). These optimized procedures are expected to
provide considerable cost savings and higher customer satisfaction on account of
additional information and more reliable product supply. The out-of-stock issue is
also reduced by means of these new technologies.
However, efficiency potentials can also be realized with the already established
European Article Number (EAN) code. The first step was the introduction of
checkouts with barcode scanners, which can easily be operated by the cashier via
touch-screens. Commercial enterprises expect further cost savings from the intro-
duction of self-checkout systems, where the customers themselves becomes cash-
iers. At present, there are two different concepts geared at providing customers
with a means to pay for their goods in a faster and more convenient way: Shop-
ping and paying with the help of personal shopping assistants (PSA) and self-
checkout systems.
With the first option, on entering the shop, the customer receives a so-called
personal shopping assistant (PSA). This is a kind of laptop, which the customer
fastens to the shopping cart. While walking through the shop, the customer scans
the items he buys into the PSA. At the checkout the customer triggers the payment
process, and the PSA transfers notification of the total sum due to the checkout
system. The sales receipt is printed out and the customer pays the stated sum,
either in cash or by bank card / credit card. The customer saves time and effort
because there is no any need to take the items out of the cart and put them on the
belt. Figure 1 shows the payment process implemented with the help of the PSA.
In addition to this simple and time-saving payment procedure, further services are
New Automated Checkout Systems 145
Fig. 1. Shopping and Paying with the Personal Shopping Assistant (PSA)
(http://www.future-store.org)
offered to the customer. For example, customer can call up their own shopping list
with purchases they have made in the last few weeks. They also do not have to
search the shop for any product they want to buy, since the PSA shows them
where to find it. After scanning the items, customers get additional price and
product information, which will make shopping much easier for them.
With the second alternative, customers use a traditional shopping cart and shop
as usual. The difference is that at the checkout, the new technology of a self-
checkout system is used, which lets each customer become his or her own cashier.
They just scan the EAN-code of the individual items over a 360-degree scanner so
that the prices are recorded. The customer then places the goods in a bag that is
automatically weighed. If the weight of the bag deviates from the weight of the
scanned goods, the employee at the information counter automatically receives an
error message. Payment can either be made in cash or by means of a bank / credit
card. The payment procedure with the self-checkout system is shown in Figure 2.
This system does not provide further services to the customer, however, and no
PSAs are handed to customers.
Both options are aimed at a considerable reduction of the waiting time at
checkouts and at making more efficient use of the sales force. The main benefit of
the PSA option is the time that is saved during the scanning and payment process.
Consequently, the number of checkouts can be greatly reduced. Furthermore, the
PSA offers numerous services to the customer, such as shopping lists and product
information. When a self-checkout system is used, only one employee is needed to
146 Thorsten Litfin and Gerd Wolfram
Fig. 2. Paying with the Self-Checkout System
(http://www.future-store.org)
control four checkouts, so that the other three employees are freed up, e.g., for
work or services in other parts of the store; alternatively, the commercial enter-
prise may elect to use the release of staff to reduce labor costs (see also chapter by
Merkel, Jackson, Pick in this book).
Nevertheless, commercial enterprises such as the METRO Group intend to re-
place only some of their traditional checkouts with these new technologies, in
order to allow customers to choose their preferred type of checkout. Those who do
not want to use the new systems are still to be given the opportunity to pay for
their purchases at a traditional checkout, as in any other supermarket. The factors
determining acceptance or rejection of technical innovations are discussed in the
following chapter from a theoretical point of view.
Acceptance as a Precondition for Market Success
The acceptance theory examines the individual sequence of the approbation of an
innovation and also the factors that have an influence on the various phases of this
process. The decision of a consumer to buy and to use an innovation is called accep-
tance. The dynamism of the acceptance process arises from the steadily changing
state of knowledge of the enquiring individual. New information is to be evaluated
New Automated Checkout Systems 147
and to be integrated into the overall judgment. This subjective opinion constitutes
the basis of each individual consumer’s decision to accept or reject the innovation.
The sum of these individual decisions produces the diffusion process and decides on
the success or failure of the innovation (Rogers 2003; Albers/Litfin 2001).
The acceptance process can only be influenced successfully in the interests of the
enterprise if the acceptance factors and the causal connections are known during the
passage through the various phases. These connections are shown in Figure 3.
Acceptance Process
The acceptance process starts with the phase of awareness in which potential buyers
get to know something about an innovation, either by chance or during the active
search for a solution to an existing problem (Kollmann 1996; Clement/Litfin
1999). If the innovation is appropriate, it is integrated into the set evoked. There-
fore, one precondition for acceptance of self-checkout systems is that customers
know about these systems.
In the following phase of opinion formation potential buyers or potential users
look for specific additional information enabling them to evaluate the innovation
with respect to its ability to solve the problem. To this purpose, the perceived fea-
tures of the innovation, such as relative advantage and complexity, are considered,
as discussed in the next chapter. If the result of the cost-benefit analysis is posi-
tive, the trial phase of the innovation takes place. This testing reduces the risk of a
wrong decision. At this point the decision is made as to whether the innovation is
to be purchased and / or used in future. Only if this turns out successfully and the
customers have positive experiences or form positive opinions while testing the
self-checkout systems will they be prepared to use them in the future.
At the end of the process the final decision is made about whether the innova-
tion is to be accepted or rejected. This rejection can be definitive or can be revised
on the basis of new information. However, the barrier in the case of a rejection is
considerably higher, since the incentives for a new assessment of self-checkouts
might be relatively low because the relative advantages of this innovation over
traditional checkouts may perhaps not be great for the customer.
The innovation is put into use during the implementation phase. The self-
checkouts are used continuously, or customers decides when to use the new
checkout systems and when the traditional checkouts. The experiences with the
innovation are decisive in the final decision on whether the new systems will be
permanently used and in showing up whether they have insufficiencies and
whether problems encountered in handling them lead to cognitive dissonances
(Festinger 1957), preventing further use.
Ideally, the innovation meets with general approval, so that it is eventually ac-
cepted. Consequently, all the measures aiming at successful acceptance of an inno-
vation must lead not only to its adoption but also to its permanent use. Cognitive
dissonances must be reduced by appropriate measures so that the decision in favor
of using the innovation can be positively influenced by confirmatory information.
148 Thorsten Litfin and Gerd Wolfram
adoption unit #1
preference order given budget
needs
technological environment
economic environment
social environment
political environment
Dimensions
of
social
environment
relative
advantage
compatibility
complexity
trialability
observability
product
creates
adoption process (ideal.)
persuasion trial decision implemen-
tation
confir-
mation
Dimensions of economic environment
(e.g., market form or other products)
communi-
cation
contacts/
initialises
demographic characteristics
sociographic characteristics
adoption unit supplier
product
distribution
communi-
cation
price
instruments
influences
needs
psychographic characteristics
Îpreference order given budget
adoption unit #1
preference order given budget
needs
adoption unit #1
preference order given budget
needs
technological environment
economic environment
social environment
political environment
Dimensions
of
social
environment
relative
advantage
compatibility
complexity
trialability
observability
product
creates
adoption process (ideal.)
persuasion trial decision implemen-
tation
confir-
mation
Dimensions of economic environment
(e.g., market form or other products)
communi-
cation
contacts/
initialises
demographic characteristics
sociographic characteristics
adoption unit supplier
product
distribution
communi-
cation
price
instruments
influences
needs
psychographic characteristics
Îpreference order given budget
Fig. 3. The Acceptance Process
(Peters 1993)
New Automated Checkout Systems 149
For example, if someone sees that people regarded as not very skilled in the use of
technological appliances can nonetheless use self-checkout systems successfully,
this will be an incentive for previous nonusers also to try such a new system. The
same applies to discussions among friends and acquaintances.
Acceptance Factors
Numerous factors influence the acceptance process and thus have a bearing on its
course, duration, and outcome. We distinguish product-specific, acceptance-specific,
and environmental-specific influential factors (Weiber 1992; Clement/Litfin 1999).
Product-specific factors involve elements that are mainly influenced by the in-
novation itself and less by the potential customers. The perceived product-specific
characteristics take a predominant position as they are regarded as the decisive
factors in the kind and extent of the necessary change in behavior when the inno-
vation is accepted and used (Holak/Lehmann 1990; Tornatzky/Klein 1982). In
spite of individual differences it is generally valid that the greater the relative ad-
vantage, compatibility, trialability, and observability, the greater is the likelihood
and speed of acceptance (Rogers 2003). These influences are also called Rogers’
criteria and are explained in Figure 4.
Shorter waiting times, protection of privacy and control of the checkout process
can be some of the relative advantages of self-checkout systems. Solutions incorpo-
rating the PSA offer additional services, such as shopping lists and complementary
product information. Greater anonymity and the loss of jobs may be regarded as
disadvantages of the PSA. As far as the compatibility is concerned it has to be ques-
tioned whether the general use of self-service systems such as automatic telling
perceived attributes of innovations
relative
advantage
compatibility complexity triability observability
result of adoption process - rate of adoption – usage of innovation
degree to which
an innovation is
perceived better
than competing
products
degree to which
an innovation is
perceived as
consistent with
existing values,
experiences,
and needs
degree to which
an innovation is
perceived as
relatively
difficult to
understand and
use
degree to which
an innovation
may be
experimented
with on a
limited base
degree to which
the results of an
innovation are
visable
perceived attributes of innovations
relative
advantage
compatibility complexity triability observability
result of adoption process - rate of adoption – usage of innovation
degree to which
an innovation is
perceived better
than competing
products
degree to which
an innovation is
perceived as
consistent with
existing values,
experiences,
and needs
degree to which
an innovation is
perceived as
relatively
difficult to
understand and
use
degree to which
an innovation
may be
experimented
with on a
limited base
degree to which
the results of an
innovation are
visable
Fig. 4. Product-Specific Acceptance Factors
(Albers/Litfin 2001)
150 Thorsten Litfin and Gerd Wolfram
machines at the bank, ticket machines at the airport, and railway stations or self-
service bottle deposit systems meets with acceptance. If there is a general negative
view of self-service systems automated checkout systems can also be expected to
encounter a negative response. Technical innovations are often prone to rejection
because of their complexity. If the operation of a new checkout system is regarded
as too complex and intuitively perceived as not understandable, this may result in
high interruption rates even in the experimental phase. Furthermore, the consumers
affected will not use self-checkout systems again, because they consider the amount
of time and energy needed to learn how to use them to be too great. In this case they
would return to traditional checkout systems. Experimenting on a limited basis has
turned out to be useful when the introduction of any innovation is planned, as this
minimizes the failure risk. As far as the new checkout systems are concerned, this
risk could be reduced by providing users with support in the case of problems or by
providing demonstrations of the function and use of such systems conducted by
skilled personnel. Compared with the other Rogers’ criteria, the observability of
results will presumably be less significant with respect to self-checkout systems,
because all that is discernible is whether or not the checkout process has worked
with no problems. It is also be possible that customers will be watched by other
customers while using these checkout systems and may present themselves as par-
ticularly enthusiastic about advanced technology. However, the opportunities for
supermarket owners to exert any influence in this situation must be regarded as low.
Adopter-specific factors refer to the willingness of users to accept and use in-
novations, and they influence the search for and interpretation of information as
well as the perception of product characteristics. Variables such as income, age,
and preparedness to accept innovations can have a significant influence on the
acceptance process (Kollmann 1996; Clement/Litfin 1998). It is often observed
that younger, male consumers adopt technical innovations more rapidly. In the
past they have been credited with a higher affinity to technology. For example, a
customer with an increased interest in technical innovations will have developed
an eye for such new technologies and will be more willing to devote time to learn-
ing its operation. Such customers are likely to accept the innovation at an earlier
point in time than customers who are just not interested in technology.
In addition, environmental factors must be considered. These include factors re-
lating to the socio-cultural, political-legal, technological, and macro-economical
environment. (Rogers 2003; Weiber 1992). The general trend toward self-service in a
society may also pave the way for technological innovations in supermarkets. For
example, self-service bottle deposit systems have successfully established themselves
in German supermarkets within a very short time. One reason for this may be that the
supermarkets did not offer other alternatives. Customers who disapprove of such bottle
return systems can switch over to other shops, but the extra expenditure in terms of
energy and time would be out of all proportion to the sums of money involved.
All the aforementioned factors are decisive elements for the acceptance and use
of innovations and have to be taken into account when introducing a self-checkout
system, as it is ultimately the consumer who decides on the success or failure of
this innovation.
New Automated Checkout Systems 151
Empirical Results on the Acceptance of New Automated
Checkout Systems
According to an international study conducted by IDC, more than 90% of retailers
expect competitive advantages to accrue from the installation of self-checkout
systems (Boone 2003). They believe that these self-checkout systems will, among
other things, ensure improved customer service and throughput flow, as well as
reducing labor costs. No retailer interviewed for this study has seen an increase in
shrinkage that can be attributed to the introduction of these new checkout systems.
And more than one third of these retailers agreed that loss of goods to theft has
decreased since the introduction of the self-checkout systems.
This research has also shown that nearly 70% of consumers in important coun-
tries (US, UK, Germany, Italy, and Australia) would be prepared to use these
checkout systems if they were available. However, the study also indicates that
American and Italian consumers would be more likely to use self-checkout systems.
The share of potential users amounts to about 80% in these countries. Almost 20%
of them would be very likely to use these new checkout systems, as against nearly
10 % in Germany. Please see Figure 5 for more detail.
An empirical study conducted in cooperation with the METRO Group Future
Store Initiative examined whether self-checkout would be accepted by German
consumers and which factors would influence their acceptance.1 Personal interviews
0 20406080100
Australia
Italy
Germany
UK
US
(% of respondents)
Very Likely Likely Not Likely Don't know
0 20406080100
AustraliaAustralia
ItalyItaly
GermanyGermany
UKUK
USUS
(% of respondents)
Very LikelyVery Likely LikelyLikely Not LikelyNot Likely Don't knowDon't know
Fig. 5. Consumer Likelihood of Using Self-Checkout Systems in the Future (Boone 2003)
1 This research was conducted in cooperation with Mr. Hans-Hermann Schepers as part of
the requirements for his diploma. Mr. Schepers also conducted the personal interviews.
152 Thorsten Litfin and Gerd Wolfram
with 398 consumers were carried out from 10 September to 2 October, 2003 in
three selected supermarkets of the METRO Group in which the new self-checkout
system had recently been introduced. To ensure that a sufficient quantity of users is
represented in the sample, two groups of similar size were formed (user/ nonuser). A
random selection was made within the groups. In total, 1,089 consumers were con-
tacted to reach the quota. There was a satisfactory response rate of 36.4%. The lay-
out of the questionnaire is based on the adoption and acceptance theory explained in
chapter 3, and the Rogers’ criteria were adapted to the subject of research, i.e., the
self-checkout system (Krafft/Litfin 2002). A receipt analysis was also conducted in
the selected supermarkets covering the period of survey.
Receipt Analysis
The receipt analysis shows that on average nearly 10% of the customers use the self-
checkout systems, spending an average of 21 euro for 11 articles. It follows that the
turnover per customer and the number of purchased articles per customer are 50%
lower with self-checkout systems than with traditional checkouts. It is striking that
nearly 40% of the customers of the supermarket in Tostedt use the self-checkouts. In
contrast to the other stores, this store, in addition to the possibility of paying by
credit card, also offered its customers the option of paying in cash, which was in fact
preferred by many customers. Furthermore, this supermarket had approximately the
same number of traditional checkouts as of the new self-checkout systems in opera-
tion. The core results of the receipt analysis are shown in the following illustration:
Percentage of customers
Percentage of revenue
Percentage of item
Item per customer
Revenue per customer
Users of
Self Checkout Systems
9,9
7,0
7,0
11,6
20,9
Non-Users of
Self Checkout Systems
90,1
93,0
93,0
16,5
30,5
Percentage of customers
Percentage of revenue
Percentage of item
Item per customer
Revenue per customer
Users of
Self Checkout Systems
9,9
7,0
7,0
11,6
20,9
Non-Users of
Self Checkout Systems
90,1
93,0
93,0
16,5
30,5
Fig. 6. Receipt Analysis
New Automated Checkout Systems 153
Give a new technology a trial
Shorter queues
Faster speed
By chance
Greater anonymity
On recommendation
Users of
Self Checkout Systems
68,6
37,4
29,9
7,6
7,6
81,5
Non-Users of
Self Checkout Systems
39,7
53,4
32,9
22,2
7,5
9,2
percentage of users
1
percentage of non-users
1
1
multiple answers possible
Give a new technology a trial
Shorter queues
Faster speed
By chance
Greater anonymity
On recommendation
Users of
Self Checkout Systems
68,6
37,4
29,9
7,6
7,6
81,5
Non-Users of
Self Checkout Systems
39,7
53,4
32,9
22,2
7,5
9,2
percentage of users
1
percentage of non-users
1
1
multiple answers possible
Fig. 7. Motivation to Use Self-Checkout Systems for the First Time
Survey Results
In essence, the results of the receipt analyses are confirmed by the results of the
customer interviews. It is seen that there are comparable shares of users and
nonusers of self-checkout systems. The users of the new checkouts differ from
those who do not use these systems in that they buy fewer items, the worth of
their purchases is lower, and they complete their purchases more quickly. Al-
most 40% of the users often or always use the new checkout systems, and a
growing number of customers want to use the self-checkout systems in the fu-
ture. The positive response of the users to this innovation is also shown by the
high satisfaction rate of 80% and the 70% of customers who would recommend
this system to others. These high rates of satisfaction are also a result of the low
number of problems encountered during scanning and paying for purchases. As
can be seen from Figure 7, more than 80% of users state that their reason for
testing the self-checkout system stems from their wish to give new technologies
a chance. Other important reasons for the first use are shorter queues and a
faster checkout process. Reasons such as greater privacy or recommendation by
others are of minor importance to present users. All nonusers attach less impor-
tance to the above-mentioned reasons for testing the new systems, with the ex-
ception of recommendation by friends. They prefer to adopt a “wait-and-see”
attitude and tend to follow opinion leaders. Moreover, the new checkout systems
were unknown to about one third of the group who had not yet used them prior
to the survey.
154 Thorsten Litfin and Gerd Wolfram
In the present users’ view, flexible payment modes (cash, credit/ debit card
payment), ease of use, and shorter waiting lines are points in favor of the new
checkout systems. The aspects of faster checkout processes and better control over
purchases are of less importance to present users. The checkout process at the self-
checkout systems takes the same length of time as that with traditional checkouts,
so that time savings cannot be anticipated from an objective point of view. It must,
however, be mentioned that the sense of time is different. In one case the con-
sumer has to wait while the checkout process is carried out by the cashier, and in
the other the consumer is active as cashier him- or herself. The possibility of better
protection of privacy with the new checkout systems is deemed insignificant. All
in all, present nonusers evaluate the advantages of self-checkout systems as less
important. In particular, they are skeptical about the ease of use of the new checkout
systems and doubtful about whether the queues are shorter. Furthermore, the per-
centage of nonusers paying by bank card/credit card is considerably lower than that
of users. It is also striking that present nonusers have a similar opinion to present
users on aspects relating to control and privacy. As can be seen from Figure 8, the
main differences are found in the assessment, in particular, of ease of use and
shorter queues.
Both users and nonusers assume that the new checkout systems will destroy
jobs and judge this unfavorably. The present nonusers especially consider it a
disadvantage if self-checkout systems allow payment by credit card only. This
explains why the rate of use for self-checkout systems is 8 times as high in the
Cash payment possible
Easy to handle
Shorter queues
Control of actions
Faster speed
Payment with credit card possible
Simplification of check-out
Greater reliability
Privacy
Users of
Self Checkout Systems
4,0
4,0
3,6
3,4
3,4
3,1
2,9
2,5
4,1
Non-Users of
Self Checkout Systems
3,7
3,4
3,5
3,4
3,3
2,7
2,9
2,9
2,6
Mean rating
1
Mean rating
1
1
scale from 1 = “I disagree co mpletely“ to 5 = “I agree completely”
* differences in averages between groups are significant at the 95 percent level
** differences in averages between groups are significant at the 99 percent level
**
**
**
*
*
**
**
**
*
*
Cash payment possible
Easy to handle
Shorter queues
Control of actions
Faster speed
Payment with credit card possible
Simplification of check-out
Greater reliability
Privacy
Users of
Self Checkout Systems
4,0
4,0
3,6
3,4
3,4
3,1
2,9
2,5
4,1
Non-Users of
Self Checkout Systems
3,7
3,4
3,5
3,4
3,3
2,7
2,9
2,9
2,6
Mean rating
1
Mean rating
1
1
scale from 1 = “I disagree co mpletely“ to 5 = “I agree completely”
* differences in averages between groups are significant at the 95 percent level
** differences in averages between groups are significant at the 99 percent level
**
**
**
*
*
**
**
**
*
*
Fig. 8. Perceived Advantages of Self-Checkout Systems
New Automated Checkout Systems 155
store offering the option of paying in cash at the self-checkouts as in the other two
shops, where this is not possible. Consequently, the additional offer of the option
of paying in cash could contribute greatly to a higher rate of use of the new check-
outs. All consumers considered the checkout process as more impersonal, and the
present nonusers attach more importance to this disadvantage than users do. The
same is true for the evaluation of the complexity degree in relation to the operation
and the concern that problems may be caused by wrong use of the new checkouts.
In this context, the nonusers attach greater – albeit still not very high – importance
to these potential disadvantages. The main reasons for not using the new systems
are inadequate knowledge about self-checkouts (32%2) and lacking interest (26%),
followed by uncertainty, complexity, and unknown mode of operation (10–%).
Further reasons are of secondary importance.
In summary, we can say that the principal results of the IDC study by Boone
(2003) and those of the BCG study (2003) are confirmed by the present research
with German consumers. (Boone 2003; Boston Consulting Group 2003). The
German consumers, too, see shorter queues and shorter checkout processes as the
main relative advantages of self-checkout systems. In addition, they want to have
greater flexibility with the payment modes. They too see better control possibili-
ties and better privacy protection as less important aspects of the new checkout
systems. In contrast to this, German nonusers regard low complexity, i.e., ease of
use as particularly important. This requirement is regarded as fulfilled, as least by
the consumers who use these new systems. The research also showed that sufficient
support, e.g. by means of easily remembered operating instructions or personnel
assistance would result in a reduction of risk and thus to the testing of the new
checkouts. The results of the survey support the hypothesis that the likeliness of
Reduction of jobs
Card payment only (no cash)
Too impersonal
Failure due to wrong handling
Too complicated
Users of
Self Checkout Systems
2,6
2,4
2,4
2,1
4,6
Non-Users of
Self Checkout Systems
4,7
3,5
2,7
2,9
2,6
Mean rating
1
Mean rating
1
1
scale from 1 = “I disagree completely“ to 5 = “I agree completely”
* differences in av erages between groups are significa nt at the 95 percent level
** differences in averages between groups are signifi cant at the 99 percent level
**
*
**
**
**
*
**
**
Reduction of jobs
Card payment only (no cash)
Too impersonal
Failure due to wrong handling
Too complicated
Users of
Self Checkout Systems
2,6
2,4
2,4
2,1
4,6
Non-Users of
Self Checkout Systems
4,7
3,5
2,7
2,9
2,6
Mean rating
1
Mean rating
1
1
scale from 1 = “I disagree completely“ to 5 = “I agree completely”
* differences in av erages between groups are significa nt at the 95 percent level
** differences in averages between groups are signifi cant at the 99 percent level
**
*
**
**
**
*
**
**
Fig. 9. Perceived Disadvantages of Self-Checkout Systems
2
The percentages do not sum up to 100 because this question allowed multiple replies.
156 Thorsten Litfin and Gerd Wolfram
accepting an innovation is high if this is compatible with personal requirements,
values, and habits. In a weakened form this also applies to the importance of rec-
ommendation by friends. This confirms the essential hypotheses of the adoption /
acceptance theory explained in chapter 3.
Implications: Measures to Increase Customer Acceptance
When compared at international level (see also the chapters on Global Trends in
European, U.S., and East Asian Retailing in this book), German consumers are
less open minded than others vis-à-vis self-checkout systems, yet the survey re-
sults described above and the receipt analyses indicate a growing acceptance of
this innovation in Germany. This development is supported by the growing pene-
tration and acceptance of other self-service systems. However, the new checkouts
cannot entirely replace the traditional checkouts with cashiers, because the self-
checkout systems are mainly used for purchases of a few items only and because a
certain group of consumers persistently rejects using them. Therefore, the self-
checkout systems can only serve as a supplement to or partial replacement for
traditional checkouts. Even so, the results anticipated by the retailers, such as im-
proved customer service, improved handling of the checkout process, and reduc-
tion of labor costs may still be achieved (NCR 2004).
For the successful introduction of self-checkout systems it is essential that the
adoption / acceptance factors be taken into account. The first priority is to empha-
size the advantages of shorter queues and the perceived faster checkout process. A
high degree of flexibility in payment modes should be offered in any case. While
exclusion of the option of paying in cash may perhaps be the technically simpler
solution, it is contrary to customers’ wishes. Easy operation is one of the crucial
factors in the success of the new checkout systems. During the introductory phase
in a shop, the complexity of the system and the uncertainty of the consumers
should be reduced by appropriate measures. One conceivable solution would be to
detail assistants to answer customers’ questions, if required, or help them during
the checkout process. This has been successfully practiced by METRO Group
since the introduction of its self-checkout system. Operating instructions that are
easy to read and understand should be available at the new checkouts. Further-
more, it is important that consumers become better informed about these new
checkout systems, because lacking information and knowledge will prevent them
from using the new technology. This has been shown both by the present study
and by the IDC study. This problem will gradually be solved by positive word-of-
mouth publicity. The use of the self-checkouts can be increased by the strategic
integration of these systems into existing checkout systems. As the new checkouts
are mainly used for purchases with few articles, a logical solution would be to
locate them near express checkouts, or to replace the express checkouts by self-
checkout systems. This would ensure that the flow of customers is led directly to
the new checkout systems.
New Automated Checkout Systems 157
References
Albers, Sönke, and Thorsten Litfin (2001): Adoption und Diffusion, in: Albers, Sönke,
Michel Clement, Kay Peters and Bernd Skiera (eds.): Marketing mit interaktiven Me-
dien – Strategien zum Markterfolg, third edition, Frankfurt/Main: 116-130.
Boone, Christopher (2003): Self Checkout Systems: Defining Retailers as Leaders of the
Pack, IDC-Survey and Presentation.
Boston Consulting Group (2003): Kundenakzeptanz der FSI-Anwendungen und resultie-
rendes Geschäftspotenzial: Ergebnisse von Marktforschung und Bon-Analyse, report
by Boston Consulting Group.
Clement, Michel and Thorsten Litfin (1999): Adoption Interaktiver Medien. In: Albers,
Sönke, Michel Clement, Kay Peters and Bernd Skiera (eds.): Marketing mit interaktiven
Medien – Strategien zum Markterfolg. Second edition, Frankfurt/Main (1999): 95-108.
Clement, Michel (2000): Interaktives Fernsehen – Analyse und Prognose seiner Nutzung,
Wiesbaden.
Festinger, Leon (1957): A theory of Cognitive Dissonance, Stanford, Calif.
Holak, Susan L. and Donald R. Lehmann (1990), Purchase Intentions and the Dimensions
of Innovation: An Explanatory Model, in: Journal of Product Innovation Management,
Vol. 7: 283-295.
Krafft, Manfred and Thorsten Litfin (2002): Adoption innovativer Telekommunikations-
dienste: Validierung der Rogers-Kriterien bei Vorliegen potenziell heterogener Grup-
pen, in: Zeitschrift für betriebswirtschaftliche Forschung, Vol. 54: 64-83.
Kollmann, Tobias (1998): Akzeptanz innovativer Nutzungsgüter und -systeme: Konse-
quenzen für die Einführung von Telekommunikations- und Multimediasystemen.
Wiesbaden.
Litfin, Thorsten (2000): Adoptionsfaktoren: Empirische Analyse am Beispiel eines innova-
tiven Telekommunikationsdienstes, Wiesbaden.
METRO Group Future Store Initiative (2003): “Presentations of the METRO Group Future
Store Initiative at the NRF 93rd Annual Convention & Expo”, CD-ROM by METRO
Group Future Store Initiative.
NCR (2004): Self Checkout´s Global Growth: Speed, convenience and labor efficiencies
boost bottom lines for real-world retailers, information by NCR.
Peters, Kay (1993): Schätzung von Diffusionsmodellen in der Telekommunikation, Master
Thesis at the Christian-Albrechts-University Kiel, Kiel.
Rogers, Everett M. (2003): Diffusion of Innovations, fifth edition, New York, London,
Toronto, Sydney.
Tortnatzky, Louis G. and Katherine J. Klein (1982): Innovations Characteristics and Adop-
tion-Implementation: A Meta-Analysis of Findings, IEEE Transactions on Engineering
Management Vol. EM-29: 28-45.
Weiber, Rolf (1992): Diffusion von Telekommunikation: Problem der Kritischen Masse.
Wiesbaden.
MARKET TRENDS
Understanding Retail Customers
Mark D. Uncles
University of New South Wales, Sydney, Australia
Introduction
All of us patronize shopping malls and retail outlets, buying goods and services
for our own consumption and for gift-giving. By engaging in these activities we
are in a good position to reflect on our personal experiences, but what in general is
known about retail customers and what changes are becoming apparent? Corpo-
rate and academic analysts are grappling with this question, and it is the focus of
this chapter. In the first section a retrospective assessment is presented, with par-
ticular attention paid to the way retail consumer choice has been conceptualized
and analyzed. The report card shows that considerable advances have been made,
although there are areas where more work is required. The next section is forward-
looking and examines the buyer-centric revolution that is sweeping through con-
temporary retailing. In particular, we consider how consumer lifestyles are chang-
ing and the impact of these changes on our understanding of consumer choices in
the retail context. This section is more speculative and raises as many questions as
it provides answers.
Retrospect
A generic framework for understanding retail customers is shown in Figure 1. The
retailer is most directly interested in consumer choices (the right-hand box). This
is where “consumers” in a general sense become revenue-generating “customers”
for a particular retailer. It is where consumers finally resolve questions that have
been consciously and unconsciously forming in their minds: what to buy, how
much to buy, at what price, who should do the buying, who else should be in-
volved, when to buy, how much time to spend, which location, what type of out-
let, which specific outlet, how to get there, what else to buy at the same time, and
other questions of this nature.
160 Mark D. Uncles
Retail
situation
+
Consumer
mood
Experiences of pur-
chasing & consump-
tion that enhance,
maintain or reduce
consumer lifestyle
what to buy?
how much to buy?
at what price?
who should do the buying?
who else should be involved?
when to buy?
how much time to spend?
which location?
what type of outlet?
which specific outlet?
how to get there?
what else to buy at the same time?
Needs, wants &
desires that
influence
consumer choices
Consumer
lifestyle, shopping
orientation,
values, attitudes &
beliefs
Consumer
choices in a
retail context
Retail
situation
+
Consumer
mood
Experiences of pur-
chasing & consump-
tion that enhance,
maintain or reduce
consumer lifestyle
what to buy?
how much to buy?
at what price?
who should do the buying?
who else should be involved?
when to buy?
how much time to spend?
which location?
what type of outlet?
which specific outlet?
how to get there?
what else to buy at the same time?
Needs, wants &
desires that
influence
consumer choices
Consumer
lifestyle, shopping
orientation,
values, attitudes &
beliefs
Consumer
choices in a
retail context
Retail
situation
+
Consumer
mood
Experiences of pur-
chasing & consump-
tion that enhance,
maintain or reduce
consumer lifestyle
what to buy?
how much to buy?
at what price?
who should do the buying?
who else should be involved?
when to buy?
how much time to spend?
which location?
what type of outlet?
which specific outlet?
how to get there?
what else to buy at the same time?
Needs, wants &
desires that
influence
consumer choices
Consumer
lifestyle, shopping
orientation,
values, attitudes &
beliefs
Consumer
choices in a
retail context
Consumer
choices in a
retail context
Fig. 1. A Framework for Understanding Retail Customers
The process of choosing is followed by the psycho-physical experiences of pur-
chasing and consumption. The experience of purchasing is influenced by store
atmosphere (ambient conditions, physical conditions, social conditions and sym-
bols – e.g., the influence of music, color, temperature, layout, and odors), as well
as by individual consumer attributes (dispositions, emotions, and moods). In many
circumstances this is temporally and spatially distinct from the consumption ex-
perience, an example of this is when grocery goods are bought and then stored for
subsequent consumption. In the case of gift-giving the experience is deferred and
displaced, in that another person has the benefit of consumption after the gift has
been purchased and given. At the other extreme, for service-related retailing (e.g.,
fast-food and hairdressing services) consumption is simultaneous with purchase,
and therefore the psycho-physical experiences associated with purchasing and
consumption are shared. Collectively, these experiences of purchasing and con-
sumption enhance, maintain or diminish a consumer’s lifestyle (see left-hand box
in Figure 1).
Consumer lifestyle describes how people live: what they generally do and
think. The emphasis is on their usual behaviors (working, shopping, playing sport,
engaging in hobbies, relaxing, watching television, or even just “hanging out”)
and enduring predispositions (values, attitudes, and beliefs). Many aspects of how
we live are repetitive and, consequently, certain fundamental aspects of consumer
lifestyle do not change much. A consumer may always wake to a cup of freshly
brewed coffee, may always buy a newspaper en route to work, and may buy dog
food every second week. In such circumstances there may be no reason for con-
sumer choices to change: the same brand of coffee is purchased, the same news-
stand is patronized, and the dog is happy to alternate between just two brands of
Understanding Retail Customers 161
canned food. These routines and habitual behaviors are highly important to con-
sumers, but also to retailers in that they provide a basis for loyal/repeat patronage.
Occasionally there are significant changes: a consumer gives birth to a first
child, moves to a different city, or takes up paragliding. These changes in the way
a person lives give rise to a re-evaluation of consumer lifestyle, generating new
needs and wants, with consequences for consumer choice. The first-time parent
finds him-/herself asking whether to buy cloth or disposable diapers, whether to
buy them in a drugstore or a supermarket, which aisle they are in, whether it is
better to buy a 20-pack or a 40-pack, and so forth. A process of orientation and
learning goes on. This need not be a protracted process. The first-time parent soon
has answers to his/her questions about diapers, and the second-time parent hardly
needs to ask the questions.
It is evident that consumer lifestyle is an amalgam of routine and habit, punctu-
ated by significant changes, all of which shape needs, wants, and desires. Underly-
ing drivers are both external to the consumer (culture, demographics, etc.) and
internal (motives, personality, etc.). The impact of happenstance cannot be over-
looked either. In particular, retail situation and consumer mood often have a pow-
erful, if unplanned, influence on needs, choices, and experiences. Thus, the pur-
chasing of a different brand of coffee is as likely to reflect a temporary stock-out
situation as a change in consumer lifestyle or a change in needs and wants.
Equally ephemeral are consumer mood swings (e.g., pleasure/displeasure,
arousal/nonarousal), which have the potential to mediate other effects and which
might give rise to quite idiosyncratic or out-of-character purchasing behavior.
Where stock-outs occur frequently or where certain moods are associated with
particular shopping circumstances, these happenstance factors may come to have
longer lasting effects on behavior.
Achievements on the Report Card
The generic framework in Figure 1 summarizes our understanding of retail cus-
tomers. Quite a positive story can be told of our current state of knowledge when
we drill down into the framework. First, much is known about the specific com-
ponents. Consider the “consumer choices” box: this has been comprehensively
studied, giving insights into patterns of shopping trip incidence (in terms of time –
of day, day – of week, season – of year), shopping frequency and inter-purchase
intervals (e.g., the regular 1-week cycle for main grocery purchases, supplemented
by three or so top-up trips), store choice (for brands/private labels, product catego-
ries and product clusters), multi-item purchasing and basket-of-goods effects, and
mode of travel and associated activities before/after visiting a store or mall.
Second, many of these observed patterns are predictable, using either descrip-
tive (pattern-based) models or decision (response-based) models. Examples in-
clude gravity and spatial interaction models to capture flows of consumers from
homes to shopping malls (Wilson, 2000) and stochastic models of shopping trip
162 Mark D. Uncles
incidence and store choice (Ehrenberg et al., 2004). Both these examples work
with aggregated data and focus on finding patterns in revealed behavior. Different,
but no less successful, are models that make use of stated preference data (e.g., to
predict choice of travel mode on shopping trips, Louviere et al., 2000). Other ap-
proaches are broader in scope, such as the attitude-intention-behavior models of
Ajzen and Fishbein (specifically, the theory of reasoned action and the theory of
planned behavior). These theories relate attitudes to behavior through intentions,
in ways that recognize that other factors may prevent consumers from engaging in
behavior that is consistent with their attitude (e.g., disposable income and avail-
able credit will impose limits on purchasing and other people will exert influence
on a consumer’s choices, as will the consumer’s own perceptions of his or her
freedom to choose) (East, 1997).
Third, there are considerable quantities of data to draw upon, enabling the cali-
bration of models of consumer choice. Some retailers (e.g., Tesco in the UK) have
internal databases that are extremely comprehensive [a by-product of massive
investment in technology, automation, and customer relationship management
(CRM) initiatives including customer demographic and transactional data from
loyalty/rewards programs]. As a result, individual-level information can be cap-
tured about the basket of goods bought, the frequency of shopping, responsiveness
to price and promotion, etc. Radio frequency identification (RFID) technology
promises to offer further insights into the behavior of shoppers in store, supple-
menting existing observational techniques (notably video surveillance) and store-
atmospheric studies. These internal sources are complemented by external
sources, such as consumer panels (operated by TNS, AC Nielsen, GfK, etc.), and
census, GIS and spatial interaction data (such as that provided by GMAP Consult-
ing), and considerable amounts of ad hoc and qualitative research. All in all, there
is a great deal of data that can be used to validate or disprove our ideas about the
behavior of retail customers.
Deficiencies on the Report Card
Counterbalancing these positives are several shortcomings. First, many retail cus-
tomer studies are extremely ad hoc and context specific (e.g., a one-off market
research study might be undertaken of brand choices made by customers at a Ma-
drid-based Continente hypermarket – this would provide information for the store
operator in Madrid but it tells us nothing about whether similar choices are to be
expected at this store next year, or at other Madrid stores, let alone at stores in
Barcelona, or Carrefour hypermarkets in Toulouse). By contrast, more systematic
approaches enable norms to be established, which then can be used as reference
points or benchmarks when examining specific cases (e.g., how does brand choice
at the Madrid store compare with company/industry norms?).
Second, of the systematic analyses that have been undertaken, the vast majority
are based on patronage of, and purchasing at, grocery outlets. Undeniably, grocery
retailing is important. As consumers we regularly and routinely spend much effort,
Understanding Retail Customers 163
time, and money on grocery shopping. It accounts for a large proportion of the retail
spend of all consumers. Moreover, considerable amounts of data are available. But
groceries represent a fraction of what might be described as retailing. In consequence,
there is a pressing need for more systematic, analytical studies of the purchasing of
nongroceries (everything from laptops and lingerie to Land Cruisers and Lego).
Third, the analytical challenges involved in broader scale research projects cannot
be underestimated. Even within the grocery context it is hard to agree on such basic
issues as decision sequences and consideration sets (does the consumer choose the
store, followed by the brand, and then the SKU, or follow the reverse sequence, or is
there a simultaneous choice process?). These specification problems are com-
pounded when the list of decisions is expanded (say, to all the questions listed in the
right-hand box in Figure 1) and when the inter-relatedness of decisions is acknowl-
edged (e.g., the purchasing of private labels is in part a simple problem of brand
choice, but it is confounded with issues concerning store choice, relative prices,
social norms, and so forth). Nor are these decisions made independently of a wider
set of decisions (e.g., are we interested in looking at a self-contained trip to a Metro
store, or a multi-purpose trip to a Düsseldorf shopping mall in which Metro features
alongside visits to Tengelmann and C&A?).
Overall, the report card presents a mixed story. An impressive body of knowl-
edge has developed with regard to our understanding of retail customers. This is of
considerable commercial and academic interest. But the record must be tempered
with the fact of significant deficiencies. Perhaps this is inevitable – analysis is
always an unfinished project. One reason for this is that society evolves. The lives
of consumers change, and their needs, wants and desires alter, as do their choices.
It is as if the analyst is aiming at a moving target. This is the theme of the second
section in this chapter.
Prospects
Looking to the future, consumer choices are being influenced by several forces of
change. In the opinion of some commentators these forces of change amount to
nothing less than a buyer-centric revolution (Mitchell, 2004; Prahalad, Ramas-
wamy, 2004). Four such forces are considered here: the rise of technologically
savvy customers; the way fad and fashion consciousness have become so perva-
sive; the importance of experiential shopping; and consumer assertiveness. There
are, of course, other changes that are not considered here (e.g., the impact of
demographic change, of more open markets, and of migration). The goal is not to
be comprehensive, but simply to highlight the impact of a few of the most signifi-
cant and universal changes.
In terms of Figure 1, each change has an impact on consumer lifestyles, shop-
ping orientations, values, attitudes, and beliefs, which then re-shapes consumers’
needs, wants and desires and ultimately influences consumer choices. This pre-
sents us with a considerable number of analytical challenges.
164 Mark D. Uncles
Technologically Savvy Customers
There is nothing new about the use of technology in retailing; it is seen in back-
room operations [e.g., in freight management systems, automated stock control,
electronic purchase-order systems, efficient customer response (ECR) systems,
electronic article surveillance (EAS), and eCRM], in front-of-store control [e.g.,
automated temperature and lighting systems, electronic shelf labeling (ESL) sys-
tems, and now RDIT], and also in interactions with final customers (notably
through checkout scanning, EFTPOS payments, virtual stores, and on-line sales).
Historically, much of this has been hidden from view, but the role of technology is
now more evident to customers. At the same time, they are themselves becoming
savvier. Recent developments illustrate the point.
Technology is increasingly involved in almost everything we do as consumers.
Electronic gadgetry surrounds us in the form of video, audio, mobile, wireless, and
computer devices: from TVs to PCs and notebooks, from mobile and cell phones
to smart phones, from Palm Pilots to PDAs, from digital cameras to GPS naviga-
tion devices and satellite radio. In most developed countries household ownership
and usage rates are very high for established technologies, and as a consequence
consumers are ready to allow technology into any aspect of their lives. When it
comes to new technologies, consumers are willing to adapt and innovate. They fit
these new technologies into their lives even if this requires attitudinal and behav-
ioral change. The phenomenal uptake of iPod in the year of its launch shows how
rapidly a particular new-technology can diffuse through consumer markets. More
generally, we have seen the growth of on-line information gathering (e.g., Froogle,
the product search engine and shopping directory spun-off from Google), on-line
shopping (for browsing, purchasing, and delivery), and on-line auctions (e.g.,
eBay) across sectors as diverse as grocery retailing and memorabilia collecting.
This is a remarkable shift in behavior; just ten years ago no ordinary consumer did
any of these things on-line.
We see that consumers are able to make effective use of technology. They are
quick to master new technologies, because of refined problem-solving skills and
the ability to acquire procedural knowledge (we know how to operate things –
usually without reference to user manuals and with minimal instruction). Some
consumers will have declarative knowledge too, but a defining feature of the tech-
nologically savvy is not that they have facts at their fingertips, but that they can
deduce how things operate, know where to go for further advice, know what
questions to ask when making a purchase, and know how to get the most from
technology.
Consumers are empowered by the information that technology makes available.
They are no longer dependent on salespersons and promotions, but can obtain the
latest facts from authoritative sources simply by searching Google or Yahoo!.
“Best-buy” information and product specifications are at their fingertips. So too
are competing offers and cross-buying opportunities (“if you liked that, why not
Understanding Retail Customers 165
try this”). And for categories such as music they have the option of buying only
what is required on a pay-per-item or pay-per-view basis.
It is also evident that consumers want to exert more control in relation to their
use of technology. This is seen in the acceptance of “user-directed” technolo-
gies, which give consumers the flexibility to make as much use of a technology
as they wish. The Web is a prime example: consumers browse from site to site
at their discretion, and navigate through sites in ways that best meet their per-
sonal needs. In-store, user-direction means a readiness to access touch-screen
information kiosks and ATMs, and to make use of self-service U-Scan checkout
systems and smart trolleys. These features come together in the Personal Shop-
ping Assistant (PSA) – a central element of the METRO Group’s Future Store
Initiative (for more detail on this initiative, see chapters by Litfin, Wolfram and
Kalyanam, Lal, Wolfram in this book). There are parallels here with the intro-
duction of self-service grocery retailing, which was readily accepted by con-
sumers in the 1960s; however, consumer expectations have risen in the interven-
ing years. Today, consumers want the control and flexibility offered by user-
directed technology, but also expect to be informed (e.g., regarding special of-
fers and aisle layouts) and provided with service benefits (e.g., using the interac-
tive touch-screen of a PSA to order delicatessen items and be advised when the
order is ready to collect).
A wide range of analytical questions arises from this growth in the number of
technologically-savvy customers. In-store, what adoption rates are to be expected
for PSA-type services? Are there impediments to adoption? How easy is it for
customers to acquire the appropriate procedural knowledge, and must they be
trained? Does the customer’s ability to gather more information (from PSAs, in-
formation kiosks, electronic advertising displays, ESLs, etc.) impact on his or her
final behavior? And, if so, what aspects of behavior are most affected: store and
brand choice, or the weighting given to product and service attributes, or the
amount of time spent shopping?
On-line, are there patterns in the way customers patronize Web sites (in terms
of visitation and repeat-visitation rates, frequency of visitation, inter-visit inter-
vals)? Are there new habits and routines – different from those in the past, but
now every bit as consolidated and engrained? How do these patterns differ from
those associated with physical stores? Have new patterns of cross-buying
emerged, and do these contrast sharply with established patterns based on the co-
location of merchandise in-store? (Weitz’ chapter on Electronic Retailing in this
book sheds light on some of these issues.)
Also, how do answers to these questions vary for different consumers? Are
some consumers technologically savvy across the board – always innovators, al-
ways informed, always at ease with new technologies? Or is there more fragmen-
tation than this? Perhaps a consumer is innovative with respect to some technolo-
gies (on-line shopping say), but not others (not, for example, PSAs).
166 Mark D. Uncles
Fad and Fashion Consciousness
Fashion has become a defining feature of contemporary culture. It is not simply a
matter of which shoes, gloves, and hats to choose when browsing through Sears,
Printemps, or Takashimaya (in the traditional sense of “fashion retailing”), but
whether the restaurant, automobile, movie, album, artist, TV show, soap star, etc.
is in vogue. Consumers have a heightened-sense of what is “in” (“so now”) and
what is “out” (“so passé”). This applies to the length of pants, to the color of
handbags, to the popularity of a neighborhood restaurant. Even the language we
use to describe fashion is governed by what is in fashion (“so now” is already
sounding passé).
It is through fashion that consumers are able to maintain their identity, express
who they are, and create and re-create their self-image (relating to the left-hand
box of Figure 1). To an AbFab generation versed in marketing and media speak
this comes easily and naturally. The process is reinforced by the media-rich soci-
ety in which we live – from images writ large on brash billboards through Lager-
feld fashion shots in Vogue to portrayals on popular lifestyle TV programs. In
these various ways we have ample opportunity to refine and hone our skills as
creators of self-image and to assess whether we are buying into the right fashions,
styles and merchandise. Sadly, this does not necessarily mean we feel more confi-
dent about our choices; shopping-related anxiety appears to be on the rise.
Associated with these developments is the seemingly insatiable appetite for
ephemeral purchases. Children’s fad merchandise is an extreme form of this, such
as card-collecting crazes (Pokemon, Dragon Ball Z, Tamagotchi, etc.), or succes-
sive generations of “must-have” electronic games (PS1, PS2, Xbox, etc.) or the
bursts of enthusiasm associated with roller-blading, skate-boarding, scooting, or
the latest Hollywood movie. Tie-in merchandising gives extra saliency to these
fads: the McDonald’s Happy Meal that ties in with Shrek movie merchandise, the
KZone magazine article that promotes a computer game that is itself a spin-off
from the latest Harry Potter novel. Any pestered parent is only too aware of the
pressure to buy these items. Significantly, they are dropped as quickly as last
year’s dress styles once they go out of fashion, becoming fodder for seasonal sales
and markdowns.
Fads and fashion have always posed analytical problems because they necessar-
ily imply change (last year’s color is never the same as this year’s). It is no coinci-
dence that most analytical modeling focuses on groceries, the purchasing of which
is comparatively stable. Really new fashion-dependent or innovation-dependent
products pose particular problems. Some of these products come and go like
shooting stars, with highly condensed product life cycles (e.g., psychedelic neck-
ties and the IBM PC Jr.); others become widely accepted, with impressive house-
hold penetration rates. It is a challenge to determine how consumers in these really
new markets are to be understood, and even to know whether previous experi-
ences in related markets offer useful analogies.
Understanding Retail Customers 167
There is also the problem of predicting changes within established or evolving
markets. Over a ten-year period CDs have not changed much from a technological
viewpoint, but that cannot be said of the popular artists appearing on the discs
(notwithstanding the staying power of pop-stars like Cliff Richard and Kylie Mi-
nogue, most artists have quickly come and gone). It is the cast of brands and sub-
brands – or varieties, models and SKUs – to which consumers respond. If these
elements within markets are always changing because of the vagaries of fads and
fashions, the task of predicting sales is a perilous one.
There are, however, countervailing factors. Arguably, few fashions or innova-
tions are truly new. Any consumer who has experience of CDs and TVs quickly
appreciates the concept of DVDs. Any one who has ever used a floppy disk has
a basic idea of what a USB can do. Moreover, even fashion-dependent and in-
novation-dependent markets can settle down and present consumers with a set of
familiar competitive offerings (cosmetics, perfumes, and fragrances illustrate the
point – the names L’Oreal, Chanel, Clinique, and Estee Lauder are very familiar
to consumers, even though specific subbrands and varieties come and go). These
markets cannot be described as stationary, but nor are they unfathomable.
Experiential Shopping
London retailer Fortnum & Mason is a purveyor of fine teas, game pies, and lux-
ury hampers; one reason for its success since being established in 1707 is its aura
and the customer experience it creates. As this example shows, “experiential
shopping” is not new. However, for several reasons, it has now become a norm –
as the following examples show.
Nowadays it is difficult to distinguish retail from nonretail activities. There is
some fuzziness in the way activities are defined. The shopping mall is enlivened
by buskers, children’s entertainers, in-store fashion shows, and multiplex cinemas,
making it into a venue for public performance and entertainment, as much as a
place for conventional shopping. Likewise, the distinction between shopping and
eating out has become blurred. Food halls in shopping centers and coffee kiosks in
bookshops are de rigueur (not content with selling books, Barnes & Noble offers a
place in which to relax, drink coffee, listen to stories, join a book group and meet
writers).
A further characteristic of contemporary retailing is that so often we shop when
we are on the move – shopping has become an integral part of the travel experience.
What started as a convenience at transport nodes (e.g., news stands at railway
stations) has become a retail industry in its own right (e.g., duty-free outlets at
airport hubs from Frankfurt to Singapore). By extension, tourism and retail ex-
periences have become intertwined: the traveler now sees the coast of New Eng-
land as a lengthy antiques and craft mall; tourist quarters from Rome to Sydney
offer the traveler luxury branded products (usually with the same cast: Prada,
168 Mark D. Uncles
YSL, Christian Dior, Donna Karan, Bvlgari, Ralph Lauren, etc.); merchandise
sales help sustain experiential theme parks, such as Euro Disney in Paris, Lego-
land in Billund, and Movie World on the Australian Gold Coast; international
visitors are more likely to be drawn to oil-rich Dubai for its shopping festivals
than for its undoubted natural attractions.
We see that in affluent societies the balance between utilitarian and hedonistic
motives for shopping has shifted. Customers still weigh up the functional value of
products in terms of the ability to satisfy basic needs and wants, and they continue
to have regard for prices, promotions, discounts, lines of credit, interest payments,
etc. Nevertheless, affluent customers seek more than this. They want pleasure
from the activity of shopping, which means the atmosphere and ambience must be
appropriate and certain standards of service must be met (for more discussion of
shopper Experience Management in retail settings, see chapter by Burke in this
book). Attention turns to the emotions of customers: are they pleased, satisfied,
contented, and hopeful, and are they aroused, stimulated, excited, and frenzied?
What is more, the social influences that have such an impact on fashion con-
sciousness also impact on shopping experiences. Who you are with, and to whom
you refer, will influence the way browsing, choice, purchasing, and consumption
are experienced (e.g., gift-buying with an older friend compared with gift-buying
with a child). Arguably, the influence of social norms in these contexts is becom-
ing greater.
The overall impact of these characteristics is to suggest a symbiotic relationship
between retail and nonretail activities, offering consumers opportunities to fulfill
utilitarian and hedonistic motives. For customers, activities are blurred into an
unfolding set of interrelated experiences: a cinema visit is also an opportunity to
purchase the theme music on CD and buy popcorn with movie tie-in merchandise;
no international flight is complete without duty-free purchases of Absolut Vodka,
Dolce & Gabbana shoes, or L’Oreal body lotions and a pre-flight Pepsi, Evian, or
Sunkist.
Conceptually, this fuzziness between retail and nonretail highlights the problem
of defining retailing as a distinct activity. In turn, this begs the question: how do
consumers view retailing, and does a degree of fuzziness concern them? Further-
more, the relevance of studying bundled activities now becomes only too apparent
– we buy brands, not in isolation but in the context of multi-purpose trips and in
combination with varied activities. Analysts must address new sets of questions.
What implications are there for the way consideration sets and choice sets are
defined? Which brands are in direct competition and in what ways? How do con-
sumers respond to co-branding, tie-ins and cross-selling? Do they see strong com-
plementarities between brands in different sectors even when there is no formal
co-branding?
Also, from an analytical viewpoint, a spotlight is cast on the spatial and envi-
ronmental aspects of retailing. Some of the richest experiences demand the co-
location of activities, implying agglomeration in certain locations. But does this
Understanding Retail Customers 169
mean CBD locations or off-center locations? And how does this sit with the cen-
trifugal tendencies of consumers to live in low-density suburban locations? Within
retail clusters, what do we know of customer responses to the retail environment
and in-store atmosphere? Also, are there on-line parallels – for instance, the use of
certain lifestyle portals to agglomerate a critical mass of varied content? An ex-
ample is www.handbag.com, the first women’s portal in the UK, launched by
Boots and Press Holdings, with information on fashion, health and fitness, beauty,
relationships, celebrity gossip, and more – including a shopping inspiration page –
all of which is designed to create a lively on-line experience.
Consumer Assertiveness
Customers are learning to flex their muscles, rather than be passive recipients of
what is placed before them. They expect to be offered choice, and they expect to
exert control over purchasing and consumption decisions. Retailers who respond
positively to these expectations find customers to be advocates, whereas the oppo-
site is true when relations turn sour – then customers are in danger of becoming
adversaries (Kozinets, Handelman, 2004).
On the one hand, assertive consumers are quite willing to provide word-of-
mouth recommendations (“consumer buzz”). A shoe shop might say it really cares
about selling correctly fitted shoes, and a restaurant might advertise the authentic-
ity of their cuisine, but these messages are more readily accepted when the source
is a trusted friend or colleague, particularly one who is seen as credible, likeable,
and similar to us. More generally, third-party recommendations are coming to
have more influence as customers seek advice through chat groups, product-
related websites, brand communities, “best-buy” sections of magazines, and prod-
uct-related editorial coverage. For the retailer, word-of-mouth becomes both a
measure of customer satisfaction and a means of increasing sales without the ex-
pense of formal marketing communications. In exchange, the retailer relinquishes
a degree of control over communication channels and content (online “blogging”
is a recent manifestation of this).
On the flip side, consumers are more inclined to answer back by writing letters,
using toll-free telephone numbers, and interacting via email. This “consumerist”
activity is focused on customer service provision, complaining behavior, and cus-
tomers’ assertion of their rights. Consumers recognize that they have a right to safe
products that are fit for the intended purpose; they have a right to be informed with-
out being exposed to misleading and deceptive information; they know how to seek
redress and how to activate warranties; they have a right to a measure of privacy and
protection from the misuse of personal data. These rights and principles are captured
in legislation and codes of practice, backed by agencies such as the Federal Trade
Commission and the CPSC in the US and disseminated through such organizations
as the Consumers’ Association/Which? and the Citizens Advice Bureau in the UK.
Today, the Web has democratized access to these sources of advice, making
170 Mark D. Uncles
information, cases, and experiences very widely available (see, for example,
www.consumerama.org, www.which.net, and www.notgoodenough.org).
Some consumers are taking a more strident stance, expressing general concerns
about what is seen as excessive, wasteful, and environmentally unsound / unsus-
tainable consumption. At a personal level this can take the form of voluntary sim-
plicity: a disposition to buy/acquire/consume less (“deconsumption”) and to dis-
pose of possessions in nonwasteful ways (through reuse and recycling, sharing and
second-hand trading, and donating). Much of this behavior is at odds with estab-
lished, commercial retailing, although it underpins alternative forms of retailing –
witness the popularity of charity shops, car-boot sales, and on-line trading, as well
as the growth of eco-friendly, socially minded retailers (Body Shop being the most
prominent example).
Other reactions are more ideological and adversarial, ranging from organized
attempts to raise consumers’ consciousness of corporate excesses (e.g., Adbusters
targeting Wal-Mart, www.adbusters.org), to protest activities [e.g., Buy Nothing
Day (BND), the Use Less Stuff (ULS) movement and TV Turnoff Week] and
more overtly political activities (e.g., boycotts of particular products, brands or
retailers, and antiglobalization protests). Many of these activities operate on the
fringe and are fragmentary, but the response to The National Do-Not-Call Registry
(which gave U.S. citizens the opportunity to opt-out from receiving intrusive
forms of direct mail) shows that some forms of action are enthusiastically em-
braced by mainstream consumers.
The developments identified here suggest that far more attention needs to be
given to informal, interpersonal communication and its influence on purchasing
and consumption relative to the traditional focus on formal communications
through advertising, brochures, fliers, displays, etc. We need to know how brand
and product information is distributed in a world populated by assertive and com-
municative consumers. Word-of-mouth appears to be critically important. In some
instances on-line chat groups and brand communities will also be important. Here
the customer is not looking for a one-to-one relationship with the retailer, but for a
networked relationship with other consumers and other sources of advice. These
relationships are not necessarily moderated by retailers or their public relations
consultants.
These developments raise many questions. How are customer expectations to
be measured and met? Do these expectations extend beyond obvious concerns
for product functionality and safety to more general issues, such as the retailer’s
environmental record? What are the consequences, if any, of consumer dissatis-
faction and complaining behavior? Do the stated beliefs of consumers carry
across into behavior? Often there are impediments to reconciling attitudes and
behavior – budget constraints, limited information, no/few alternative options,
and situational factors. These impediments can leave customers feeling they
have little choice or control, at the very time when they are demanding more
choice and control.
Understanding Retail Customers 171
Retrospect and Prospect: An Assessment
It is evident that the forces of change that underlie the buyer-centric revolution are
having direct and indirect impacts on consumer choices, presenting challenges for
anyone who is trying to understand customer attitudes and behavior. The problem
is exacerbated by the apparent contradictions that exist. Hedonistic motives for
shopping are of increasing importance, but at the same time we see the popularity
of discount retailers such as Aldi and Lidl. Fashion is a defining feature of con-
temporary culture and a means of self-expression, yet blue denim has become a
ubiquitous “blending-in” dress code. At the same time as there is talk of voluntary
simplicity, deconsumption, and environmental sustainability, we see no sign of a
general rejection of the acquisitive consumer society. Far from it. Demand for
consumer goods remains strong. Festive season sales figures break records year
after year. Levels of consumer credit are on the rise. Our love affair with the
automobile continues, despite escalating oil prices and concerns over pollutants.
Indeed, shopping malls like Meadowhall and Cribbs Causeway in the UK and
Edmonton in Canada owe their existence to the fact that the majority of people
within their extensive trading areas have access to automobiles. Moreover, these
features of Western society are being rapidly copied wherever non-Western na-
tions have the economic freedom to do so, as is apparent in the pristine glitzy
shopping malls of Mumbai, Shanghai, and Dubai.
Change, of course, is inevitable, and it is the right of consumers to respond in
ways that at times seem contradictory and contrary, but where does this leave the
analyst? There are two opposing views. One view is that change makes any for-
mal, systematic, and enduring understanding of customers highly unlikely – or, at
best, very problematic (Sheth, Sidosia, 1999). In a world where change is all-
pervasive, because of shifting technologies and fashions, and where the pace of
change is increasing, customers come to be seen as unpredictable and their ac-
tions, as coincidental, resulting in ephemeral business outcomes. It is hard to en-
visage consumers settling down into routine and habitual behaviors. Equally, it is
hard to see how past behavior could be a good guide for looking at future behav-
ior. In this fast-paced world, the popularity of iPod today tells us nothing of how
popular it will be tomorrow, or of what other technologies will be popular in fu-
ture. SMS text-messaging is the lingo of teenage culture today, but the self-image
of future teenagers will be re-assessed and re-expressed in ways we have no hope
of anticipating.
An alternative view is that a degree of order is there to be discerned by those
who care to look. There are several reasons for saying this. First, while influences
are changing and while they may appear hard to fathom, the behavioral conse-
quences are not necessarily any more complex than in the past. Ultimately, cus-
tomers must still answer the same basic questions (what to buy, how much to buy,
at what price, etc. – all the questions listed in the right-hand box of Figure 1), and
172 Mark D. Uncles
we are as likely to find patterns in brand choice, store choice, purchase timing,
duration in store (or on-line), etc. now as in the past.
Second, our ability to find order from complex data is improving. We are not
omnipresent and cannot know everything, but it is possible to know a few things
better. To our existing techniques must be added new procedures for analyzing
revealed and stated choice, data-mining techniques, GIS, and spatial analysis
techniques (e.g., see chapter by Ravi, Raman, Mantrala in this book). When we
use these procedures simplifying assumptions have to be made, but that is true
with any form of modeling: the goal is to cast light on customer behavior, not
replicate it in all its messiness.
Third, there are lags and legacies that hold back the forces of change. For in-
stance, the cost of rationalizing a property portfolio of stores is considerable and
gives rise to inertia. Invariably, physical assets are used for longer than is desir-
able – until a tipping point is reached and comprehensive reorganization or ration-
alization is required. On the face of it, retail websites are immune from these prob-
lems, but even here the investment of time and resources needed to up-grade and
overhaul sites means there is inertia. The implication is that there will be a certain
level of supply-side stability to counterbalance all the drivers of change.
Finally, while major changes are occurring, perhaps they are not as novel as we
might like to think. For instance, experiential shopping is a major trend, but there
always have been experiential aspects to shopping (frenzied market scenes in the
genre paintings of Pieter Bruegel the Elder remind us of this). Likewise, the notion
that shopping takes place in conjunction with other activities, be it personal bank-
ing, fast food consumption, or movie attendance, lies at the heart of traditional
urban hierarchy and central place theories (Christaller, 1933; Lösch, 1940). Even
in the technological sphere there are historical parallels: home delivery, mail order
and on-line shopping have significant elements in common; the PSA reminds us of
an era when stores were staffed with large numbers of knowledgeable sales assis-
tants. What new technologies have done, by substituting (low-cost) capital for
(high-cost) labor, is democratize aspects of retailing, giving all of us access to
advice, information, and service. This is a significant change, but it is one that
builds on legacies of the past.
Conclusions
Retail customers have to make many choices, such as those listed in Figure 1.
These choices are influenced by past experiences, consumer lifestyles, and basic
needs and wants, as well as situational and mood-based factors. All these factors
are undergoing change, and the pace of change is increasing, so that it is only
natural to feel that the world of the consumer is complex, messy, confusing, and
contradictory. Indeed, at the individual level, this appears to be true. A nuanced
and subtle interpretation of what is going on in the head of a particular customer
Understanding Retail Customers 173
will reveal idiosyncratic responses to changing technologies, fashions, experiences
and actions. But, invariably, our concern as corporate and academic analysts is
with groupings of people – not whether there is one technologically savvy person
in Helsinki, but how the citizens of that city and other cities are distributed across
what might be seen as a savviness spectrum and whether those who are savvy on
one scale are generally that way inclined, and whether this correlates with other
factors (e.g., are they more or less likely to be fashion-conscious or buyer-
centric?). At this scale, a greater sense of order is likely to be observed. With this
in mind, a meaningful way forward – if we are to continue to understand retail
customers as effectively as in the past – is to extend and enhance proven analytical
approaches (such as those described in the first section) to take full account of the
buyer-centric revolution that is having a profound impact on contemporary retail-
ing (as described in the second section).
Acknowledgments
The support of the METRO Group is acknowledged, as is partial funding from
Australian Research Council Grant DP0344446.
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Future Trends in Multi-channel Retailing
Peter Sonneck and Cirk Sören Ott
TNS Infratest, Bielefeld, Germany
Introduction
Commercial retailers find themselves in an increasingly complex environment. On
one hand, this complexity is shaped by establishment of new channels and store
formats, while there is also moderation of the earlier “store-specific offered
goods” targeted at the consumer. On the other hand, consumers also demonstrate
multi-optional behaviour and needs structure.
This chapter will outline the status quo currently prevailing in the retail world.
In the first part, we intend to show the characteristics of consumer needs and be-
havioural patterns set against the background of immensely diverse channels and
store formats. The second part will deal with the question of how retailers are able
to react within the existing framework of multi-channel strategies, and provide
some basic guidelines.
Characterizing Consumer Behaviour
The term “multi-channel retailing” is a new way of referring to an “old” theme (cf.
Schramm-Klein, 2003). The food retail store has been using the stationary store
format parallels for some time now. However, over recent decades, non-food re-
tailers have combined the stationary store format with catalogue sales. The con-
cept of multi-channel used today refers to the Internet and e-commerce. This may
either be a new contact perspective, offering potential for new sales by dis-
patcher/sender; it can be used simply as an advertising medium (information plat-
form on the Internet, picking up any goods at a stationary retailer); or it can be
used as a sole distribution channel (e.g. Amazon).
The various channels can complement each other (i.e. the dispatch retailer) or
they can be used to gain a new customer segment that had hitherto been unavail-
able for reasons of positioning. This is now possible with multi-channel (i.e. plac-
ing a store brand in the food area segment as opposed to simply being positioned
176 Peter Sonneck and Cirk Sören Ott
in the brand-name retailer segment). When we refer to multi-channel, we interpret
this concept as including all ways in which the consumer can contact a retailer or a
retailer can contact the consumer. This includes all stationary and non-stationary
formats and channels. Products and/or services sold can appear under on the same
brand name. This is not an absolute condition, although it may well be the deliber-
ate intention of the retailer.
Consumers have a wide choice of store formats and channels from which to
make purchases. Consumers are continually making new choices on purchasing
sources, and their choice is directed by different occasions, diverse situations and
what they actually need. In selecting the source for a purchase, the consumer fol-
lows an individual decision-making pattern that is not obvious. In other words,
segmentation of consumers is increasingly subject (exclusively or primarily) to
socio-demographic determination. There are other factors that are of prime impor-
tance in the selection of a retailer. Many other factors impact on this choice, and
they can exert a lasting effect on the choice of retail outlet (see, e.g., chapter by
Uncles in this book).
The lack of exclusivity or clarity is a decisive factor resulting in generaliza-
tion of consumer behaviour. The principle of “the more the merrier” is at work
here. Different outlets, store formats and channels are used either simultane-
ously or in succession. Analysis carried out by TNS shows that this behaviour is
an expression of a basic trend directed towards satisfying consumer need: con-
sumers expect more and more convenience in making their purchases. They
want to spend less and less time on making them. Consequently, they will seek
out and use the shopping outlet that best fits their particular situation on the
basis of their needs.
The concrete motives of consumers may one day favour a discount store over a
shopping mall; they might place an order on e-Bay before going on to a speciality
store. They’ll order a new outfit from a mail-order catalogue today before buying
a fashionable outfit from a store in the city. Consumers are highly individual and
independent of the sector.
Table 1 illustrates significant retail branches and the overlapping of various
store formats and channels which result in specific consumer behaviour. Consum-
ers are able to purchase food and other products for their daily needs through vari-
ous store formats, while also being able to purchase almost every product avail-
able through a range of different channels. A DVD is available in a large
supermarket, as well as in a speciality store or at a service station. A drill can be
found in a specialist store, but also in a discount store or in a conventional mail-
order company’s catalogue.
The consumer is well aware of which retailers have specialized in a particular
product line and which offer particular items for a limited period only. The drill or
the notebook in the discount store or the large supermarket is usually available as
a special sales promotion for a limited period only.
Future Trends in Multi-channel Retailing 177
Table 1. Overlapping Usage of Various Store Formats and Retail Channels
Main branches of retail:
Store formats/
channels Food
Cloth-
ing
Multi-
media
Entertain-
ment
electronics/
appliances
Household
goods/
Home
textiles
Watches/
Jewellery
Cosmetics/
Drugstore
products DIY
Discounter x x x x x x x
Supermarket x x x x
Shopping mall x x x x x x x x
Department store x x x x x x x
Branch
specialist store x x x x x x x
Specialist
trade store x x x x x x x x
Mail order x x x x x x x
Newspaper stand x x
Service station x x x
Tele-shopping x x x x x x x
Internet shops x x x x x x x
Internet auctions x x x x x x x
The criteria of price, quality and range are only three of a large number of com-
plex determining factors. Depending on the channel or store format, these criteria
can exert an individual impact on the consumer. One set of channels may be used
to meet a need, while another set of channels is used to generate the need. If you
want to purchase a drill, you go to a DIY store. The drill available from the dis-
counter at a low price motivates the consumer to buy it there. The parallel usage of
store formats and channels is becoming increasingly multi-layered and blurred. As
retailers present their products in more and more widely differing ways, consum-
ers’ behaviour also becomes more diverse in terms of their use of the range of
channels on offer.
Consumers have a wide spectrum of intentions they can draw on in order to
celebrate shopping as an event. They make their purchases secure in the belief that
they have taken independent decisions and acted of their own free will. In addition
to these motives, and depending on the context, the consumer becomes a multi-
channel buyer: the impulse buyer, smart shopper, the good deal (only discount)
buyer, the event buyer or the needs-only buyer. But since motives are the decisive
point in consumer behaviour – dependent on the situation, intention or product – it
is difficult to place such any consumer in a specific channel.
178 Peter Sonneck and Cirk Sören Ott
Individual Consumer Benefits from Different Store
Formats and Channels
Consumers perceive an individual benefit in the different store formats and chan-
nels. The situation determines what is useful. The store-format and channel choice
is closely associated with the decision on situation. The unconscious decision-
making process undertaken by the consumer checks the available shopping re-
sources. Which shopping alternatives are available to the consumer? How much
time am I willing to invest in gathering the information and the actual purchasing?
What basic quality am I looking for in my purchasing need? How much am I will-
ing to invest? How well informed am I? What further advantages or services do
the different retailers provide? Another factor that comes into play is whether the
customer needs a “fun” or “event” element in that day’s shopping Where will I be
inspired and get new ideas? What kind of atmosphere awaits me? What concrete
experience I already have with one channel tells me that I can meet my actual
purchasing need through another channel as well?
Stationary Retail
The direct benefit of a stationary retailer is provided by the local access to the
retailer in addition to its ability to supply the products. Whatever products are
offered at a stationary retailer can immediately be registered by all the senses. The
purchased products are available for immediate use by the consumer.
The consumer gets products from all sectors in a stationary retail store. Brand-
specific stores have been differentiated into various store formats as a result of
global commercial trade:
When we address the issue of daily shopping for food and non-food products,
consumers are confronted with a diversified variety of (large) supermarkets, shop-
ping malls, department stores, discount stores and specialist stores. Each of these
types of store offers a particular benefit to the consumer. Large supermarkets offer
a diverse range of products in a large shopping area (department stores do the
same, but in a smaller space). The supermarket provides for the needs for the con-
sumer in its neighbourhood with a wide range, but has a rather shallow product
range. The discount store offers a limited range of products with prices much
lower than the normal price range. The specialist store is characterized by a lim-
ited range of products but extremely good service and excellent advice.
The individual benefits can also be transferred to other sectors. The specialist
store always represents good advice and personal service. The department store
stands for a large range of products that are immediately available to the consumer
at reasonable prices, and the discount store provides a contrast, with a limited
range of (sometimes no-name) products at the lowest possible prices.
Specialist stores, department stores and discount stores – but also drug stores –
are in first place when it comes to food and other products being bought for our
daily needs. Local proximity is the decisive factor determining the choice of
Future Trends in Multi-channel Retailing 179
which store to go to. This means that the store has to be near enough for customers
to get to it in a reasonable length of time. Aside from the consumer being able to
purchase products for immediate use, proximity is virtually the only common
characteristic of these retail stores.
The discount store offers no-name products and/or brand name products at dis-
count prices. The primary factors here are usually the requirement for sober and
non-emotional purchasing combined with satisfaction derived from a limited
product range with a clear view of the products available, presented in a limited
amount of sales space.
Department stores offer consumers a large variety of products and ranges,
while also focusing on branded products. These products are presented in attrac-
tive and spacious surroundings with added customer service. Consumers can find
products advertised in the media at this venue, and there is also a choice of no-
name and private label products.
In the entire retail world, the stationary retail store is the only place where con-
sumers notice even the smallest change. The format, layout, displays and products
on offer are brought to the immediate attention of shoppers. Many players in the
retail world have recognized the trend and acknowledged the potential of actual
brand names – these players will position themselves directly in front of the con-
sumer. Just like a branded product, different chains define themselves as emo-
tional and rational benefits for the consumer and promote this image. Department
stores are being attacked by discount and drug stores. Discount stores are less
focusing on food only and fighting back with a variety of special offer products.
Selling products such as computers and drills means that they are impacting on
established specialist stores, appliance stores and DIY stores. Franchised coffee
shops are offering insurance packages and mobile phones among high-tech multi-
media products and woolly socks.
Internet Shopping
Internet shopping combines a variety of benefits (see also chapter on electronic
retailing by Weitz in this book). The Internet makes it possible to shop 24 hours a
day, 7 days a week. More importantly, consumers do not have to waste time in
finding a retailer as is the case with stationary retail stores. The Internet offers an
inexhaustible source of information that even a specialist store cannot hope to
compete with. Finally, the Internet allows consumers to compare prices.
The Internet is continually adding more sectors, although this does not necessar-
ily always mean success. Regional and cultural characteristics are decisive in deter-
mining whether or not a particular sector in the Internet is seen as beneficial. The
Global eCommerce Report from TNS was based on 40,000 interviews in 37 coun-
tries and showed that in 2002 online users differed by region and culture. In the year
2002, every second online user in Israel ordered electronic products, while in Korea
only every fifth user ordered online. Jewellery and fashion accessories were ordered
via the Internet by twice as many online users in Taiwan as in England in 2002.
180 Peter Sonneck and Cirk Sören Ott
1
Online Shopper 2002
01233333344
67777778910 10 10
12
14 14
16
18 19 19 20
22 23
25 26
31 32
0
5
10
15
20
25
30
35
Bulgaria
Ukraine
Romania
Argentina
Hungary
Lithuania
Malaysia
Thai lan d
Turkey
Indi a
Latvia
Indonesia
Czech Republic
Estonia
Italy
Poland
Slovak Republic
Mexico
Hong Kong
Singapore
Spain
Belgium
Serbia
Taiwa n
Australia
Finla nd
Canada
Israel
France
Irela nd
Netherlands
Denmark
GB
Norway
Germa ny
Korea
USA
Percentage of Internet users
Percentage of Internet users who have bought goods or services online during the past month
• The USA retains its position as the nation with the
greatest proportion of online shoppers at 32% of all
Internet users. This compares with the global average
of 15%.
• In Bulgaria, Ukraine and Romania, 2% or less of the
online population shop online.
Country average (15%)
Copyright 2002 © TNS
Fig. 1. Online Shopper 2002
The attempt to sell groceries via the Internet has been dropped in Germany,
whereas it has become well established in Australia.
Classic Mail-Order Catalogue Sales
Classic catalogue sales involve illustrating products offered in department stores
on paper. The mail-order sales catalogue is one medium that has found a place on
the Internet in today’s digital world. A definite time advantage is the benefit of
mail-order catalogues (no travelling and everything under one “roof” etc.).
Sales through classic mail-order catalogues are moving forward and improving.
There is an increasing number of sector-specific catalogues geared up to appeal to
the orientational needs of consumers. Consumers benefit from the situational re-
tailer and the associated choice of products.
Tele-shopping and T-Commerce
Tele-shopping offers the consumer a convenience benefit par excellence. Tele-
shopping depends on an interest in the products presented during a television broad-
cast. Tele-shopping requires no physical or technical activity to visit and use this
“shopping world”. It is likely that the current time and product restrictions still char-
Future Trends in Multi-channel Retailing 181
acterizing tele-shopping (in order to build a benefit value niche) will soon be irrele-
vant. At present, consumer control over navigation is still limited. However, this
deficiency in T-commerce will soon disappear with the increased technical advances
in interactive television. Today, the Otto Group is one of the world’s leading mail-
order companies for catalogue sales. It is featured on the digital television channel
on the German Satellite Network as the “Otto MHP Shop”. Remote control allows
consumers to view, choose and buy a product for direct home delivery.
This system offers individual orientation with reduced complexity and is inde-
pendent of transmission time.
Convenience Shopping
Service stations are one of the outlets that have established themselves as indis-
pensable for convenience shopping. Fast and convenient shopping just around the
corner offers a definite benefit, and consumers are willing to pay a premium price
for this benefit. The latest developments in Europe and the USA support the theory
that the trend in convenience shopping will continue. Convenience shopping in
smaller stores with clearly placed products geared to quick orientation is meeting
consumer needs. Consumers gain maximum benefit with minimum effort: the
service station is a convenience store with long opening hours and it offers “fast
turnover”, meaning groceries, drinks and snacks for daily use with short travel
distances and little time spent shopping.
Complex Retail Trade – How Can Retailers React?
Retail is undergoing a process of constant change. This is nothing new. At present,
this does not signal the demise of the “old” type of consumer and their replace-
ment with a new type. As far as retailers are concerned, it also does not mean that
various store formats or channels will disappear with consequent supremacy of a
dwindling number of store formats and channels, resulting in fewer global players
(see also chapters by Ahlert, Blut Evanschitzky, and Dawson, in this book). The
future trend in retail lies in increasing environmental complexity, with a constant
decline in the size of consumer target groups and a broader range of consumer
types. Numerous studies from TNS confirm that it is increasingly difficult for
retailers to communicate effectively with diversified consumer groups. The multi-
optional consumer is characterized by a combination of behaviour patterns and
attitudes geared to price, event and convenience. Retailers are also forced to ad-
dress their own increasing complexity. This is due to new technological develop-
ments (Internet, digital TV shopping) and the increase in diversity of products, e.g.
from discount stores, which often attack even “category killers”.
Basically, retail has a variety of options available for succeeding strategically in
today’s complex environment. Retail strategies must be based on the following
principles:
182 Peter Sonneck and Cirk Sören Ott
Table 2. Overview of the Benefits of Individual Store Formats and Channels Seen from the
Perspective of the Consumer
Store formats/channels Individual benefit
Discounter Fast orientation with the central focus on food items and
products for daily requirements. This entails a standard-
ized product choice with a limited range. There are dis-
count prices on high-quality products. Special products
are also offered at extremely low prices.
Supermarket Neighbourhood retailer (close proximity) for food and
products for daily requirements. Includes an extensive
range of fresh products. Satisfies consumer purchasing
requirements for brand names: consumers find products
that have been advertised in the media.
Self-service warehouse/
shopping mall
A comprehensive range of private label and branded prod-
ucts in the food and non-food segments with additional
customer service.
Department store A wide range of products offered in a large space (almost)
everything under one roof with additional customer service.
Franchise specialist store Specialist product range offered in a large space at attrac-
tive prices, comprehensive brand-name articles.
Specialist store Specialist product range with a high degree of customer
service and personal advice.
Dispatcher/sender Shopping after normal opening hours. Offers branded
products as well as private labels from a wide range of
products and specialist products.
Newspaper stand Close proximity shop focused on food and snacks with-
out waiting time.
Service station Impulse shopping and convenience shopping for quick
purchases without long waiting times.
Tele-shopping Shopping from the living-room chair. Products are pre-
sented live and replace personal service in stores.
Internet Offers comprehensive information and products 24 hours
a day and 7 days a week. Allows the highest levels of
personal freedom and price comparison.
Future Trends in Multi-channel Retailing 183
x Retail has to give consumers what they want.
x Basic insights into today’s and tomorrow’s multi-optional consumer are re-
quired. To put it clearly: “one” consumer no longer exists; the consumer
wants one thing today and something else tomorrow.
x Retailers have to embrace and attract consumers wherever they happen to
be. In the shopping mall, at the discount Store, at the computer or at the
newspaper stand round the corner.
x Success in retail requires innovation, flexibility and customer orientation
– these are “must-haves”. This applies to communication and to policies on
lines of distribution, location, product range and personnel.
x Retail is not simply judged on the products it offers but also on what the
company concerned represents.
Analyses have demonstrated that an attractive product selection – even when
products are also attractive in terms of price and service – can never balance out a
negative image that has become attached to a retailer. The retailer itself is seen as
a brand, and the brand equities communicated by a retailer have to be balanced
against the apparent needs and the continuing requirements of the consumer. A
store brand must be seen to involve not only rational but also emotional benefit to
the consumer, as well as continually polishing the retailer’s own image (see, e.g.,
chapter by Grewal et al in this book for more on retail success factors in today’s
world).
Strategies for Multi-channel Initiatives
Today’s multi-channel systems already have a high empirical value: the retailer
segment concentrating on only one store format or on selling to a specific con-
sumer channel is gradually dwindling. On the other hand, important retailers with
worldwide sales activities are implementing multi-channel Strategies and planning
to augment their portfolios with more channels and/or store formats.
The conclusion reached forms the key initial focus for further strategic discus-
sion. Retailers have to be where consumers need them. Retailers have numerous
options for building up further channels in order to achieve this goal.
It is necessary to make decisions on three levels if retail business is to find the
right strategy:
1. Store format and channel segmentation: the first step involves identifying
the segments that have not been covered, or only partially, by the present
store formats or channels. If sufficiently relevant, one or more segments, or
a new restructuring of existing market segments, can be used to implement
a new store format or a new channel, which can then be included in the
portfolio.
184 Peter Sonneck and Cirk Sören Ott
2. Market positioning: unique positioning of store formats and channels
within the market, with the goal of achieving a distinctive profile for con-
sumers and the competition. Aside from the core profile strategies relating
to quality and price leadership, it is crucially important to improve image.
Examples of this could be “event shopping” or “supply”.
3. Portfolio implementation: implementation of multi-channel strategies fol-
lows a basic development of growth and expansion, reduction or dwin-
dling, or retaining the same formats or channels.
a. For example: expansion of a store format can be attained by an increase
in outlets.
b. A retaining strategy is followed when an existing store format is used to
realize and attain the highest possible margin.
c. Elimination of store formats.
d. New development of store formats
e. Integration of existing store formats within the portfolio.
Guiding Principles for Successful Multi-channel Retailing
The Retailer as an Observer and Participant in the Market
This understanding is a basic prerequisite for successful multi-channel marketing.
Retailers focusing solely on market observation and reacting to actual trends along
the lines of “me-too” strategies are missing the opportunity for directional partici-
pation and action initiated by themselves. The innovative approach and the cour-
age to launch something new on the market are also recognized and respected by
consumers. This is an intrinsically invaluable competitive asset and should defi-
nitely be used.
Innovative Exploration of New Store Format Combinations
Willingness to try something new also entails identifying latent trends, pursuing
these trends and testing them for relevance. There is a tendency for future trends
to be on the streets. Consumers are the best judges of what inspires them and what
and where their needs are. Explorative research techniques are able to provide
answers on these issues. They are also able to assist in making what has been
learnt operational and implementing the insights gained using a further stage of
quantitative assessment.
Segmentation of Existing Customers
A continuing “must-do” for retailers relates to precise knowledge of existing cus-
tomers and far-reaching consumer potential. This information is imperative for con-
version to a successful Multi-Channel Strategy and cannot be over-emphasized.
Aside from the hard economic facts – such as turnover, average sales slip, customer
Future Trends in Multi-channel Retailing 185
frequencies etc. – precise analytical, demographic and psychographic segmentation
of customers reveals the potential opportunities and risks entailed in expansion of
the store-format portfolio. Which customers use which store formats? How can
cross-selling behaviour be characterized? Which customer segments are moving
towards the store formats used by the competition or even to other channels? What
are the reasons and intentions behind this behaviour? What commercial relevance
does this behaviour have?
Channel Fit: Not Everything Can Be Had Everywhere
It is important to coordinate the channel, the products and target consumers in a
sensible manner.
For example: standardized goods are basically a positive development, because
they allow consumers to form their own opinions without the help of a salesper-
son. Products requiring a great deal of consultation and advice are not necessarily
ideal for online sales. Before establishing a new channel it is important to consider
what the level of acceptance will be among customers for the new product or ser-
vice being offered in the new channel. If a new channel is added to an existing one
it is important that the same service is offered through both.
New Store Formats and Channels Must Be Pretested for Acceptance
Implementing a new store format or channel usually involves substantial invest-
ment. This is the main reason why many innovative ideas never come to pass. It
does not matter if the new initiative is a line extension – the addition of a new
selling line in an existing retail brand – or relates to establishing a new channel
under a new brand. In both cases it is important to examine and possibly fine-tune
the core benefits and service, in addition to presentation and image. This is best be
done with a suitable test.
Continuous Examination of Store Formats and Channels
Existing and new channels and store formats must undergo continuous observation
and evaluation to allow recognition of future trends under a retailer’s own roof
and appropriate reactions:
What relevance does the channel have for the company overall? How adequate
is the acceptance of the store formats for existing and potential customers? What
is the motivation or reason behind nonacceptance? Where do customers see the
outstanding added values? Is the image presented mirrored in the consumer? What
potential is there for customer loyalty and winning new customers?
Creative Elements of Identity – Cultivation of the Image
A company presenting itself to consumers under one brand name through a range
of channels is well aware of the importance of maintaining and caring for presen-
tation, communication, the core benefits and the services on offer.
186 Peter Sonneck and Cirk Sören Ott
In cases where consumers are able to communicate with the same company by
different routes, the creative elements of the corporate identity have to be unique and
unambiguous. This involves a phenomenal balancing act. On the one hand, it is
important to emphasize the specific details of the individual store formats and chan-
nels. On the other hand, however, consumers have to be convinced that they are
receiving the same quality and customer service whether they go to the stationary
store or make their purchases online by way of the Internet. Consumers cannot be
allowed to perceive any disadvantages for any of the channels they are able to ac-
cess. If a consumer has a negative experience with any one of the channels the im-
age of the entire company can be irreversibly compromised. Don’t’s include differ-
ent prices or availability of certain items only by one of the channels.
Where different store formats and channels do not appear under a common
brand name, it is important to differentiate the different aspects of service. Every
retail channel with its own label needs a dedicated and unique brand profile. If this
is achieved, corporate design elements may even be adopted from the channel.
This may be deliberate or unintentional, and the independent brand profiles of the
store formats and channels might be watered down. For example, if a discounter
appears as a hidden spin-off right beside an existing self-service warehouse and
the discount store adopts the brand name elements of the warehouse chain, this
would impact negatively on the Discounter, because its authenticity would no
longer be credible for the customer. There is also potential for the self-service
warehouse to be infected by the discounter’s negative image (since the discounter’s
image correlates negatively with its own image).
Joint Venture: Synergy Potential Beyond Business Borders – Recognition and
Implementation
Top players in the international retail landscape have store format and channel
know-how in addition to sector expertise when it comes to product range and pro-
curement. They have acquired this knowledge through many years of experience.
Retail companies often break new ground if they want to establish more channels.
(For example when a DIY branch store expands its sales range on the Internet or
via dispatch). In the other direction, a dispatcher may want to expand its DIY
business in a professional way.
Channel experts can derive benefit from each other if they set up a joint venture
with the channels (such as DIY stores, catalogues and Internet) are linked under a
common brand label.
x Know-how on operating type comes together and builds synergy advantages.
x Multi-channel marketing exerts a customer loyalty effect and counteracts
the behavioural changes of the customer.
x There is better customer acquisition and customer potential is better ad-
dressed through the use of different media and sales.
x Sales are maximized by addressing full customer potential.
Future Trends in Multi-channel Retailing 187
Multi-channel marketing offers the following benefits for consumers:
x A wide choice of times, locations and methods of shopping with this DIY
retailer.
x Determination of provision for gathering information, transactions and pos-
sible returns by consumers.
x Possibility of correlating the advantages of each channel with avoidance of
disadvantages (e.g. shopping 24 hours a day, viewing the product at the lo-
cation and customer service).
Implementation of multi-channel management involving strong sales channels and
control at the level of the multi-channel are requirements for a successful joint
venture.
Differentiation: As Global as Possible, as Regional as Required
Regional and cultural characteristics exert a definite influence on the opportunities
and risks relating to whether the different channels are accepted. As far as global
retailers are concerned, it is particularly important to determine what global rele-
vance specific multi-channel strategies have for the company. Only one principle
is applicable here: as global as possible and as regional as required (e.g., see chap-
ter by Mierdorf, Mantrala, Krafft in this book on Metro’s international growth
strategy). It is therefore essential to assess the efficiency of training and best prac-
tice in using of a Channel for a specific country or region.
Management Tools and Application in Market Research
As we have seen, it is more important than ever to understand the needs of the
consumer. We need to know how consumers view the different formats and chan-
nels and why consumers use the ones they have chosen. Retailers needs an answer
to the issue of how these two factors – basic need and perception – relate to each
other, in order to be in a position to come up with statements on the action that
needs to be taken:
x What general possibilities are available in multi-channel proposals?
x How can I improve and expand my established store format position in the
market?
x Where are the dangers inherent in the competitive store formats and / or
channels?
x How can I attack the competition?
188 Peter Sonneck and Cirk Sören Ott
Segmentation
The retail trade is endeavouring to understand the needs of its customers and its
customer potential better. Most research is based on rational determining factors,
such as quality, price and product choice. If the retail trade initiates consumer
segmentation of this nature, the actual and target relationship structures between
consumers and their (own) store format or channel are derived on this basis.
However, changes in purchasing behaviour make it essential to apply segmenta-
tion procedures. This approach identifies more in-depth – often emotional – needs
structures inherent in consumers. Different formats radiating personality and sym-
bolism also have to be considered.
If both are known, it is much easier to achieve a format-specific offer that
meets customers’ requirements.
There is sound evidence to support the advisability of viewing consumer needs
and the perception of formats, differentiated into three needs levels:
x Functional, rational needs (e.g. price, availability, convenience) that are
easily accessible.
x Identity needs (affiliation with certain groups, e.g. social classes) that are
difficult to quantify.
x Emotional/psychological needs (e.g. control, activity, security) that cannot
be quantified directly.
In Germany, “more affluent” customers also buy at Aldi because it is “chic”,
while in the UK nobody is likely to stress openly that they cannot afford to shop at
other outlets than those they actually use. Knowledge of these aspects is important
for optimum communication with target groups and for successful management of
portfolios.
Perception of Store Formats and Channels
x Store formats/channel characteristics (e.g. price, quality, selection, accessi-
bility) that are obvious.
x Social values (e.g. in general only, male, female, young, old) aimed at so-
cial identity.
x Symbolism/personality (e.g. strong, determined, passive) affecting the
emotional/psychological level.
In the same way as customers, the format also radiates its own “identity”. For
example, in many countries the tele-shopping format still has a less favourable
image with many potential customers. Use of the levels of need described above
allow more in-depth identification of inhibitions or obstacles than simply “bad
offer” or “too expensive.” These are probably some of the true reasons and repre-
sent key barriers to effective marketing.
Future Trends in Multi-channel Retailing 189
Furthermore, emotional needs and perceptions cannot be adequately assessed in
verbal form. Market research offers qualitative and quantifiable assessment proce-
dures using nonverbal techniques to avoid the issue of rationalization.
Combining both levels – consumers and formats – allows both levels to be set
in context, and the congruence between provider and needs can then be high-
lighted. The ultimate goal is to derive workable measures for an optimum fit be-
tween the two.
Customer Loyalty
Competitors are fighting for market shares within the wide range of online, offline
and mail-order trade and deploying a variety of the communications mix available.
A special significance is attributed to the structure of customer loyalty. Only those
retailers who have created a genuine structure for customer loyalty will succeed in
protecting themselves against the situation where their customers visit another
outlet at the next available opportunity. Only customers with an emotional bond to
“their” retailer are resistant to other infiltrating influences. Customers with a defi-
nite emotional bond do not need to be convinced of the desirability of returning.
They are immune to the activities of the competition. They exhibit less price sensi-
tivity and prefer to leave a larger proportion of the contents of their wallet with
“their” retailer rather than with another.
A company that practises multi-channel retailing can be in a position create a
better bond with customers more effectively than one with only one format. Natu-
rally, the requirement here is that customers recognize that they are shopping at
“one” company, which in turn means that the connection must be clearly visible
and desirable.
En route to successful multi-channel retailing, companies need to conduct a
separate examination of the status of customer commitment. Investigation of the
formats implemented followed by a cumulative assessment can lead to an im-
proved overall strategy.
Actual studies have shown that customers using both a stationary store and the
same retailer’s online shop, for example, have a far better bond with their retailer
than other customers who only use one channel. This confirms that it makes sense
to draw customers’ attention to this multi-offer.
It is not sufficient to determine the favourite store mainly used for shopping if
the aim is to measure customer loyalty for a particular format. For example, a
certain store may be frequented because there are too few alternatives available, or
even none at all. The actual quality of customer loyalty can only be assessed if
relative factors within an overall psychological model are evaluated. TNS has
identified three main components for measuring the strength and intensity of the
relationship between consumers and format. These components are satisfaction
with this format, the consumer commitment to this format (how important it is for
190 Peter Sonneck and Cirk Sören Ott
consumers to shop at this precise venue) and the level of ambivalence consumers
have towards other formats or retailers.
Depending on the intention, assessing these factors allows consumers to be bun-
dled or clustered according to the intensity of their loyalty within the store format
and channel. The levels of intensity are as follows: from embedded to ready to
change, or on the noncustomer side from attainable to completely unattainable.
This collective data allows retailers to make an adequate judgement of the
situation. It can be viewed as a sort of early warning system: how many of my
customers am I at risk of losing to the Internet? or How many of my customers are
attainable? This information is extremely useful for the development of existing
formats and for establishing new formats.
Linking Segmentation and Customer Loyalty
How successful are attempts at bonding various customer segments by means of
dedicated store formats and channels? Which segments are by contrast loyal to the
competition? The answers to these questions are provided if the segments deter-
mined are brought together and referred to the provider-specific bonding groups or
clusters. This offers extensive possibilities. On the basis of the market-research
data outlined, channel fit can be strategically optimized.
In this context, rational and emotional needs have been successfully evaluated,
as have image and communication (in each case from the consumer’s perspective),
for relevant retailers and their portfolios. These dimensions represent and high-
light precise strategic points at which retailers need to make adjustments to suit
consumers in order to optimize their own portfolios.
Outlook
The future of retailing will be influenced by further expansion of store formats and
channels. An important issue here is whether a single-channel or a multi-channel
strategy is the right objective for the future. It is therefore imperative to create a
channel mix that is recognized as such by consumers and from which consumers
derive genuine emotional added value.
One of the leading forces in the future will be the massive role played by tech-
nology in breaking down the barrier between the “real” and “virtual” worlds. E-
Commerce will be redefined, if it succeeds in offering alternative Internet-based
channels. E-Commerce needs to interconnect these channels actively in the per-
ception of consumers, and consumers have to use them proactively.
The “store with connectivity” is a reality and exists in Seattle, Washington
(USA). Customers in the outdoor chain store, REI, have access to an area arranged
according to the principles of an event shopping experience. Using a laser scanner,
customers can call up information on all the products they are interested in. The
Future Trends in Multi-channel Retailing 191
“secret” of this concept is that all this information is stored in a central database
and is accessible to everyone online. At REI, the lists are updated automatically
and continuously as soon as a scanner records a request or a product is automati-
cally taken off the list because it has been purchased by mail, over the phone, on
the Internet or in one of the 77 stores throughout the country. The database is
therefore automatically up to date. The same products are available at all the stores
and by all channels: each product offered online can also be purchased offline, and
each product available in the stores can be purchased online.
This mixed concept will be the driving force for future retail. Data mining and
web analyses give insight into what customers have purchased, while also offering
information on which products customers have looked at. This will helps retailers
to coordinate their advertising campaigns.
Products purchased online and then picked up offline increase offline turnover.
When purchases are ordered offline, customers tend to buy other products as well.
This trend has also been identified by Tesco in England. Tesco in England delivers
Internet orders through the branches. All purchase data is stored on the consum-
ers’ customer cards. Customers have access to this information through their home
computers or even on pocket computers. At present, Tesco uses this giant database
for personalized mail distribution of promotional material and discount coupons or
for selection of bargain offers. Tesco distributes customer magazines for five dif-
ferent target groups every three months.
OTTO – one of the largest mail-order company in the world – has just started to
expand its stationary retail store business. Mail order is no longer enough in to-
day’s competitive retail business. Today’s customers have a huge choice. The
future belongs to the multi-channel companies, since single-channel companies
(e.g. OTTO in its original form) have reached the limit of their growth potential.
As outlined above, multi-channel trading also means total linkage or network-
ing of the retailer’s dedicated distribution portfolio. This makes economic sense
and is also desirable from the customers’ perspective, because this is the most
successful choice.
The authors believe that the future of the retail trade does not lie in a “parallel
configuration”, but rather in a network of channels and store formats that is trans-
parent for consumers. The retailers of the future will identify this trend and adapt
their portfolios accordingly.
References
Dach, C. (2002): Sind Multi-Channel-Anbieter wirklich überlegen? Handelsjournal, (1),
24-25.
Dach, C. (2002): Vorteile einer Multi-Channel-Strategie: Eine nüchterne Betrachtung;
Synergien zwischen Ladengeschäften und Online-Shops aus Konsumentensicht. Insti-
tut für Handelsforschung an der Universität, Cologne.
Feldmann, L., Schögel, M. and Staib, D. (2004): Blackbox Kunde – Warum Kunden wo und
was einkaufen. Rüschlikon.
192 Peter Sonneck and Cirk Sören Ott
Nunes, P., Cespedes, F. (2003): The customer has escaped. Harvard Business Review (11),
96-104.
Ott, C S. (2005): Controlling und Monitoring einer Betriebstypen-Marke; wie der Handel die
Wirkung seiner Marketingaktivitäten effektiv überprüft, TNS Infratest Papers, Bielefeld.
Pooler, J. (2003): Why we shop. Emotional rewards and retail strategies. Westport.
Schögel, M. (2001): Alternative Vertriebswege: Neue Absatzkanäle – neue Herausforde-
rungen, Symposium Publishing, Düsseldorf.
Schramm-Klein, H. (2003): Multi-Channel-Retailing: verhaltenswissenschaftliche Analyse
der Wirkung von Mehrkanalsystemen im Handel. Wiesbaden.
Schramm-Klein, H. (2003): Zwölf Grundsätze zur Gestaltung von Multi-Channel-Systemen.
Science Factory, (1), 10-14.
Retail Competition
Edward J. Fox and Raj Sethuraman
Cox School of Business, Southern Methodist University, Dallas, USA
Introduction
Forty years ago, a consumer who wanted to buy prescription medicine in the US
or many other western countries would have visited a local independent drug-
store. Today, a US customer can fill prescriptions at any number of drugstore
chains (e.g., Walgreens or CVS), supermarkets (e.g., Kroger or Albertson’s),
mass merchandisers, or supercenters (e.g., Wal-Mart or Target) in town, not to
mention mail-order providers (e.g., AmeriCan Meds 1-800-469-0955) and
online pharmacies (e.g., www.Drugstores-Online.com). The increased number
of options for purchasing pharmaceuticals illustrates the high intensity of retail
competition in today’s consumer goods marketplace, driven by discerning con-
sumers with heightened expectations and varying tastes, along with technologi-
cal advances that facilitate efficient distribution of products and provision of
retail services.
As the above example shows, most product categories can now be purchased in
several different retail formats. A retail format is comprised of stores that offer the
same, or a very nearly the same, variety of product categories.1 Formats that have
emerged in recent years, mass merchandisers, supercenters (supercenters include
both a mass merchandise store and supermarket under one roof), warehouse clubs,
and dollar stores, are collectively known as nontraditional formats. Formats with a
longer history, such as grocery, drug, and department stores, are more traditional
formats (see also chapters by Ahlert, Blut, Evanschitzky; Weitz, Whitfield; Daw-
son in this book).
Perhaps the most important trend in retail competition is the increasing compe-
tition between retailers of traditional and nontraditional formats in the product
categories that they offer in common. We refer to this type of competition as
1 Stores of a given retail format offer generally similar promotion, pricing, assortment, store
location, and merchandising strategies. However, differences in those strategies are im-
portant factors in within-format retail competition.
194 Edward J. Fox and Raj Sethuraman
between-format competition and will devote considerable discussion to this
emerging trend. Of course, retailers of the same format also compete with each
other for market share and consumers’ “share of wallet,” a phenomenon that we
term within-format competition. As noted, stores of the same format offer very
similar varieties of merchandise. For example, all department stores sell primarily
apparel and goods for the home; all supermarkets sell perishable and dry grocery
products along with health and beauty items; and all warehouse club stores sell a
wide variety of products, including food, packaged goods, apparel, and durable
goods. Though the variety of products is very similar within one format, retailer
prices, assortment, and store location strategies can differ substantially.
The objective of this chapter is to investigate the two types of retail competition –
within- and between-format – by identifying key trends, offering insights and
predictions about the future, discussing open issues, and highlighting topics for fu-
ture research. Our discussion of retail competition will focus primarily on retailers of
packaged goods products, such as grocery stores and mass merchandisers. The dis-
cussion is organized around four key dimensions of retail competition.
x Price – Prices of items within and across categories, which may vary from
week to week as a result of promotions
x Variety – Breadth, or number of categories typically carried by the outlet
x Assortment – Depth, or number of items within a category
x Store location – Where the retail store is located and how this affects cost
of shopping to consumers
The next section discusses the impact of nontraditional formats on retail competi-
tion. Then, for each dimension of competition, we draw on the available research
to assess its effect on consumer shopping behavior and highlight trends in compe-
tition within and between retail formats, making predictions about the future and
identifying questions that are as yet unresolved.
The Impact of Nontraditional Formats
Open Issue: Are Traditional Formats in Decline?
The catalyst of competition between formats has been the emergence of hyper-
efficient mass merchandisers, in particular Wal-Mart, which carry an exception-
ally wide range of products. Mass merchandisers (and the supercenter format they
pioneered) offer packaged goods categories in common with supermarkets and
drugstores and apparel and home categories in common with department stores,
and overlap with the offerings of most category specialty stores (also known as
“category killers”). As a result, mass merchandisers and supercenters are in com-
petition with supermarkets, drugstores, department stores, and category killers for
Retail Competition 195
many purchases. Because of Wal-Mart’s well-publicized cost advantage (which is
also enjoyed, to a lesser extent, by other nontraditional format retailers), competi-
tion for these categories has prompted many to sound the death knell of traditional
formats. Although predicting the demise of these formats is premature, there is
evidence to support this concern. This evidence includes (1) the dramatic inroads
that Wal-Mart’s supercenters have made in grocery sales in the last decade – Wal-
Mart now sells more grocery products than any other retailer in the world, and
28% of US shoppers now claim to shop for groceries regularly at mass merchan-
disers or supercenters (Food Marketing Institute 2002, p. 23); (2) recent high-
profile bankruptcies of category killers such as K-B Toys and Toys ‘R’ Us; and
(3) the general malaise among department store retailers.
Trend: Traditional and nontraditional formats are competing for store visits
rather than for customers. A recent study found that a supercenter opening cost a
nearby supermarket 17% of its business, primarily because customers made fewer
visits to the supermarket (Singh, Hansen, Blattberg 2004). Most of the consumers
who patronized the supercenter continued to shop at the supermarket, albeit less
frequently. This study highlights the point that competition between retailers of
traditional and nontraditional formats is competition for store visits, not for cus-
tomers. Another study shows that the more mass merchandisers a household visits,
the more grocery stores it also visits (Fox, Montgomery, Lodish 2004). This
suggests that a visit to a mass merchandiser is not necessarily a substitute for a
grocery store visit; rather, consumers use both formats as part of their shopping
strategies. Traditional format retailers must therefore focus on defending the
“share of wallet” of their customer base in order to remain viable.
Trend: Greater consolidation across retail sectors. In response to the growing
competitive threat from nontraditional formats, traditional formats are consolidat-
ing. This consolidation is due more to mergers and acquisitions than to organic
growth. A few recent examples are the sale of much of the Eckerd drugstore chain
to CVS, the sale of May department stores to Federated, and the purchase of
Kmart by Sears. The underlying rationale is that larger retailers will have the scale
necessary to reduce costs so that they can compete with Wal-Mart and other low-
cost mass merchandisers. As a result, retail concentration has increased signifi-
cantly, with Kroger, Safeway, and Albertsons now comprising 53.4% of super-
market sales; Walgreen’s, CVS and Rite Aid representing 73.2% of drugstore
sales; and Costco and Sam’s Club making up 89.5% of warehouse club sales
(shares of various retail sectors in 2003 are computed from Troy 2004 and the Top
150 Annual Industry Report 2004).
For consolidation to be successful, however, the larger firms that remain must
exploit their scale to reduce costs. This requires eliminating overhead and redundant
functions, centralizing operations, and negotiating concessions from their suppliers.
Without such changes, consolidation results in retailers that are bigger, but still do
not have lower cost structures.
196 Edward J. Fox and Raj Sethuraman
Retail Price Competition
Consumers Emphasize Value
In recent years, the proliferation of nontraditional retail formats, a weaker global
economy (especially since the 9/11 terrorist attack), and the availability of price
information on the Internet have all resulted in greater consumer price conscious-
ness. Consumers exhibit price consciousness by purchasing items on special pro-
motions, shopping across stores and formats in search of bargains, patronizing
discounters, and purchasing more low-priced private-label products (Sethuraman
2003). The phenomenal growth of Wal-Mart is a testament to the increasing em-
phasis on value.
At the aggregate market level, consumers’ emphasis on value can also be un-
derstood from the household income distribution. The distribution of US house-
hold incomes in the year 2000 is shown in Figure 1. The distribution is highly
skewed – although the average income is $55,409, the median household makes
only $41,486, and over 58% of US households earn less than $50,000 per year.
Because the majority of households have limited disposable income, they are
likely to be price sensitive. Moreover, high-income households buy no more in
most packaged-goods categories (e.g., toilet tissue, detergent, salty snacks) than
low-income households of the same size. In fact, because high-income house-
holds spend more on money eating out, they may actually buy fewer grocery
items. As income levels continue to polarize because of the growth of low-paid
service jobs, price sensitivity is likely to increase, at least for frequently pur-
chased consumer goods. In order to serve the mass market of consumers in com-
ing years, retailers must therefore price their goods so as to offer the value these
consumers seek.
0%
5%
10%
15%
20%
$- $50 $100 $150 $200 $250
% Households
Fig. 1. US Household Income Distribution for Year 2000* Within-Format Price Competition
Retail Competition 197
Open Issue: Promotional or everyday low pricing? To offer value to customers,
retailers generally use one of two pricing strategies: (1) frequent promotional dis-
counts, known as HiLo pricing, or (2) everyday low prices, commonly abbreviated
as EDLP. On average, EDLP stores offer lower prices than HiLo stores, but dis-
counting by HiLo stores allows opportunistic shoppers to pay lower prices there
than in EDLP stores. The interplay between these two pricing strategies can be
illustrated in the context of competition between supermarkets. By offering tem-
porary price promotions each week, HiLo supermarkets price discriminate be-
tween opportunistic shoppers, who are willing to invest time and effort searching
for bargains, and those who are not. Consumers whose costs in terms of time are
low and/or enjoy greater benefits from searching for low prices will gather informa-
tion from different supermarkets, and may even shop at multiple stores. They
gather information about weekly price deals by studying the feature advertise-
ments of competing retailers and may even be willing to visit multiple stores to
take advantage of price deals at each store, a practice known as cherry-picking. In
fact, a recent industry study finds that one-third of US households shop at multiple
grocery stores in an average week (Food Marketing Institute 2002).
We can shed some light on price competition between EDLP and HiLo stores
by understanding who shops at EDLP stores and why. EDLP retailers require
scale economies to make it possible for them to offer low prices, so they operate
fewer stores in a geographic market (to draw customers from a larger trade area)
than do HiLo retailers, though their stores are larger (to gain scale economies and
accommodate the traffic). As a result, for most shoppers, visiting EDLP stores
requires more travel than visiting less distant HiLo stores. EDLP stores are also
more time consuming to shop, because of their larger size. Shoppers who are loyal
to EDLP supermarkets have one or more of the following characteristics: (1) low
opportunity costs of time – these shoppers are willing to spend more time shop-
ping, perhaps because they have lower wage rates or fewer time constraints; (2)
greater benefits from shopping at low-priced EDLP stores – the lower prices found
at EDLP stores can be applied to the needs of a larger family (Bell, Ho, Tang
1998; Briesch, Chintagunta, Fox 2005); (3) big-basket shoppers – infrequent
shoppers buy a large basket of goods when they visit a supermarket (Bell, Lattin
1998), so that the lower prices available at EDLP stores are effectively magnified
by the big basket2 ; and (4) brand loyalty – brand-loyal shoppers are unwilling to
buy whatever brand a HiLo retailer offers at a discount as a substitute for their
preferred brand, which limits their ability to be opportunistic.
A substantial segment of shoppers switch between EDLP and HiLo supermar-
kets, depending on the purpose of their shopping trip (Fox, Metters, Semple 2003).
These shoppers sometimes stock up and sometimes simply fill in between major
trips. When stocking up they will be willing to travel to a less convenient EDLP
2 Big basket shoppers also have less flexibility to delay purchases, which prevents them
from changing the timing of their purchases to accommodate the deal schedules of HiLo
retailers.
198 Edward J. Fox and Raj Sethuraman
store. However, if they intend to purchase only a small amount, these shoppers
will choose a more convenient HiLo store (Bell, Ho, and Tang 1998). Thus, the
more often consumers shop, the more likely they are to choose HiLo stores; the
less often they shop, the more likely they are to select EDLP stores. EDLP super-
markets can influence consumers’ shopping frequency by providing incentives for
big-basket shopping, which are basically volume discounts, frequent shopper pro-
grams, and other, less narrowly targeted, means.
In summary, consumers shop most often at HiLo stores, because they value the
convenience of HiLo stores and/or because they can take advantage of the price
discounts. In the grocery sector, those who shop at EDLP stores do so because
they have low opportunity costs of time (e.g., low wage rates), and/or they can
apply EDLP stores’ low prices to larger shopping baskets. Still others switch be-
tween EDLP and HiLo supermarkets, depending on whether the purpose of their
shopping trip is to stock up or to fill in supplies between major purchases.
Between-Format Price Competition
Trend: Increased price competition between formats. The consumer trend toward
price consciousness, together with the implementation of information and supply-
chain technologies by retailers, suggests that price competition between retail
formats has increased. The industry has recently witnessed the implementation of
several retail technologies that reduce operating costs, allowing retailers to lower
prices to consumers (Sethuraman, Parasuraman 2005). For example, customer-
operated check-out registers reduce front-end labor costs; cross-docking reduces
inventory and storage costs; collaborative planning, forecasting and replenishment
(CPFR) reduces supply costs; and radio frequency identification (RFID) technol-
ogy offers the promise of reducing product tracking and inventory costs. Accord-
ing to one Sainsbury (UK) manager, RFID tags have reduced their receiving-
function time from two and a half hours to 15 minutes.
Prediction: Mass merchandisers will keep prices low and enjoy a widening price
advantage. Mass merchandisers, though they do not all use an EDLP strategy,
offer significantly lower average prices than other formats for a given basket of
goods. Because they are less reliant on promotions, mass merchandisers sell fewer
discounted items than supermarkets or drugstores do. The only available study
with a bearing on price competition between formats shows that mass merchan-
disers could increase short-term revenues by raising their overall price levels,
while supermarkets and drugstores would lose revenues by raising prices (Fox,
Montgomery, Lodish 2004). Interestingly, the study also finds that mass merchan-
disers could increase short-term revenues by offering more promotions. Why do
mass merchandisers keep their prices low, despite the revenue they could gain by
raising prices and the already substantial gap between their prices and those of
other formats? The mass merchandiser business model depends heavily on scale
and its associated cost advantage – the greater the scale, the greater the cost ad-
Retail Competition 199
vantage. Preserving and extending this advantage is critical to their long-term
success. To date, mass merchandisers, particularly Wal-Mart, have maintained an
almost single-minded focus on cost efficiency. Moreover, by concentrating their
capital investments over the next few years on building supercenters, Wal-Mart
and Target have shifted the product mix of their stores toward lower-margin gro-
cery products in pursuit of store traffic and sales volume. The investment in lower
margin supercenters is a credible commitment to maintaining low prices. Given
the apparent success of their strategy, there is no reason to believe that mass mer-
chandisers will raise their prices in the foreseeable future.
Trend: Small-store formats are becoming more cost efficient and offering lower
prices. “Big box” retail formats, such as mass merchandisers, supercenters, and
hypermarkets are not the only retailers undercutting traditional formats on price.
Dollar stores, including Dollar General and Family Dollar, have rapidly become
profitable purveyors of general merchandise in the US, while hard discounters
such as Aldi and Lidl have made major inroads in the market for groceries in
Europe. These formats operate large numbers of small stores located closer to
consumers. By using flexible logistics, information technology, and effective cen-
tralized management of inventory and personnel, however, they are able to match
the cost structures of operators of larger stores.3 Metters, Ketzenberg, Gillen
(2000) argue that “tightly linked networks of small stores … can actually enjoy
the same scale advantages as those of superstores.” Wal-Mart obviously agrees,
having announced plans to roll out its own small-store Neighborhood Market for-
mat, offering products at the same prices as its supercenters.
Retail Variety Competition
Consumers Prefer One-Stop Shopping
Shopping convenience has several aspects, from spatial convenience to transactional
convenience to one-stop-shopping convenience. One-stop shopping enables con-
sumers to be efficient by buying everything they need from a single store. A survey
conducted by Information Resources, Inc. (2002) finds that 54% of shoppers pre-
fer one-stop shopping.
Variety Competition Between Formats
By definition, stores of the same format offer essentially the same range of product
categories, so we will consider variety competition only between formats.
3 Note that dollar stores reduce costs further through opportunistic buying, while hard
discounters offer private-label products almost exclusively.
200 Edward J. Fox and Raj Sethuraman
Trend: Growing popularity of broad-line retail formats. Retailers facilitate one-
stop shopping by offering a broad range of product categories. For example,
many consumers can now buy bananas, beer, frozen entrées, detergent, sham-
poo, blue jeans, television sets, and computers in the same store in which they
can fill prescriptions, get their nails manicured and their hair cut, do their bank-
ing, rent a video, and eat a hot meal. The increasing popularity of broad-line
retail formats such as mass merchandisers, supercenters, combination grocery
and drugstores, and warehouse clubs reflects consumers’ growing desire for
one-stop shopping.
Trend: Blurring of retail formats. In general, retailers add categories that will
increase store traffic. Examples include convenience stores and supermarkets of-
fering freshly prepared foods for immediate consumption; supermarkets and mass
merchandisers dispensing gasoline; grocery stores offering ethical drugs by adding
pharmacies; and bookstores opening coffee bars. Because only a few categories
can effectively drive store traffic, both traditional and nontraditional formats find
themselves with more and more categories overlapping, a phenomenon known as
format blurring.
Retail Assortment Competition
Just the Right Amount: Not Too Little, Not Too Much
When assessing consumers’ preference for product assortment, it is important to
understand that more is not necessarily better (e.g., see Broniarczyk, Hoyer
chapter in this book). Deeper retail assortments (stocking more items per cate-
gory) increase the time and effort consumers must expend when purchasing
from a category and can cause consumers to become confused or frustrated. On
the other hand, deeper assortments give consumers a wider range of items to
choose from, increasing the probability that they will find the item they want.
However, the items with widest appeal are the first to be included in an assort-
ment, so that each additional item added will appeal to fewer and fewer shop-
pers. The benefit of adding additional items therefore diminishes as the number
of items in the assortment grows.
For over a decade, the grocery industry has made reducing assortments a fun-
damental tenet of such cost-reduction initiatives as Efficient Consumer Response.
Research on response to assortment has yielded mixed results. Though reductions
in category assortments appear to have little or no negative impact on sales in the
categories affected, they may reduce shoppers’ willingness to patronize a store.
Thus, the primary risk of reducing category assortments is the loss of store visits,
not category sales. The question remains whether category assortments can be
profitably reduced, and if so, under what conditions.
Retail Competition 201
Within-Format Assortment Competition
Trend: Customizing assortments to meet local market preferences. It is well
known that retailers modify the depth and composition of their assortments on the
basis of demographics and other characteristics of households in their trade areas.
For example: grocery stores in markets with larger Hispanic populations offer
more authentic Mexican food items; drugstores in markets with more elderly
populations carry larger assortments of incontinence products while drugstores in
markets with more young children and families will carry larger assortments of
diapers; and department stores in trendier urban markets offer more haute couture
fashions. The practice of customizing assortments for individual stores is known
as micro-marketing. To the extent that assortments can be customized for individ-
ual stores cost effectively, micro-marketing is a valuable competitive weapon.
However, because micro-marketing is inherently ad hoc, we will not discuss it in
further detail here. We will focus instead on how the size of assortments systemati-
cally affects within-format competition.
The assortment size that consumers prefer reflects the tradeoff between the bene-
fit they enjoy from the availability of more items and the cost they incur when shop-
ping from a larger assortment. Because consumers’ opportunity cost of time drives
their cost of shopping, consumers with different opportunity costs will prefer
different assortment sizes (Briesch, Chintagunta, Fox 2005). To illustrate this point,
Figure 3 shows the difference in the assortment sizes preferred by consumers with
low shopping costs and high shopping costs. Consumers with low shopping costs
(because they have low opportunity costs of time) prefer larger assortments. Con-
sumers with high shopping costs (owing to high opportunity costs of time) prefer
smaller assortments. When the idea of opportunity costs is related to consumer
demographics (which are more easily measured), these findings suggest that stores
with trade areas that have higher wage rates, more working women, and more
single-parent households should offer smaller product assortments.
Between-Format Assortment Competition
Each format sells a different variety of categories, but may also offer different as-
sortment levels within categories. As a result, categories that are sold in two or
more formats are likely to have larger or smaller assortments in each. For example,
the assortment of carbonated beverages in a warehouse club store may be less than
one-tenth the size of the carbonated beverage assortment in the average supermarket.
There is evidence that shoppers’ preference for assortment varies by format
but is highly correlated with the assortment levels offered. In packaged goods
categories, for example, supermarket assortments are roughly twice as large as
mass merchandiser assortments, which are about twice as large as drugstore
assortments. Consistent with the actual assortments, consumers’ exhibit the
highest preference for assortment in supermarkets and are far less sensitive to
drugstore assortments (Fox, Montgomery, Lodish 2004).
202 Edward J. Fox and Raj Sethuraman
Fig. 2. Shopping Costs and Assortment Response
(Source: Briesch, Chintagunta and Fox 2005, p. 5.)
Prediction: Retailers will segment markets based on the purpose of the shopping
trip. Consumers’ preference for assortment is heavily dependent on the purpose of
the shopping trip. When stocking up, shoppers prefer stores that offer larger assort-
ments because the benefits of searching can be applied to a larger basket. For quick
trips, on which shoppers buy fewer items, smaller assortments are preferred. As a
result, stock-up trips are more likely to be made to supercenters and supermarkets,
while quick trips are more likely to be made to convenience stores and drugstores.
Currently, retailers segment markets primarily on the basis of customer-specific
factors (e.g., demographics) market-specific factors (e.g., weather; region of the
country), or store-specific factors (e.g., urban, suburban, or rural; presence or ab-
sence of competing stores). In the future, retailers will segment markets based on the
purpose of the shopping trip, implying that a shopper may be in the target segment
on some trips, but not on others. Wal-Mart’s new Neighborhood Market format is an
example of just that: its small-footprint stores attract quick trips, while Wal-Mart’s
supercenters are positioned for stock-up trips.
Prediction: Supermarkets will not reduce their assortments substantially. Trip-
specific assortment preferences have additional implications for the competition
between supermarkets and nontraditional formats. If supermarkets are to mount
an effective defense against the nontraditional formats, they must compete for
consumers’ stock-up trips, which represent a disproportionate volume of sales. If
Retail Competition 203
supermarkets were to cut their assortments substantially, they would risk relin-
quishing the stock-up trips to supercenters, warehouse clubs, and mass merchan-
disers. Cost savings from reducing assortments, which were promised by industry
initiatives like Efficient Consumer Response and category management, do not
justify this risk. Thus, supermarkets will not make substantial assortment reduc-
tions, at least not in the foreseeable future.
Retail Location Competition
Consumers Balance Convenient Retail Locations and Low Prices
Store location, perhaps the longest term decision that a retailer makes, is com-
monly considered the primary driver of retail competition. This is because conven-
ience is the most important factor in store selection, and stores located closer to
the consumer are more convenient. However, in order to locate its stores close to
consumers, the retailer must have a large number of stores, each serving a small
number of consumers. This means that scale efficiencies are lost (despite the prot-
estations of Metters, Ketzenberg, and Gillen 2000) and more convenient stores are
not able to offer prices as low as those in less convenient outlets. In other words,
spatial convenience usually comes at a cost. Retail properties themselves have cost
implications that affect pricing strategies and margins. For example, Wal-Mart’s
inexpensive rural store sites are an important component of its low cost structure.
The consumer’s store choice decision represents a balancing act between paying
high prices for goods in more convenient outlets and paying low prices for goods
in less convenient outlets.
Within-Format Location Competition
Open Issue: How much should stores of the same format agglomerate? Shopping
convenience is multi-faceted; for example, shoppers’ proximity to the store and
the possibility of one-stop shopping both contribute to convenience. Another fac-
tor is agglomeration – locating stores near one another – which allows “virtual”
one-stop shopping. The agglomeration of stores affords two benefits to consumers:
(1) They can fulfill different needs on a single shopping trip, such as dropping off
their dry cleaning, visiting a restaurant or café, doing their banking, shopping for
apparel, food, etc. This is known as multi-purpose shopping, and is an important
reason for agglomerating stores in shopping malls and retail centers. (2) Consum-
ers can also search across similar stores to maximize the value or quality of the
products they purchase. This second consumer benefit provides the rationale for
locating stores of the same format close together. This is quite common in some
types of retail, as suggested by the phrases “restaurant row,” “motor mile,” and
“red light district.” For packaged goods retailers, however, within-format location
competition is essentially a zero-sum game. The gains that one store realizes from
204 Edward J. Fox and Raj Sethuraman
agglomeration with stores of the same format are offset by the losses of other
stores. More research is needed to determine the conditions under which retailers
should locate their stores near other stores of the same format.
Between-Format Location Competition
Spatial convenience – the proximity of stores to consumers – depends largely on
the format (Fox, Montgomery, Lodish 2004). Drugstores typically have high mar-
ket penetration, so that each store serves a small trade area. Grocery stores have
only slightly lower market penetration, serving somewhat larger trade areas. Mass
merchandisers, supercenters, and warehouse clubs all have substantially lower
penetration levels, and stores of these formats serve proportionally larger trade
areas. The reader is reminded, that for the shopper who intends to buy a large
basket of goods, price looms larger than spatial convenience; if a smaller purchase
is planned spatial convenience is relatively more important than price (Bell, Ho,
Tang 1998). While consumers generally prefer more convenient locations, this
preference is therefore stronger for drugstores than for grocery stores, and stronger
for grocery stores than for mass merchandisers (Fox, Montgomery, Lodish 2004),
supercenters, or warehouse club stores.
Trend: Retailers are moving off the mall. Malls have prospered because locating
stores in a single shopping destination offers consumers the ability to satisfy multi-
ple purposes on a single trip and search across stores efficiently. Yet malls are fal-
ling out of favor with consumers, and retailers are therefore shifting their stores off
the mall. Examples include JCPenney and Bombay Company, both of which have
changed their real estate strategies to locate more stores off the mall, and Sears,
which has announced that it will close mall locations to open new stores on Kmart’s
sites off the mall (this was touted as a primary reason for Kmart’s purchase of
Sears). Why this off the mall trend? In part, because one-stop-shopping can be
accomplished more efficiently in the emerging large-store formats, such as mass
merchandisers and supercenters. The lower prices offered by these nontraditional
formats have also reduced the consumer’s return to price search. Furthermore, mall
real estate can be quite expensive, and many urban malls require gentrification.
Final Questions About the Future of Retail Competition
Before closing, we will address three compelling questions about the future of
retailing:
1. Will nontraditional formats be successful in penetrating urban markets?
2. Can Wal-Mart continue its current impressive growth rate?
3. Will major US retailers grow internationally, exporting successful formats
and operations to other countries?
Retail Competition 205
Open Issue: Will nontraditional formats successfully penetrate urban markets?
The low-cost business model of nontraditional formats benefits from the low real
estate and labor costs in rural and some suburban areas. It is therefore not surpris-
ing that mass merchandisers and supercenters have experienced nearly all of their
growth in such areas. However, the limited populations of rural markets mean that
they can support relatively few large stores, and nontraditional retailers are ap-
proaching saturation level in many of these markets. This raises the question of
whether urban markets represent a growth opportunity for these formats, particu-
larly in light of the rapid growth of dollar stores in these markets.
From the retailer’s perspective, the concentration of consumers in urban mar-
kets is attractive, and the density of these markets offers some benefits in transpor-
tation and distribution efficiency. However, real estate costs are high, and there is
very limited availability of sites with 100,000 square feet of space or more. Most
potential sites require stores to occupy multiple floors, which causes operational
problems for most nontraditional retailers. These real estate issues, along with
higher labor costs and taxes, represent major hurdles for low-cost operators. In
addition, consumers in urban areas have a stronger preference for spatial conven-
ience because of traffic congestion and the availability of many other shopping
outlets. Urban consumers are therefore less likely to prefer the widely dispersed
“big box” stores offered by most nontraditional retailers. Together, issues about
compatibility with their existing business model and consumer acceptance of their
formats call into question the opportunities for success of nontraditional retailers
in urban markets.
Prediction: Wal-Mart will continue to grow by expanding its grocery offerings,
and then …? Wal-Mart’s remarkable size – roughly 8% of all US retail purchases
are made at Wal-Mart stores, and 82% of US households shop there at least once
a year (Information Resources, Inc 2002) – and phenomenal history of growth
make its future decisions relevant for a wide range of retail competitors and
potential competitors. In the short term, its growth strategy is clear. In the US,
Wal-Mart’s capital expenditures will be focused on supercenters for the next
few years, after which it will roll out the Neighborhood Market format more
widely.4 Though the few Neighborhood Market stores currently in operation
have failed to generate supercenter-sized returns, the smaller store format con-
tinues to be prominent in Wal-Mart’s future plans. Rolling out a second format
with a full range of grocery items offers Wal-Mart two important benefits: (1)
the convenience of Neighborhood Markets enables Wal-Mart to attract quick
convenience trips from shoppers who stock up at supercenters, thus getting a
greater “share of wallet” from those customers; (2) another grocery format allows
Wal-Mart to exploit its already extensive food distribution infrastructure and
negotiating clout with suppliers.
4 Assumes no major legislation or regulatory constraints that limit Wal-Mart’s strategic
options.
206 Edward J. Fox and Raj Sethuraman
If the Neighborhood Market format is successful, Wal-Mart will achieve a
dominant share of the US grocery sector in the next decade. As growth in the gro-
cery sector slows and saturation is approached, can Wal-Mart’s growth rate re-
main in double figures? Any strategy aimed at achieving this would have to take
advantage of the company’s scale and operational expertise while targeting a sec-
tor that was sufficiently substantial to allow for meaningful growth. Within the
US, the most attractive opportunity might be the sale of automobiles. Despite Wal-
Mart’s less-than-successful pilot program of selling used cars in Houston, auto-
mobile retail nevertheless represents a compelling opportunity for the world’s
largest retailer. With over a trillion dollars in sales, it is the largest retail sector in
the US. It is also highly fragmented, with powerful suppliers (automobile manu-
facturers) administering a relatively inefficient channel. On the other hand, it is
uncertain whether Wal-Mart can adapt to the high-service selling environment that
predominates in automobile sales and also whether local and state regulators will
allow Wal-Mart entry into this sector. Yet if Wal-Mart could exploit its scale and
bring efficiencies to automobile retail, it could fuel the company’s growth for
another decade, both literally and figuratively.
Open Issue: How can major US retailers best expand internationally? Increased
local competition, limited domestic expansion opportunities, and the availability
of large, relatively under-served retail markets in developing counties are prompting
US and European retailers to seek growth abroad. Asia, Russia, and Eastern
Europe appear to be the most promising markets for the next decade. European
retailers, in particular Ahold and Carrefour, have been at the forefront of interna-
tional expansion, at least in terms of the percentage of sales generated from inter-
national markets. For example, 85% of Ahold’s sales in 2004 were international,
compared to 16–18% for leading US retailers Wal-Mart and Costco (A.T. Kear-
ney, Inc. 2004). Wal-Mart is committed to increasing international sales, with a
target of 33% of its revenue in the next few years, and Costco is planning further
expansion in Asia. Because of global demand for their services and operational
models that can, at least to some extent, be exported, we expect US retailers to
focus on international markets in the next decade.
The question, then, is not whether major US retailers will expand internationally,
but how they can do so most successfully. Specifically, we ask:
x What format(s) should they export?
x When should they enter these markets, as first mover or later entrant?
x What pricing strategies should they use?
The answers are not obvious. We would expect that low-price formats such as
hypermarkets and discount stores, with their associated cost advantages, should be
successful in price-sensitive developing markets. However, A.T. Kearney’s re-
search shows no correlation between the type of retail format and international
success (A.T. Kearney, Inc. 2004). Being an early entrant in an emerging market
Retail Competition 207
is advantageous because the most attractive retail locations go first – locations are
particularly important in emerging markets because of inadequate transportation
and infrastructure. However, being a first mover is inherently more hazardous,
because of uncertainties in these markets. In addition, prices offered by new en-
trants, may need to be lower than those of local competitors (for products of like
quality) initially in order to gain acceptance in the market. Yet such a penetration
pricing strategy could result in early losses, testing the resolve of retailers attempt-
ing to expand internationally.
In summary, in order to succeed in emerging international markets, retailers
have to be flexible in terms of format, time of entry, and pricing strategy. They
must also be able to keep costs low and possibly withstand initial losses. A few
major global retailers, notably Wal-Mart, Carrefour, and METRO AG, are well
positioned for international success because of their diversity of store formats,
deep pockets, and efficient cost management systems (see, for example, the chap-
ter by Mierdorf, Mantrala, Krafft in this book).
References
A.T.Kearney, Inc. (2004): Emerging Priorities for Global Retailers, Chicago: A.T.Kearney,
Inc. Marketing and Communications.
Bell, David R., Teck Hua Ho and Christopher S. Tang (1998): Determining Where to Shop:
Fixed and Variable Costs of Shopping, Journal of Marketing Research, 35 (August),
352-69.
Bell, David R., and James M. Lattin (1998): Grocery Shopping Behavior and Consumer
Response to Retailer Price Format: Why “Large Basket” Shoppers Prefer EDLP, Mar-
keting Science, 17 (1), 66-88.
Briesch, Richard A., Pradeep K. Chintagunta, Edward J. Fox (2005): Assortment, Price,
and Convenience: Modeling the Determinants of Grocery Store Choice, Working pa-
per. Dallas, TX: Southern Methodist University
Food Marketing Institute (2002): Trends – Consumer Attitudes and the Supermarket,
Washington DC: Food Marketing Institute.
Fox, Edward J., Richard Metters, and John Semple (2003): Every House a Warehouse: An
Inventory Model of Retail Shopping Behavior, Working paper, Dallas, TX: Southern
Methodist University.
Fox, Edward J., Alan L. Montgomery and Leonard M. Lodish (2004): Consumer Shopping
and Spending Across Retail Formats, Journal of Business, 77 (2), S25-S60.
Information Resources, Inc. (2002): IRI Insights on Channel Differentiation, Chicago:
Information Resources, Inc.
Metters, Richard, Michael Ketzenberg and George Gillen (2000): Welcome Back Mom and
Pop: Big Retailers Are Starting to Think Small Again, Harvard Business Review, 78
(3), 24–26.
Sethuraman, Raj (2003): Measuring National Brands’ Equity over Store Brands, Review of
Marketing Science, 1 (2), 1-26.
Sethuraman, Raj and A. Parasuraman (2005): Succeeding in the Big Middle through Tech-
nology, Journal of Retailing, 81(2), 107-111.
208 Edward J. Fox and Raj Sethuraman
Singh, Vishal P., Karsten T. Hansen, and Robert C. Blattberg (2004): Impact of Wal-Mart
Supercenter on a Traditional Supermarket: An Empirical Investigation, Working paper,
Pittsburgh, PA: Carnegie Mellon University.
Top 150 Annual Industry Report (2004): DSN Retailing Today, 43 (13) 30-38.
Troy, Mike (2004): Sales Rise 6.5%, Lending Credibility to Rebound, DSN Retailing To-
day, 43 (13) 15.
PART III:
Trends in Retail Management
PEOPLE
New Challenges in Retail Human Resource
Management
Julia Merkel1, Paul Jackson 2, and Doreén Pick 3
1 METRO AG, Duesseldorf, Germany
2 University of Coventry, UK
3 University of Muenster, Germany
Why Do We Need Professional Human Resource
Management in Retailing?
Such terms as globalization, process management, and value-based management
dominate the current discussion of management in retail companies. There has
been an increasing realization that people are one of a company’s key assets. Re-
tail means working and serving customers in a direct, personal way. This calls for
special actions from retail companies to fulfill the demands of an increasing num-
ber of well-informed and sophisticated consumers. In view of all the changes in
both national and international contexts, it is absolutely essential to have the right
people if a business is to be successful and sustainable.
Retailing is a major labor-intensive industry sector. Therefore, companies are
continually challenged to re-organize and adapt their structures to become more
efficient. The necessity for part-time workers, because of long store opening hours
and peaks in the trading day/week, requires a flexible framework to optimize labor
processes. Emotionally, the workforce needs orientation and vision in changing
times. Human resource management (HRM) has to provide a “coach,” not only to
organize, but also to support employees and management mentally and profes-
sionally in fulfilling their tasks in terms of future company goals. People are the
driving force behind all transactions that occur in retailing outlets. In the future
world of retailing, there will be an increasing need to adapt and change towards a
more formative and proactive style of HRM.
212 Julia Merkel, Paul Jackson, and Doreén Pick
Changes
Changes in Retail
The formats of retailing have been evolving continuously over the last 100 years,
and individual retailers have changed tremendously in the products they sell and in
the manner in which they operate. Retailing of lifestyle products impact directly
the changing culture of our societies – one has only to think of the introduction of
the Sony Walkman or the Apple iPod to grasp the international range of consumer
needs. In order to provide an expanding product and service range, retail has had
to alter and amend its approaches to satisfy ever more voracious and increasingly
sophisticated consumers. For several years, retailers have had a prominent role in
today’s society in their capacity as employers: the retail industry employs one in
nine of the UK workforce, for example (Gilbert 2003). Nearly two thirds of em-
ployees are female. Therefore, special concepts in HRM are required to allow for
the compatibility of work and family. Gilbert (2003) also points out that: “[T]he
retail sector has had a reputation for not supporting its employees and for having
lower pay and longer hours than other sectors.” Future HRM has to find a practi-
cal approach that will lead to the right balance of companies’ and employees’
needs in terms of payment and hours for the workforce, and service guarantees for
their customers. The developments in many European countries show the chang-
ing attitudes of young university graduates for whom retailing now provides mod-
ern and attractive career prospects. However, retailing is still far from the first
choice for top graduates and this needs to change.
Environmental factors such as economic, social, political, cultural, and demo-
graphic developments are driving the rapid changes in the retail business. Retail
management and HRM departments have to be aware of all these changes. Some
of the environmental factors are described below.
New Forms of Trading
New trading formats have been the lifeline allowing businesses to gain and sus-
tain competitive advantage. New trading formats are constantly appearing at
both ends of the spectrum. Higher margin goods, sometimes even with designer
labels, have coexisted with the increasing demand for more aggressive pricing
such as that applied by hypermarkets, off-price retailers, and hard discounters.
Often, consumers switch from smaller local stores to supermarkets, and increas-
ing numbers of consumers are using new channels for Internet and TV shopping.
The international press reports the continuing success of new forms of online
retailing (e-tailing) in Europe and the USA, as well as rapid changes in Eastern
Europe and Asia in use of the Internet. Within these trading formats, new pro-
fessions, working careers, and functions are developing very fast. To succeed,
HRM has to recognize and manage these changes in retailing human resource
requirements. Exchange of knowledge is one of the basic prerequisites: For ex-
New Challenges in Retail Human Resource Management 213
ample, the German retailer METRO Group is installing software that will allow
knowledge sharing with systematic transfer of all necessary information and
skills to Metro sites throughout the world. It is imperative for a retailer to collect
and structure all experience and knowledge from different staffs, stores and
country-markets. The challenge in the future for retail company management in
general and HRM in particular will be to ensure that the right knowledge is
available at the right time and in the right place.
Consumer Behavior
Closely aligned with the expansion of new trading formats are the changing needs
of consumers. Increasing social acceptance of women in the labor force has led to
the emergence of a new lifestyle and changed consumer purchasing patterns over
the last several decades (Gilbert 2003). Present-day consumers are more experi-
enced, more aware of their important role in the business, and more self-confident
than previous generations. Further, as international retailers have found out, there
is a great need for retail chains to adapt to “local” ways, so as to fulfill regional
needs and shopping habits, especially in the food business (e.g., see chapter by
Mierdorf, Mantrala and Krafft in this book).
Technology
Let us consider what retailing looked like 20–30 years ago: little or no EPOS tech-
nology, electro-mechanical tills, paper-driven accounting, checking and comptom-
eter systems, perhaps enhanced by a “Kimball tag” system to aid stock replenish-
ment. Thirty years ago there were not even many supermarkets – self-service was
just appearing over the horizon for some modern retailers in the 1960s and 1970s.
The advent of increasing computerization in the late 1970s started to affect busi-
nesses as they adapted to possibilities that began to open up through IT-supported
working practices. Processes for controlling, distribution, payroll, accounting and,
especially, merchandise management systems started to be automated during the
early 1980s. EDI, scanning, and bar-coding were implemented – after heavy IT
investments – to lower costs and increase accuracy levels. Many organizations were
downsized and refocused as these manual processes were converted to more cus-
tomer-focused activities and professional supply chain management.
Structural Trends and Competition
In Europe and USA, retailing is characterized by increasing rates of market con-
centration. This is caused by shareholders’ requirements for more cost-effective
operations, mergers among suppliers, and the growth of technology. Future retail-
ers have to be fast and flexible in making decisions about worldwide sourcing and
selling. This calls for people to acquire skills and competencies that will allow
them to compete successfully in both national and international contexts. Interna-
214 Julia Merkel, Paul Jackson, and Doreén Pick
tional HRM has to consider different ways of working with people: in many Euro-
pean countries, HRM departments have to cooperate with works councils, which
influence companies’ management thinking. HRM has the role of developing and
defining human working processes fairly and providing for capability-oriented
working conditions. Germany’s political debate about the consequences of capital-
ism in 2005 shows the need for companies to act and communicate on the basis of
consistent and balanced argumentation. HRM needs executives who are familiar
with developments going on in a society, shifts in cultural values and behavior. To
be competitive in global markets, many organizations reduce staffing levels and
change to automated processes to lower costs. Beyond this, however, more pro-
gressive retailers, such as Carrefour, Metro and Wal-Mart, have expanded their
offerings: they have invested heavily in new product ranges, new trading formats,
and joint ventures, or in shaping and spreading their brands. Merely cutting in-
vestments, e.g., in the sales force, or opening stores around the world per se is not
enough to meet the demands of the new retail age. A clear strategy, stable and IT-
supported processes, and correct allocation of financial and management resources
are needed for international success the future.
Globalization of Sourcing
Sourcing from overseas vendors gathered momentum with the conclusion of trad-
ing agreements with, for example, the People’s Republic of China and grants of
“favored nation” status. Manufacturing’s importance has decreased enormously in
most Western countries since the emerging Asian “tigers” and less expensive
Eastern European manufacturers began to dominate the supply of goods, espe-
cially, nonfood goods, to the industrialized countries. Consequently, in the West,
distribution has become one of the most promising sources of improved margins
as new technology drives down the cost of logistics. However, with globalization
of sourcing, it has become imperative to develop special strategies to enable the
headquarters workforce to be aware of international processes, markets, and com-
petitors. Further, domestic retail companies anywhere have to also stay on top of
emerging global trends. Companies that plan to enter new foreign markets have to
carefully consider local cultures, religious values, and national laws in developing
their new market entry strategies.
All the developments mentioned above are strongly interrelated. Retail man-
agement and HRM have to jointly examine all these changes to make adequate
and appropriate adaptations to organizational structures, systems, and processes.
Changing Role of HR Departments
HR departments – originally called payroll departments, then relabeled staff man-
agement, followed by another metamorphosis to personnel and then to human
resource management – have been in the vanguard of change management in re-
New Challenges in Retail Human Resource Management 215
tailing. Many companies have recognized that HRM is an essential component in
achieving long-term success, and not just a means of recruiting workers. Areas
such as the recruitment process, selection, induction, retention, performance moni-
toring and evaluations, staff training, development and motivation, decision mak-
ing, and re-sourcing for expansion will continue to demand the professionalism of
HRM workers.
Personnel in different kinds of businesses have to adapt and change in response
to emerging trends. The international HRM professional has to think globally,
while remaining able to fulfill local aspirations. This idea is based on Geert
Hofstede’s theory of cultures. He turned the well-known slogan, “Think globally,
act locally” into: “Act globally, think locally.” A major task of the international
HRM professional is to provide expertise in terms of interpretations of the local
laws and working practices, so as to offer practical steps for successful operation
of the international retailer.
Building the Future – HRM Challenges for Retailers
Retailing means working in a global context but simultaneously adjusting to
local needs. We describe below some international challenges to HRM in retail
which are connected with national and local requirements. As mentioned above,
major retail companies have decided to invest globally to ensure greater poten-
tial for sustainable growth. Several retailers have identified internationalization
as a huge opportunity for growth. In 2004, about 44% of the METRO Group’s
employees worked outside Germany. The American retail giant Wal-Mart,
France’s Carrefour, and United Kingdom’s Tesco are three more organizations
that are aggressively pursuing international expansion. This immediately gives
rise to questions that require answers in every area of operation. Answering
these questions is key to successful transformation of a national business model
into an international one.
HR strategy builds on the business strategy of the firm. The HR persons in
charge have to be business partners for management, providing strategic and
practical operational solutions in the form of HR concepts or staffing solutions
based on thorough knowledge of the business. Wal-Mart’s initial attempt at
expansion in Germany failed – as did Marks and Spencer’s – because neither of
these companies appreciated the nuances of German retail culture, underestimat-
ing local competition and, especially, the price sensitivity of German customers.
Carrefour’s forays into the United Kingdom likewise ended with a strategic
retreat. As long ago as in 1989, Dawson stated that: “Retail is a response to cul-
ture” – and the HRM function plays a crucial role in assisting corporate man-
agement understand and adapt to local cultures. For example, UK consumers’
resistance to the use of self-scanners provided by some retailers to reduce
queues at checkouts might have been anticipated by HR managers interacting
with local employees.
216 Julia Merkel, Paul Jackson, and Doreén Pick
Strategic Tasks of HRM: Key strategic tasks of human resource management of an
international retailer include:
x Assisting the retailer’s top managers who work well over 60 hours a week
negotiating myriad complex issues in a competitive marketplace, cope with
stress arising from quick changes, fierce competition, cost pressures, time
management problems, and the need to make quick decisions.
x Keeping up to date with continuously developing technology and being
able to optimize its usage so as to achieve the right balance between pro-
ductivity gains and service gains. HR needs to find answers to the follow-
ing question: How much technology can customers and the workforce han-
dle in the store?
x Dealing with demography, e.g. an aging workforce in Western Europe but
predominantly young and inexperienced employees in other areas of the
world, such as Asia and the Middle East. Strategically, this poses one of
the hardest challenges for HR professionals who are required to recruit and
develop talented staff, offer training for all age groups, ensure a well-
balanced age structure, and build up a working climate enabling employees
of all ages to buy in and show suitable results.
x Cross-cultural recruiting and training: All cultures have their own unique
practices and emphases, some of which are obvious while others are more
subtle and harder to detect. HR departments need to be able not only to of-
fer advice and professional preparation to local managers but also ensure
that individuals appointed to these positions are aware of company policies
as well as sensitive to the local culture. That is, in international settings, in-
dividuals need both a common language and intercultural sensitivity.
x Identifying and retaining highly qualified, highly motivated individuals ready
for international management appointments: The role of HRM is to provide
an international assignment policy that takes into account individual prob-
lems of expatriates, works around and supports family integration abroad.
Operational Tasks of HRM: Some key HRM tasks that have to be fulfilled to enable
the workforce to meet the needs of customers nationally and internationally include:
x Reshaping and restructuring the workforce so as to broaden their experi-
ence by the acquisition of new skills: Developments like automatic stock
replenishment, new methods of conducting transactions, and alterations to
the way goods are displayed, have increased retailer employee training re-
quirements. Also employees must learn to serve increasingly litigious con-
sumers while maintaining high productivity which is essential in high-
volume, low-margin enterprises. Professional human resource managers
must train employees on how to balance these oft-conflicting demands for
high staff-productivity and great customer service.
New Challenges in Retail Human Resource Management 217
•
•
•
•
•
•
•
HR Challenges
General Conditions
• Company Strategy
• Added Value Management
• Change Management
• Recruitment and Retention
• Employability and Lifelong Learning
• Corporate Governance
• Technology / IT Infrastructure
Fig. 1. Challenges and General Conditions for HRM
x The critical resource of most businesses is no longer financial capital, but
rather their employees (Barber, Strack 2005). Consequently, identifying and
gathering the data for human capital valuation and assessment of the return
on human resource investments is an important task for HR managers.
x HRM itself must develop, moving from being a “personnel” department to
its new role as a strategic business partner and building the basic structural
foundation that will enable companies to organize and optimize their return
on human resources.
The emerging trends that persistently need HR attention currently include some of
the areas discussed below. We make a distinction between HR challenges and gen-
eral conditions (Figure 1). In the case of HR challenges HRM has direct influence,
while general conditions are contingencies within which HRM has to operate. This
list is not exhaustive, but looks at some selected current trends and needs.
Current HR Challenges
x Company Strategy. HRM has to adapt its entire program to the company’s
overall vision and strategy. It is known that organizations with good human
capital management generally create substantially more shareholder value
than other companies. The significance of human capital is especially visi-
ble in the case of a merger. The success of a merger depends much more on
the competencies of the staff and management than on other aspects, such
as finance, IT, and production. Hax and Majluf (1991) feel that it is there-
fore essential for well-planned practices and highly efficient HR functions
to be aligned with the business of the company concerned. An HR strategy
must be “comprehensive” in the sense of addressing all the different per-
sonnel and HR activities central to the long-term development of the firm’s
businesses. HRM departments have to conceptualize and structure business
218 Julia Merkel, Paul Jackson, and Doreén Pick
plans with detailed operations extending from the current to the future state
of strategy, organization, and action. These must be based on the organiza-
tion’s mission and common values.
x Added Value Management. This confronts HRM with the critical question
of what actions add measurable value to the business. There is less cer-
tainty about the central direction and more about committed management
setting the right tone within the organization for defined values to flourish.
Commitment in the form of personal engagement and belief in the organi-
zation and its concepts is important. HRM has to support this by elaborat-
ing concepts and criteria for their evaluation, some of which should be re-
vised annually. The following behavioral aspects of the workforce should
be included in the HRM concept:
Personal Honesty and Integrity
Self-Motivation and Entrepreneurial Style
Ability to Communicate the Values and Benefits
Encouraging Others to Want to Work with the Company and Share Its
Values; Pride in the Company
Training and Developing, Coaching and Mentoring: Developing People.
x Change Management. The most important drivers for change are globaliza-
tion, technology, and a workforce that is increasingly knowledge-based.
Ulrich has stated that there is a need to redefine firms’ performance less in
terms of cutting cost and more in terms of profitable growth (Ulrich 1997).
Managers have to be able to make changes happen of their own volition
and also to support the company in its drive for sustained success. Manag-
ers have to be able to empower their own staff. Moss Kanter (1989) states
that it is only through true empowerment that staff will really contribute to
the changing needs of a business, since they will then be doing things be-
cause they understand them and for the right reasons, thinking and reflect-
ing on the changes and their likely impact, and above all feeling at ease
with the implementation of change. Change management recognizes the
need to reflect on the manager’s role in the management of change, the
identification of problems, and the ability to make changes in either a pro-
grammed or a nonprogrammed manner. HRM has to take account of the
risks required for the achievement of change in the company.
x Recruitment and Retention. Employee recruitment and selection is one the
most vital HR functions. However, the retail industry is faced with difficul-
ties in attracting highly educated people. Nonetheless there is a positive trend
for change. The challenge for HRM is to show the attractiveness of the retail
sector and ensure that appropriate training and careers are available, so that
this sector can take a leading place in the competition for available talent. Re-
tail has recently been promoting opening up access to its workforce by de-
clared rejection of discrimination on the grounds of gender or race, and,
New Challenges in Retail Human Resource Management 219
lately, also by employing more elderly persons. It is also necessary to build
up programs for part-time workers. The ability to value diversity within the
workforce is a strength, provided that this is backed up by continuous train-
ing and correctness. Many organizations run courses on this aspect, usually
under the title of “Increasing Self-awareness,” as the ability to understand
one’s impact on others is a powerful skill. Next, retention focuses on the goal
of keep well-performing staff in the company. This depends not only on in-
teresting work, fair compensation, and a motivating climate and management
culture, but also on transparent and achievable career paths combined with a
supportive management that provides guidance.
x Employability and Continuing Education. This is a major area of challenge
to most employers, but especially those who employ large numbers of staff,
as retailers do. Staff have to take retraining in order to adapt to a constantly
changing external environment. It is a question of mind-set, working envi-
ronment, and attitude towards self-responsibility. The future will be charac-
terized by the following needs, amongst others:
The need to handle increasing complexity.
The need for continual enhancement of the management skill sets known
as “Life-Long Learning,” i.e. the ability to adapt to changing environ-
ments, challenges and technology.
The need for a positive attitude to newly emerging opportunities: Manag-
ers themselves have to become life-long learners. This is of particular im-
portance to the changing generations. The process can be aimed, for ex-
ample, at obtaining further business qualifications, such as an MBA, a
marketing diploma, or HRM qualifications, or attending training courses
on key skills, such as leadership, or personal development workshops.
Some universities are now offering master’s degree courses on work-
based learning in which projects are directly related to the learning envi-
ronment of the individual student’s workplace. Analysis of actual work
problems can be counted as a credit toward an MA or a MSc. Classroom
training fostering positive acceptance of new structures, topics, and tech-
nologies is necessary.
The need to communicate regularly and precisely, and transmit meaning
and values: While the company will provide support, it will be the indi-
vidual managers who have to “drive” their own learning and that of others
in periods of intense change, often using technology such as video con-
ferencing or E-learning / blended learning to pursue their studies. HRM
needs to consult with managers on how best to use modern methods.
The need for creative management: This can be the way to bring new in-
sights into common view or to introduce new issues as an area for the
HRM specialist to develop. Many managers are locked into their own re-
ality or their own version of their world, allowing themselves to be
trapped into a mind-set of either success or self-perpetuating failure. One
220 Julia Merkel, Paul Jackson, and Doreén Pick
of the keys to successful business growth is for managers not to allow
themselves to be trapped in a “psychic prison” (Morgan 2001) of their
own making, causing them always to see retail in one dimension only.
Current General Conditions
x Corporate Governance. The recent case of Enron and the difficulties faced
by retailers such as Sainsbury suggest that the governance of these organi-
zations was grossly at fault in permitting the excessive amounts of power
vested in their chief executive officers (CEOs). The nonexecutive directors
seem to have abdicated their duties in not restraining the CEOs in their
riskier schemes. Expansion, absolute power, soaring costs, and misinterpre-
tation of facts and figures appear to have gone unchecked and a tacit acqui-
escence to have been entered into, presumably with the goal of presenting
stakeholders with a picture that was more positive than the reality. As the
impact of the backlash is always difficult to predict, it is likely that HR di-
rectors will become more closely involved in the careful examination of
candidates’ integrity and suitability for high office. It is likely that this will
slow the decision-making process within the board environment, but it
might be a small price to pay for a more responsible environment acting in
the best interests of all parties. HRM needs to motivate the entire staff of
their company, to observe and evaluate the “political” situation within the
company, and to react in an appropriate way that can influence the re-
tailer’s level of success. HRM has the opportunity, and therefore the duty
to support and communicate national and international codes.
x Technology/IT Infrastructure. In some of the new and emerging markets
management has to decide whether to implement a total system with all
branches totally aligned with the parent company. It can be prohibitively
expensive for a branch at the periphery of the organization to lock into a
global IT infrastructure that is geared to operations in Western countries
where labor costs are very much higher. Retailers operating internationally
rely on common platforms and IT structures; the decision to be made is
when is the time right for investments?
A major change in retailing in the future will be the worldwide use of
RFID technologies. The success of the METRO Group in developing and
running their “Future Store” in Rheinberg as a tightly controlled experi-
ment has had a strong impact on the application of new technologies in
“real business,” since Metro has shared the results with industry and with
its suppliers, as well as its IT and logistics providers (see, e.g., chapter by
Kalyanam, Lal and Wolfram in this book). The scientific research involves
customers’ reactions to the new shopping methods, and also staff training in
the use of intelligent technologies and introductions to available information
and changing processes for customers.
New Challenges in Retail Human Resource Management 221
In conclusion, there has been, and continues to be, a great deal of activity sur-
rounding staff appraisal. The management of progression, or performance moni-
toring, continues to exercise HRM professionals, who wish it to be as fair as pos-
sible to individuals, but also want the company to obtain maximum benefit from
the exercise. While the strategy should be systematic, it also needs to be continu-
ous, with a fully implemented set of key metrics. A full look at each individual’s
future, which can be a position as well as a set of personal goals, should be carried
out at regular intervals. HRM professionals must ensure that line managers can
perform this function.
Next, we discuss approaches that address current HR challenges in retailing.
HR Challenges
General Conditions
• Company Strategy
•
A
dded Value Management
• Change Management
• Recruitment and Retention
• Employability and Life-long Learning
• Corporate Governance
• Technology/ IT Infrastructure
Structure
Motivation
Fig. 2. Approaches to Challenges and General Conditions for HRM
Approaches to HR Challenges in Retailing Practice
Building Up and Keeping Motivation
As indicated in Figure 2, HRM has to ensure that the workforce is motivated and
trained to satisfy consumers’ needs. Retailers have to develop the employee value
proposition. This means an attractive position with the fulfillment of employee
needs and expectations and achievement of a good, unique image in terms of re-
cruiting and keeping human capital. We list below some approaches to retaining
an adequate sales force. HR quality cannot be assured without investment. Such
investment has to be justified in economic terms and must therefore be constantly
monitored:
x Planning the HR costs and expenditures for the annual business budget and
forecasts
x Supplying key data needed for planning the workforce at all levels and
providing benchmark data on key performance indicators, such as average
working hours per store opening hour, turnover per working hour, profit
per working hour
222 Julia Merkel, Paul Jackson, and Doreén Pick
x Elaboration of systems to measure the work involved in and results of HRM
(training investment per employee, rate of internal job placements, etc.)
x Providing common and communicated values of the company to give the
workforce a strategic framework and common mind-set
x Creating a transparent internal job market
x Offering the staff a perspective for the future and clear career paths
x Flexible models of working times, such as part-time working concepts, an-
nualized hours contracts, and balancing of profession and family with the
aid of sabbaticals
x Ensuring adequate processes, tools, and budget to allow for members of the
workforce to achieve their objectives and ambitions
x Continuing education of executives and employees within actual training
programs and a corporate university
x Training the workforce in soft skills and mentoring to ensure proper align-
ment of their values with the company’s values and beliefs
x Initiation of an employee suggestion / inquiry system to improve the proc-
ess of cooperation
x Recruitment of talented graduates from exchange programs with universi-
ties worldwide
x International education within internal exchange programs, with partici-
pants from different countries
x Apprenticeships and educations in new professions to build up the best
workforce
x Sharing company success with employees (incentive systems at all staff
levels, based on parameters that are accessible to employees)
x Offering fringe benefits, such as discounts for shopping at the employer’s
stores, company cars, equity programs, retirement arrangements, company
nursery/kindergarten, and other social benefits.
The Future of HRM and Final Remarks
Most employees spend a substantial amount of time at work. Some people there-
fore consider their job decisions on joining a retail company or some other industry
in the context of social environment. HRM has to keep an eye on such constraints,
as the retail trade is anxious to attract the best employees. Future HRM will con-
centrate on supporting management and workforce and outsource administrative
tasks to contractors. In future, there will be more intensive collaboration and
networking with external parties. Professions in retail, such as that of IT specialist,
New Challenges in Retail Human Resource Management 223
are developing. HRM must also place greater emphasis on ethical working condi-
tions, safer working environments, and equal-opportunity policies (ending sex/age
discrimination, inclusion of minorities, etc.). In any company, HRM has to build
up trust and commitment among all persons working in that organization. Contin-
ued reliance on traditional processes is definitely no longer a recipe that promises
much success. HR management has to assure fast and market-oriented actions that
are appropriate to complex market situations.
HRM will have to set priorities on the HR strategy and its realization, but will
be viewed on the operational side more in the role of a service center. In future,
the issue of management development will gain even greater importance.
To sum up, HRM has to be aligned with the business strategy of the company,
to work in keeping with all of its corporate objectives, and to be prepared not only
to help in implementing all changes necessary but also to instigate and be at the
vanguard of change programs. Further, HRM should be aware of employee inter-
ests within the organization yet conscious of its place as the “power house” when
controversial business decisions, such as downsizing, have to be implemented.
Lastly, it plays a key role in ensuring that constant retooling and retraining takes
place in the operation to meet ever-evolving challenges. Life-long learning should
be an integral part of any business, to enable it to respond to its rivals’ activities
with fresh initiatives within the company.
HRM specialists have to ensure the long-term performance of “their” retail or-
ganizations. It is a big challenge for HRM to meet the future needs, and the task is
wide ranging. How well HR managers perform their function will determine
whether a retailer registers a sustainable success in the future. We have tried to
show in this chapter the comprehensive and central role of HRM in retailing. Re-
tail has been and will continue to be an exciting field of business throughout the
world. The main function of the retail sector is to work with and for people all
over the world, so that retail has the chance to give people interesting and fulfill-
ing workplaces.
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60-73.
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ish Journal of Management, 12, 253-266.
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search. International Review of Retail, Distribution and Consumer Research, 10, 119-
148.
Gilbert, D. (2003): Retail Marketing Management, 2nd edition. Prentice Hall.
Hax, A. and Majluf, N. (1991): The Strategy Concept & Process. A pragmatic Approach,
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224 Julia Merkel, Paul Jackson, and Doreén Pick
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London: Kogan Page, Social Science Research, 24, 28-62.
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Tomorrow’s HR Management, edited by Dave Ulrich, Michael R. Losey et al., 354-360,
John Wiley & Sons.
PRODUCT
Retail Assortment: More Better
Susan M. Broniarczyk and Wayne D. Hoyer
University of Texas at Austin, USA
Product assortment strategy is a central yet complex issue for retailers. Retail
product assortments have undergone drastic changes in the past decade from un-
paralleled large assortments in the early 1990s to the current emphasis on stream-
lined, efficient assortments. The purpose of this chapter is to provide guidance to
retailers making these important assortment strategy decisions.
Consumer assortment perceptions have been shown to be one of the top three
criteria, along with location and price, in determining retail patronage. In the
1980s and early 1990s, retailers assumed that larger product assortments better
met consumer needs. Broad assortments should increase the probability that con-
sumers will find their ideal product and offer flexibility for variety seekers. Thus,
in an effort to serve the customer, the number of products offered in supermarkets
escalated from 6000 stockkeeping units (SKUs) in the 1980s to over 30,000 SKUs
in the early 1990s. However, the Food Marketing Institute issued two imperative
reports that called this increasing assortment into question. First, these broad as-
sortments resulted in higher inventory costs and more out-of-stocks for retailers
(see Verhoef & Sloot chapter in this book for further information on out-of-
stocks). Second, these higher costs made it difficult for conventional supermarkets
to compete against the growing retail formats of discount stores, warehouse clubs,
and supercenters.
As part of its 1993 report, the Food Marketing Institute conducted a field study
in which it reduced SKUs in six product categories (cereal, pet food, salad dress-
ing, spaghetti sauce, toilet tissue, and toothpaste) at 24 test stores. Redundant
SKUs were eliminated and shelf space was held constant, with more space now
allocated to high-market-share items. Importantly, the results showed no signifi-
cant negative impact of SKU reduction on sales. In other words, this initial evi-
dence suggested that efficient assortment might result in cost savings without loss
of sales. However, it was difficult to draw definite conclusions as the magnitude
of SKU reduction in these categories was vague.
In another series of in-store studies, Dreze, Hoch, and Purk (1994) examined a
10% reduction of low-volume SKUs in eight test categories over a 4-month period.
226 Susan M. Broniarczyk and Wayne D. Hoyer
Their shelf-reset procedure was similar to that in the Food Marketing Institute study,
with shelf space held constant and freed-up shelf space reallocated to high-volume
SKUs. Across eight categories, they found that sales increased by 4% for 30 test
stores compared with 30 control stores. These results began to indicate the possibil-
ity that smaller assortments might even have a positive effect on sales.
In the remainder of this chapter, we review recent research that further ques-
tions the conventional wisdom on assortment and shows that more product as-
sortment does not necessarily lead to a better shopping experience. The chapter is
organized around four research questions: (1) How do consumers perceive assort-
ment? (2) How should assortments be organized? (3) How does assortment affect
consumer product choice? and (4) How do marketing mix variables interact with
assortment?
How Do Consumers Perceive Assortment?
Assortment is traditionally defined as the number of SKUs offered within a single
product category. However, consumer perceptions often differ from objective
reality. Although the aforementioned studies examined the impact of SKU reduc-
tion on sales, they did not provide any insight into how consumers actually per-
ceived assortment. In a seminal paper, Broniarczyk, Hoyer, and McAlister (1998)
reported that assortment perceptions were influenced by three factors: (1) the
number of unique SKUs offered, (2) the heuristic of the total space devoted to the
category, and (3) the availability of a consumer’s favorite SKU.
Assortment Dimensions. In keeping with the traditional definition of assortment,
the number of unique items offered was directly correlated to consumer assort-
ment perceptions. However, consumer assortment perceptions were found not be a
one-to-one function of the number of items offered, as consumers do not process
assortment information in a great amount of detail. Instead, their laboratory stud-
ies conducted by Broniarczyk et al. (1998) showed that consumers were not sensi-
tive to a SKU reduction by 25–50% in the popcorn category if the size of the shelf
space was held constant and their favorite item was still available. In fact, con-
sumer perceptions actually increased following a 25% SKU reduction if shelf
space was held constant. This increase in assortment perception was due to popu-
lar SKUs being duplicated, which made it easier for consumers to find their favor-
ite products. This finding leads Broniarczyk et al. (1998) to suggest that consumer
assortment perceptions have both a cognitive dimension (total number of SKUs
offered, size of category space) and an affective dimension (availability of favor-
ite, ease of shopping).
Broniarczyk et al. (1998) confirmed this multi-dimensional view of assortment
perceptions in a convenience store field study. The leading five product categories
(accounting for 80% of sales) were subjected to a 54% SKU reduction at two test
stores, and assortment perceptions in the test stores were compared against those
Retail Assortment: More Better 227
in two control stores. In-store intercepts with customers revealed no change in
assortment perceptions, but customers did report that it was now easier to shop. In
addition, overall sales increased by 8% in one of the test stores and by 2% in the
other. Thus, substantial SKU reduction was shown to have positive affective con-
sequences without negatively affecting consumers’ cognitive perceptions of as-
sortment.
Product Dissimilarity and Attribute Dispersion. Two follow-up papers further
developed our insight into how consumers perceive assortment by specifying
mathematical models of consumers’ cognitive assortment perceptions. Hoch,
Bradlow and Wansink (1999) modeled the assortment of a product category as the
dissimilarity of product pairs (i.e., product-based approach). In an experimental
test of hypothetical products, attribute differences between SKUs were found to
have a substantial impact on assortment perceptions. Uniqueness of product pairs
was found to be critical, with assortments containing duplicates severely penal-
ized. However, it is important to point out that there are diminishing returns to
increased uniqueness. Adding a unique feature to one of two products will have
more of an effect on pair similarity if the products are currently identical than if
they already differ in multiple attributes. That is to say that beyond a certain point,
adding further attribute differences between product pairs has no additional as-
sortment benefit.
Van Herpen and Pieters (2002) use an attribute-based approach to model the
assortment of a product category as a function of the dispersion of attribute levels
across all products in the category and the correlation between product attributes.
An assortment is varied to the extent that attribute levels are dispersed and a low
level of association exists between attribute pairs. For instance, the four products
black cotton sock, black nylon sock, white cotton sock, and white nylon sock offer
greater assortment than the four products two black nylon socks and two white
cotton socks. In the latter set, the attributes of color and fabric material are per-
fectly correlated, thereby reducing assortment. The model of Hoch et al.(1999)
would make a similar prediction, as the latter set also increases the number of
product duplicates. Although different conceptually, the product pair dissimilarity
model of Hoch et al. (1999) and the attribute-based model of Van Herpen and
Pieters (2002) have been shown to be mathematically similar when accounting for
assortment size. Both models have received empirical support in laboratory ex-
periments, but would benefit from further validation in the field.
Brand-Size Effects. Boatwright and Nunes (2001) did examine SKU reductions in
the field, in an on-line grocer’s assortment. Specifically, they found that an aver-
age of 56% SKU reduction in 42 product categories did not affect sales (Boat-
wright, Nunes 2001). They found that retailers could trim brand-size combinations
while maintaining the total number of brands and sizes offered in the assortment.
Consider an assortment of six products: brand A in size X, size Y, and size Z and
brand B in the same three sizes. This assortment could be reduced to four products
with all attribute levels maintained by brand A offering sizes X and Y and brand B
228 Susan M. Broniarczyk and Wayne D. Hoyer
offering sizes Y and Z. This reduced number of items would be predicted to have
null or positive effects on consumer assortment perceptions as the dispersion of
attribute levels across products remains constant (Van Herpen, Pieters 2002) and
the dissimilarity between product pairs is increased (Hoch et al. 1999). However, a
note of caution: 60% of customers whose favorite SKU was eliminated reduced or
stopped their category purchases.
Summary and Implications. Retailers and manufacturers need to understand that
consumer assortment perceptions are not simply a function of the number of items
offered in the product category. A key principle is that consumer perceptions of
assortment are also a function of the similarity of the items in the assortment, the
size of the shelf display, and the availability of their favorite products.
The multi-dimensional nature of assortment perceptions implies that retailers
may be able to reduce the number of items offered without decreasing consumers’
perceptions of assortment. The threshold for reducing SKUs without adversely
affecting consumer assortment perceptions is likely to be dependent on several
factors. Key implications are: (1) There is an inverse relation between the initial
size of the assortment and the magnitude of SKU reduction on assortment percep-
tions (Van Herpen, Pieters 2002). This means that large SKU reductions are more
likely to decrease assortment perceptions when the initial assortment size is small
rather than large. (2) There is a link between distribution of SKU sales and magni-
tude of SKU reduction on assortment perceptions. If sales are uniformly distrib-
uted across products in the category a significant reduction in SKUs is likely to
make the favorite product unavailable for a large proportion of customers. How-
ever, if the majority of sales are driven by a few products (e.g., 80% sales are
driven by 20% of products), a reduction of low-selling SKUs will have minimal
adverse impact on the availability of customer favorites. For instance, in the con-
venience store field study, few customers reported that their favorite was unavail-
able following the 50% SKU reduction because the majority of products ac-
counted for a negligible portion of sales (Broniarczyk et al. 1998). (3)
Mathematical models offer guidance on strategic SKU reduction by identifying
products offering the lowest unique value to the assortment, such as redundant
brand-size combinations.
How Should Assortments Be Organized?
In addition to assortment perceptions, it has also been recognized that the manner
in which assortments are organized can have a significant impact on how consum-
ers process information. Prior research has clearly highlighted the fact that the
manner in which information is presented greatly influences the way consumers
process information about the brands. In particular, consumers tend to be con-
structive processors who adapt their decision-making style to the information dis-
play format. Thus, if information is organized by brand, consumers tend to process
by brand. If information is organized by attribute, consumers are more likely to
Retail Assortment: More Better 229
make comparisons across attributes. Researchers in marketing and consumer be-
havior have identified various key aspects of assortment organization that can
influence how consumers process assortment information.
Nature of the Display. A series of studies by Itamar Simonson and Stephen Nowlis
has examined how the nature of the display influences consumer processing. Side-
by-side displays favor brands with a lower price or with superior features because
the display makes it easy to compare the brands. Brands with high prices are better
served by separate displays that inhibit comparison (such as an end-of-aisle or pe-
rimeter display). In fact, Dreze et. al. (1994) found that location in the display is far
more critical than the number of facings. Brands in the middle of a display are more
likely to be compared and to influence perceptions of variety.
Organize by Brand or Model? Another way to organize assortments is by brand or
by model. For example, a retailer could either group all the models of a particular
brand together (e.g., Sony, Magnavox, etc.) or group all different types of models
together (e.g., all low-priced models together, mid-range models together, and
high-end models together). When options are organized by model or tier, consum-
ers are more likely to select the mid-line and top-of-the line brands (owing to a
tendency to avoid the cheapest brand). A study of yogurt found that organizing the
display by brand encouraged consumers to buy the same brand in different flavors.
However, organizing by flavor caused consumers to think about flavor first and
then buy different brands. Thus, a brand display encourages more brand loyalty,
while an attribute-based display encourages brand switching and variety seeking.
Ordering of Brands. Retailers can also determine the order in which brands and
information are processed. This is very easily accomplished in on-line environ-
ments, by controlling which brands are presented first. In store this can be accom-
plished by the position of the brands in the display (right-to-left and left-to-right,
as well as shelf level). Consumers can also develop internal ordering of products.
Research has shown that such ordering of information can have a big impact on
consumer evaluations.
For example, when consumers engage in limited information search, a declining
order (best to worst) leads to the most positive evaluations. This occurs because
consumers tend to see only the brands that are rated most positively. When a
search is extensive, however, evaluations are more positive for an increasing order
(worst to best). Exhaustive searching ensures that all the brands are processed
(especially the most positive ones at the end). Thus, it is clear the retailers should
consider the likely search patterns of their consumers in determining how the
brands are ordered.
How Well the Display is Organized. At the extremes, assortments can be either
well organized or rather disorganized. When the assortment is large, actual variety
is easier to recognize when assortments are organized. With small assortments,
however, organized assortments can actually make the lack of choice more salient.
230 Susan M. Broniarczyk and Wayne D. Hoyer
Further, if actual variety is increased in a disorganized manner, the disruptive
impact on consumers will be less than if it was increased in an organized manner.
Symmetrical vs. Asymmetrical Assortments. When assortments are asymmetrical
(i.e., some items appear more or less frequently than others) it is easier for con-
sumers to appreciate the variety in them than it is in a symmetrical assortment
(where all items are presented equally – Kahn, Wansink 2004). This occurs be-
cause low-frequency items carry more information and are rare compared with
those that are high in frequency and are therefore more redundant. This notion is
consistent with Hoch et al.’s statement (1999) that uniqueness of items in an as-
sortment is critical.
Comparability with Consumer Knowledge Structures. Assortment displays (either
in physical stores or on line) have the potential to be very complex as they contain
vast amounts of information. Consumers deal with this complexity by developing
an “internal structure,” which involves categorizing brands and information into
knowledge structures called “schemas.” For instance, when categorizing the prod-
uct category of popcorn, consumer A may organize the options around different
brands (Orville Redenbacher, Pop Secret, Jolly Time) whereas consumer B organ-
izes the options around different flavors (butter, low fat, cheddar). In a series of
studies, Morales et al. (2005) show that when a consumer’s internal structure for
the category matches the external structure of the shelf display the consumer is
more likely to perceive greater variety and be more satisfied with his/her choice.
Product schemas become more established in memory and play a stronger role
in information processing as consumers gain experience with a product category.
Thus, if consumers are very familiar with the product category, the internal
schema structure is likely to be strong and it is critical that the assortment organi-
zation be congruent with their prior knowledge. However, when familiarity with
the product category is low, consumers will not have well-developed schemas and
it is more important for the assortment structure to be congruent with their situ-
ational shopping goals (e.g., foods for a snack, foods to take to the beach).
Summary and Implications. Not only do retailers and manufacturers need to
determine the size of their assortments; it is also critical to evaluate carefully
how these assortments are organized. Our summary of research on this topic
identifies a number of key principles: (1) Side-by-side displays facilitate brand
comparisons, while separate displays are better for high priced brands. (2) Orga-
nizing by brand encourages consumers to buy by brand, while organizing by
model stimulates the use of other attributes such as price. (3) Evaluations tend to
be more positive when brands are in worst-to-best order. (4) Organized displays
are better for large assortments, but for small assortments they make the lack of
choice more apparent. (5) Asymmetrical assortments make it easier for consum-
ers to see the variety in an assortment. (6) It is important to align assortments
with consumers’ internal knowledge structures if consumers are familiar with
the product category.
Retail Assortment: More Better 231
How Does Assortment Affect Product Choice?
The previous section discussed how assortment organization affects consumers’
assortment perceptions and product choice. This section reviews recent research in
consumer behavior and psychology to further extend our understanding of how
assortment affects product choice. Across a wide range of products and service,
consumers report a desire for large assortments. Yet, the consumer decision-
making literature suggests that larger assortments may have negative conse-
quences.
Decision Difficulty. The information overload literature has shown that increasing
the number of product alternatives increases the cognitive load, thereby increasing
consumers’ decision difficulty. A large number of product alternatives also leads
to consumer confusion and lower consumer satisfaction with the decision process.
Increased cognitive effort further results in task-induced negative affect, with
consumers preferring to choose alternatives that are easy to evaluate. The decision
difficulty, confusion, and negative affect associated with large assortments may
lead consumers to walk away from the shelf display without purchasing.
Likelihood of Purchase. Iyengar and Lepper (2000) recently examined this dual
attraction/difficulty characteristic of large assortments. They found that large as-
sortments initially attracted consumers to the shelf display, but the decision diffi-
culty they encountered on trying to make a choice was demotivating, increasing
regret and leading consumers to walk away without making a purchase.
Specifically, in a series of studies, Iyengar and Lepper (2000) compared con-
sumer reaction to six options (small assortment) versus 24 options (large assort-
ment). In a field study in an upscale grocery store, they showed that consumers were
more attracted to a sampling station when it offered 24 varieties of jam (60% of
shoppers sampling) than when 6 varieties of jam were offered (40% of shoppers
sampling) even though extent of sampling was comparable in both situations (aver-
age of 1 or 2 jams). Consumers who sampled were then given a coupon that was
redeemable if they purchased a jam from the regular shelf display. Purchase likeli-
hood exhibited a strikingly different pattern, with consumers more likely to purchase
after sampling from the small (30% purchase) than from the large (3% purchase)
assortment. That is, although consumers were initially more attracted to the larger
than to the smaller assortment, they were actually less inclined to buy. As the num-
ber of options increased, consumers were less certain that they could select the best
option. Thus, most consumers did not make a purchase from the large assortment.
Even when consumers do choose to make a purchase from a large assortment,
there are still negative consequences from a broad product selection. In follow-up
laboratory studies, Iyengar and Lepper (2000) found that when consumers chose a
product from a large assortment they were less satisfied with their product choice.
These consumers experienced higher levels of regret over the idea that other, fore-
gone, options might have been more preferable.
232 Susan M. Broniarczyk and Wayne D. Hoyer
Moderating Factor of Consumer Expertise. Additional research suggests that large
assortments may cause more difficulties for some consumers than for others. In
particular, choosing from large assortments is likely to be more difficult for those
who do not possess well-defined product preferences (Chernev 2003). For these
consumers, choice is a two-stage process of first deciding their ideal attribute
combination and then locating the product in the assortment that best matches this
ideal. Deciding the ideal attribute combination is more overwhelming when faced
with a large than with a small assortment. Thus, consumers without well-defined
preferences fare better with smaller assortments.
Conversely, for consumers who have well-defined preferences, product choice
is a single-stage process of locating the product that matches their established
ideal. For these consumers, a large assortment increases the probability of finding
a match with their ideal. Thus, in a series of laboratory studies, Chernev (2003)
has shown that consumers with well-defined preferences in a product category
prefer large to small assortments.
Moderating Factor of Assortment Alignability. In addition to consumer individual
differences, the type of assortment may also affect consumer choice. The models
of both Hoch et al. (1999) and Van Herpen and Pieters (2002) showed that attrib-
ute dissimilarity increased assortment perceptions. This attribute dissimilarity can
be further specified as either an alignable or a nonalignable attribute difference.
Alignable attributes are defined as different levels of the same attribute, so that
consumers are making tradeoffs within an attribute. Nonalignable attributes, on
the other hand, involve comparisons among different attributes, so that consumers
are making tradeoffs between attributes. For instance, in computers, an alignable
attribute would be processor speed, which might vary from 1.60 GHz through 2.40
GHz and 2.80 GHz to 3.00 GHz. A nonalignable attribute would be computer
peripherals, which might range from monitor through printer and fax to speakers.
Nonalignable attributes are more likely to increase perceived assortment than
alignable attributes. However, Gourville and Soman (2005) show that increasing
brand assortments of nonalignable attributes can have a negative impact on brand
choice. They compared choice between two brands, one brand (brand A) offering a
single product option and the second brand (brand B) offering either a single product
option or five product options. When brand B increased its product assortment from
one to five options and the attribute differences were nonalignable, its market share
relative to brand A decreased from 53% to 40%. However, when the attribute dif-
ferences were alignable, the opposite pattern emerged. When brand B increased its
product assortment from one to five options and the attribute differences were align-
able, its market share relative to brand A increased from 53% to 73%.
There are several causal mechanisms underlying this differential effect of as-
sortment type on product choice. First, nonalignable assortments place a heavier
cognitive load on consumers than alignable assortments, as comparisons between
attributes are more difficult than comparisons across levels within an attribute.
Thus, consumers may choose to simplify their decision by selecting the brand
offering fewer options.
Retail Assortment: More Better 233
Second, nonalignable assortments have been shown to lead to higher levels of
regret than alignable assortments. When choosing between nonalignable attributes,
consumers with budget constraints must make a tradeoff between attributes. These
consumers are likely to experience a sense of regret about the options foregone: a
computer peripheral choice of a monitor, for example, means completely forego-
ing a printer, fax, or speakers. When choosing among alignable attributes, how-
ever, regret is minimized as the choice between levels of a common attribute (e.g.,
1.6GHz versus 2.0Ghz) still results in the consumer obtaining an item with that
attribute (e.g., a computer processor). Third, nonalignable assortments increase
consumer expectations more than alignable assortments. Even if only one periph-
eral is within a consumer’s budget, his/her ideal computer package may now in-
clude multiple peripherals (e.g., both a monitor and a printer). If this increased
ideal point is unrealistic (given the consumer’s budget constraints), it may deter
consumer purchase or, if consumers do purchase a single peripheral option, in-
crease purchase dissatisfaction.
Summary and Implications. Large assortments have several negative effects on
product choice. (1) Large assortments increase choice difficulty, increase negative
affect, increase regret, and decrease product purchase. (2) These negative conse-
quences have been shown to be more likely in consumers without well-defined
preferences. (3) These negative consequences are more likely for nonalignable
than for alignable assortments. Thus, if consumers do not have well-defined pref-
erences they are more likely to make a purchase from a smaller display offering
alignable differences between options. If consumers possess well-defined product
preferences they prefer a large assortment, as it increases their ability to find their
ideal. However, even for these consumers, a large assortment of nonalignable
attributes may increase expectations regarding the ideal product to a level that is
simply unattainable – leading to purchase deferral.
How Do Marketing Mix Variables Interact
with Assortment?
Assortment perceptions and decisions do not operate in isolation; rather, the influ-
ence of assortments on consumer information processing and decision making
may interact with other key marketing mix variables, such as price, store environ-
ment, region, and competitive considerations. Thus, it is important to examine the
interactive nature of these different variables. Unfortunately, however, the aca-
demic research attention devoted to this important topic has been rather sparse.
Assortment and Price. Some studies have examined the joint effects of assortment
and pricing. Since a key goal of product category management is to maximize
profit for the category, assortment and pricing decisions are inseparable. In fact,
according to McIntyre and Miller (1999, p. 296): “this joint decision is believed to
234 Susan M. Broniarczyk and Wayne D. Hoyer
be one of the most central problems in retailing.” Furthermore, pricing variables
often dominate assortment considerations. In one field experiment, assortment
manipulations had approximately a 5–6% impact on category profits, while in
another study (Dreze et al. 1994), price manipulations had a 32% impact on cate-
gory profit. Thus, it is clear that the pricing must be considered when making as-
sortment decisions (see also chapters by Simon, Gathen, Daus, and Bolton,
Shankar, Montoya in this book).
McIntyre and Miller (1999) propose an empirical approach for improving op-
timal assortment/pricing decision combinations. With this approach, retail shop-
pers are asked to provide information about their reservation prices for brands in
their consideration set. Then, a simple choice rule is developed to model and fore-
cast the sales of each item in the set given the stated prices. In an empirical test of
this model, this approach resulted in significantly more profitable assortments than
a constant markup rule or a regression approach. Note, however, that this model is
more applicable to high-involvement product categories. Research is still needed
to develop a model for common, frequently purchased product categories.
Assortment and Other Marketing Variables. A study by Koelmeijer and Oppewal
(1999) increased our understanding of assortment composition by modeling item
and store choice as a function of assortment, store ambience, price, and competing
store characteristics. Some key findings were that an increase in assortment size
generated additional purchases relative to the attractiveness of the items added and
reduced the likelihood that customers would go to another store. Further, having a
competing store nearby and poor store ambience will hurt a store’s drawing power
above and beyond assortment effects. While, the study examined only one product
category, its real contribution is that it provides a powerful tool for optimizing
retail assortments. Using this approach, retail managers can manipulate various
marketing mix variables and assortment options to determine the overall effect on
consumer choice as well as sales.
It is also important to note that both of the previously mentioned studies were
conducted in an experimental context. In the context of actual grocery store data,
studies have focused on how assortment overlap, price differentiation, and in-
terstore distance impact on the sharing of customers between stores. A key finding
is that assortment overlap and interstore distance are the key determinants of cus-
tomer overlap. The more similar the assortments of two stores, the more likely
they are to have the same customers. Not surprisingly, proximity of the stores
increases customer overlap. In addition, stores are more likely to be differentiated
on the basis of assortments and match their competitors’ prices on identical items.
Thus, based on this study, assortment decisions rather than price are critical in
differentiating a particular store and giving customers a reason to shop there.
Assortment and Regional Differences. Retailers have long recognized that assort-
ments must be adjusted by region to better meet customer needs. Clearly, having
distinctive assortments that appeal to specific customer groups is a key way to
achieve competitive advantage. However, because retailers have traditionally re-
lied on aggregate performance measures (i.e., gross margin, sales per square foot,
Retail Assortment: More Better 235
etc.) to evaluate performance of individual stores, regional differences may com-
plicate the assortment planning process. Retailers need to be able to measure mer-
chandise performance accurately at the individual store level.
To address this problem, Grewal et al. (1999) employ data envelopment analy-
sis (DEA) which enables retailers to plan and evaluate the performance of similar
stores. Essentially, the performance of individual stores is compared to “best prac-
tice” stores, which are similar in terms of certain characteristics (e.g., region, cate-
gories). Thus, similar best practice stores can be examined to determine which
assortments and practices make their stores successful. Mediocre stores can also
be examined in order to identify key ways to improve.
Assortment and Sales Promotion. Finally, a series of experimental studies have
highlighted the important interaction between assortment and sales promotion. For
example, the likelihood of switching from a low-quality, low-price brand to a
promoted high-quality high-price brand tends to be significantly greater than the
likelihood of switching from a high-quality brand to a promoted low-quality
brand. However, by manipulating assortment and adding another price tier (i.e., a
generic brand), retailers can eliminate this effect. Also, the number of items pur-
chased on a particular shopping trip can be increased by offering bundles of pre-
ferred items or encouraging the purchase of multiple items in a category through
the use of various promotions (see Gedenk, Neslin, Ailawadi in this book for more
information on retailer sales promotions).
Summary and Implications. Taking all these studies together it is clear that assort-
ment decisions must be viewed in the context of other marketing mix variables, such
as price, interstore distance, store ambience, and region. Considering this, marketing
mix variables need to be decided jointly to maximize profit for the product category
and the store. The key conclusions are: (1) assortment decisions must be made in the
context of pricing decisions; (2) having a nearby competitor and poor ambience will
have a negative impact above and beyond assortment effects; (3) similar assortments
and close proximity increase customer overlap between two stores; and (4) retailers
need to evaluate assortments by region and individual stores.
Summary and Conclusion
The purpose of this chapter was to review the main research findings and knowl-
edge on retail assortments. Table 1 summarizes these key findings. For years there
has been a strong belief among retailers that having more assortment is always
better. However, a key conclusion that can be drawn from this review is that this is
often not the case. Rather, having an optimal amount of assortment (which may
not be the largest) is more critical. Furthermore, our review demonstrates that
through selective reduction and proper organization, retailers can shrink the number
of products offered without lowering consumer perceptions of assortment. This is
236 Susan M. Broniarczyk and Wayne D. Hoyer
Table 1. Summary of Findings
How do consumers perceive assortment?
1. In addition to number of total items, assortment perception is a function of similarity of
items, shelf display size, and availability of favorites.
2. Large SKU reductions will decrease assortment perceptions more when initial assort-
ment is small than large.
3. If majority of sales are driven be a few SKUs, reduction of low selling SKUs will have
minimal impact on assortment perceptions.
4. Mathematical models offer guidance on the unique value of each item in assortment
and strategic SKU reduction such as redundant brand-size combinations.
How should assortments be organized?
1. Side-by-side displays facilitate brand comparisons whereas separate displays are better
for higher price brands.
2. Organizing by brand encourages consumers to buy by brand while organizing by model
stimulates other attributes such as price.
3. Evaluations tend to be more positive when brands are ordered from worst to best.
4. Organized displays are better for large assortments but for small assortments, make the
lack of choice apparent.
5. Asymmetrical assortments make it easier for consumers to see variety.
6. Aligning assortment organization with consumer mental representation is important.
How does assortment affect product choice?
1. Large assortments have negative consequences of increasing choice difficulty, negative
affect, and product regret.
2. Large assortments decrease purchase likelihood, especially for consumers without
well-defined preferences.
3. Negative consequences are more likely for nonalignable than alignable assortments.
How do marketing mix variables interact with assortment?
1. Assortment decisions must be made in context of pricing decisions.
2. Having a nearby competitor and poor ambience will have negative effect beyond as-
sortment.
3. Similar assortments and close proximity increase customer overlap between stores.
4. Retailers need to evaluate assortments by region and individual stores.
Retail Assortment: More Better 237
particularly the case when assortments for a category tend to be large and when
the majority of sales are driven by a few brands. Moreover, the positive benefits of
reduced assortments include a higher level of shopper satisfaction with their shop-
ping experience and a higher likelihood that customers will make a purchase from
small than from large product assortments.
In addition, we learned that the organization of product assortments is also very
critical. Retailers must carefully make a variety of important decisions, including
whether to place brands side – by side or in separate displays, whether to organize
by brand or model/flavor, how to order brands in the display (well-organized vs.
random displays, symmetrical vs. asymmetrical displays) and how to align dis-
plays with consumer knowledge structures.
We also found that large assortments increased choice difficulty, increase nega-
tive affect and regret, and decrease the likelihood of product purchase. This is
particularly the case when consumers do not have well-formed prior preferences
and when assortments are more nonalignable than alignable. Finally, we showed
that assortment decisions cannot be made independent of other marketing mix
variables, such as price, interstore distance, store ambience, and region.
Taking all this together, it is clear that there are a number of key decisions
which must be made in relation to product assortments. However, by carefully
analyzing each category and optimizing decisions in terms of the factors men-
tioned, retailers can significantly improve both category and overall store profit.
Technology such as RFID tags (see Verhoef and Sloot chapter in this book) will
facilitate such assortment management.
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Out-of-Stock: Reactions, Antecedents,
Management Solutions, and a Future Perspective
Peter C. Verhoef1 and Laurens M. Sloot2
1 University of Groningen, The Netherlands
2 Erasmus Food Management Institute, Erasmus University Rotterdam, The Netherlands
Introduction
In today’s competitive environment, service-oriented retailers are faced with one
important question: How can we deliver good service levels to our customers,
while becoming more cost efficient at the same time? Superior levels of service to
customers are necessary to differentiate these retailers from the strongly price-
oriented chains, such as Aldi, Lidl, ASDA, Wal-Mart, and Colruyt. One key dif-
ferentiator of service retailers is their assortment. In general, service retailers offer
more national brands than discounters, and also a wider variety of products. How-
ever, offering more variety in products and brands has two important conse-
quences. First, retailers are confronted with more costs in the supply chain, due to
higher inventory, procurement, handling, and warehouse costs. Second, more vari-
ety also increases the probability that out-of-stocks (OOS) may occur, which may
lead to customer dissatisfaction and (temporary) store disloyalty. As service retail-
ers strive to compete with discounters on service, OOS can severely jeopardize
their competitive position in the consumers’ mind.
It is therefore important for retail managers to manage their assortments in a
professional manner (see, e.g., Broniarczyk, Hoyer in this book). In managing the
assortment they must strive for an optimal assortment, which at the same time
creates customer satisfaction by offering the customers’ required products, reduces
supply chain costs, and minimizes OOS levels. The minimization of OOS levels is
not an easy task for retailers. However, it is very important, as gross margin losses
due to OOS are estimated at between $7 and $ 12 billion in the United States (An-
dersen Consulting 1996). Moreover, the aforementioned dissatisfaction that can
result may decrease retailers’ overall satisfaction scores, which are now regarded
as important indicators for future retailer profitability.
In this chapter we will focus on OOS. We will first discuss the OOS phenome-
non. Subsequently, we will focus on consumer reactions to OOS and the antece-
dents of these reactions. This is followed by discussion of some empirical findings
240 Peter C. Verhoef and Laurens M. Sloot
recorded in a study on OOS reactions in eight product categories. After that, we
provide some implications for retailers, and discuss methods of reducing OOS
levels and negative consequences of OOS. We will also discuss our ideas on the
future of OOS. In this future, the introduction and role of Radio Frequency Identi-
fication (RFID) is especially interesting.
Out-of-Stock, out of Business?
Out-of-Stock. Out-of-stocks of SKUs occur rather often in supermarkets. For
instance, AC Nielsen reports that in the Netherlands, 7% of the offered products
are OOS on the important shopping days Friday and Saturday. Corresponding
OOS percentages for other countries are 7% for France and 8% for the US (Ro-
land Berger Strategy Consultants 2002). OOS percentages in the US seem not to
be significantly lower than in other countries, even though such techniques as
electronic data interchange have been more widely implemented in the US than
in other countries. It is therefore not surprising that OOS is one of the most irri-
tating aspects of shopping for consumers. For example, EFMI calculated that the
expected loss of revenues due to OOS in the Netherlands is 175 million Euros,
or 0.7% of the yearly turnover of that country’s retailers. In Germany, revenue
losses due to OOS are estimated at 1 milliard Euros per year in the food retail
channel.
An OOS may occur for several reasons. For instance, it can happen that the
demand for a product is unexpectedly high or a store employee has ordered too
few products. Generally, OOS leads to a temporary unavailability of the product
concerned for the consumer. Thus, when the consumer is confronted with an OOS,
s/he would be aware that the product is unavailable for only a limited time period.
This contrasts with a brand- or item de-listing, for instance, in which case the
brand or item will never be available again.
Consequences of OOS. As already noted, OOS can have severe consequences for
retailers. These severe consequences arise because consumers may exhibit a nega-
tive response to OOS. OOS reactions can be classified into two clusters: (a) buy-
ing a substitute and (b) not buying a substitute during the store visit. From a re-
tailer perspective this classification is very interesting. When a substitute is
purchased the retailer will lose almost no sales. However, when a consumer de-
cides not to buy a substitute in the same store, sales are lost. Within these two
general reaction clusters six specific reactions can be considered:
a) Substitute purchased
1. Item switch: switching to another format or variety of the same brand;
2. Category switch: buying a substitute product from another product
category; and
3. Brand switch: buying another brand within the same product category.
Out-of-Stock 241
b) No substitute purchased
4. Store switch: going to another store on the same day to buy the item
that is OOS;
5. Postponement: postponing the intended buy until the next regular trip to
the store;
6. Cancellation: dropping the intended purchase completely or postponing
it for a longer period of time.
Brand, item, and category switch should have no negative consequences for the
retailer. In fact, a brand switch from a national brand to a private label may have
positive profit consequences owing to higher private label margins. Of the “no-
substitute” purchase reactions, store switch in particular is a rather negative con-
sequence for retailers. In the case of store switching, consumers visit another store
to buy the product that is OOS. In this competing store, consumers can also pur-
chase products in other categories which they would normally have purchased in
the store where the OOS occurred. Cancellation is also rather negative, as the
planned product is definitely not purchased in the store. The negative conse-
quences of postponement are less clear, as the postponed purchase may occur at a
later time. However, postponement may also imply cancellation. Moreover, post-
poning the purchase may also imply that the postponed purchase is finally actu-
ated in a competing store.
For a retailer, it is important to know the frequency of each of these reactions
relative to the others. In an OOS study in eight categories we found that the OOS
response of brand switching was the most common among our respondents (34%),
followed in declining order by postponement (23%), store switching (19%), and
item switching (18%) (for an extensive discussion see Sloot, Verhoef, Franses,
2005). In this study respondents mentioned the specific OOS reactions of cancel-
ing their purchase (3%) and switching categories (2%) less frequently. Thus, 45%
of the responses (postponement, store switching, and cancellation) imply not pur-
chasing a substitute. Moreover, 22% of the responses have direct negative sales
consequences for the retailer. This last figure re-emphasizes the importance of
minimizing OOS levels. Overall, brand switching is the most likely response,
postponement is the second most likely, while cancellation and category switching
are very rare reactions.
Differences in OOS Responses. In the past, several researchers have investigated
OOS responses. For an overview of these studies we refer to Sloot, Verhoef,
Franses (2005). A more detailed analysis of these studies reveals some interesting
exploratory results:
x cancellations and category switch are rare reactions to an OOS in all studies;
x consumers appear to be more likely to purchase a substitute in the cases of
nonfood products, such as detergents and tissues, than in the cases of food
products such as coffee and soft drinks; and
242 Peter C. Verhoef and Laurens M. Sloot
x in the case of an item OOS, brand switch occurs less frequently than when
the brand itself is OOS. That is, in the case of an item OOS, other items of
the (preferred) brand are still available. Thus, consumers still can switch
within the brand and purchase another item with the same brand name.
It is also important to note that the reported occurrence of the different OOS re-
sponses depends on the type of research design. Researchers have used natural
experiments with actual out-of-stocks, and survey studies, where consumers re-
ported what they would do in the case of a hypothetical OOS. Our analysis of all
these studies shows that “buying a substitute” is more often reported as a reaction
when the item is truly OOS than when the consumer is confronted with a hypo-
thetical OOS. This discrepancy in results can be attributed to the difference in
what people say (intend to do) and what they actually do.
These results seem to suggest that retailers should concentrate on reducing
OOS in food categories. It also suggests that retailers should select the research
design carefully when measuring potential OOS responses.
Antecedents of Consumer Reactions to OOS
In the retailing literature, several studies have investigated the antecedents of reac-
tions to OOS. Based on a review of this literature, we developed the general model
below which includes five clusters of variables that explain reactions to OOS (see
Figure 1):
x Brand-related antecedents;
x Product-related antecedents;
x Store-related antecedents;
x Situation-related antecedents; and
x Consumer-related antecedents.
Brand-Related Antecedents
An important brand-related antecedent is brand equity or brand strength. A brand
has high customer-based brand equity when consumers react more favorably to a
product with the brand identified than to one whose brand is not (Keller 2002). In
general, consumers value high-equity brands more than low-equity brands. Hence,
reactions that are negative for the brand, such as brand switching, occur less often
for high-equity than for low-equity brands. In hedonic product categories the effect
of brand equity may even be stronger, as in these categories brands have opportuni-
ties for building brand equity (Sloot, Verhoef, Franses 2005). Fast-moving consumer
goods retailers can use several measures for brand equity. For instance, one can use
market share or price premium as a proxy for brand equity. The advantage of using
market share as a measure is that it has easily adopted implications for the retailer,
e.g., try to minimize OOS for brands with high market shares.
Out-of-Stock 243
Brand Related Antecedents
-Brand Strength/ Equity
-Brand Loyalty
Store-related Antecedents
-Store Loyalty
-Number of Competing Stores
-Store Type
Situation Related Antecedents
-Buying Urgency
-Shopping trip
-Part of the week
-Personal Use of Product
Consumer Related Antecedents
-Shopping fun
-Store visit frequency
-Age
OOS-reactions
-Brand switching
-Item switching
-Category switching
-Store switching
-Postponement
-Cancellation
Product Related Antecedents
-Product type (hedonic vs utilitarian)
-Number of Available Brands
-Stockpiling
-Buying Frequency
Brand Related Antecedents
-Brand Strength/ Equity
-Brand Loyalty
Store-related Antecedents
-Store Loyalty
-Number of Competing Stores
-Store Type
Situation Related Antecedents
-Buying Urgency
-Shopping trip
-Part of the week
-Personal Use of Product
Consumer Related Antecedents
-Shopping fun
-Store visit frequency
-Age
OOS-reactions
-Brand switching
-Item switching
-Category switching
-Store switching
-Postponement
-Cancellation
Product Related Antecedents
-Product type (hedonic vs utilitarian)
-Number of Available Brands
-Stockpiling
-Buying Frequency
Fig. 1. Explaining OOS reactions
A second important brand-related antecedent is brand loyalty. Whereas brand
equity can be considered as a brand characteristic (that distinguishes between
weak and strong brands), brand loyalty can be seen as brand strength at the con-
sumer level. Many studies show that brand-loyal consumers are more likely to
switch to another item of the desired brand or switch stores to buy the preferred
item of the brand. Thus, retailers should aim to avoid OOS for brands with many
brand-loyal consumers. Note, however, that brand loyalty correlates with brand
strength measures, such as market share.
Product-Related Antecedents
Important product-related antecedents are the hedonic level of the product category
and the number of available brands in the category. In hedonic categories, such as
chips, beer, cola, and cigarettes, brands are more highly valued than in utilitarian
categories, such as detergents and margarine. Therefore, negative consequences for
the retailer of a brand being OOS occur more often in these categories. Similarly, the
negative consequences of an OOS brand are greater in categories with many avail-
able (differentiated) brands because each brand typically fulfills a specific need of a
consumer segment which cannot be satisfied by any of the available alternatives.
244 Peter C. Verhoef and Laurens M. Sloot
Conversely, the negative consequences for the retailer are reduced as the number of
available acceptable alternatives increases, that is, if the OOS brand can easily be
replaced by another competing brand available in the same store.
Another product-related antecedent of reactions to OOS is the stockpile ability
of a product. In the cases of those products that can be and are easily stockpiled at
home, e.g., coffee, detergents, and tissues, the most likely consumer reaction to an
OOS is postponement or cancellation of the purchase as the consumer can con-
tinue to consume his/her inventory of the product.
Lastly, OOS responses can also depend on the purchase frequency of products.
For products with a high purchase frequency, the purchase of an alternative, less
preferred item is not so unattractive for consumers. In these categories, they will
have to use or consume the less preferred item only for a short time period. How-
ever, for categories with a low purchase frequency the purchase of a different and
less preferred item will have more enduring consequences. As a consequence,
substitutes will be bought less often in categories with a low purchase frequency
than in categories with a high purchase frequency.
Store-Related Antecedents
In the literature, several store-related variables have been introduced as antece-
dents of OOS responses. For instance, store-loyal customers are more likely to
switch to another brand or item, rather than switch to another store to buy the pre-
ferred item or brand. Brand or item switching can also be expected to occur more
often when the number of available stores in the neighborhood of the store with an
OOS is low. The third variable is store type. In service supermarkets, consumers
face more extensive assortments offering them more alternatives. Hence, substi-
tutes are more likely to be purchased in these service supermarkets. However, we
might also reason that service supermarkets’ customers expect more service from
a supermarket. Hence, they will be more dissatisfied in the case of an OOS, which
might create more store switching.
Situation-Related Antecedents
Situation-related variables are those that relate to the consumer’s purchase situa-
tion. One such antecedent variable is purchase urgency. Consumers are more
likely to switch brands or items when the purchase is urgent. Also, the type of
shopping trip is relevant. We distinguish between trips for weekly purchases and
trips for daily purchases. Weekly purchases are rather time consuming. Hence,
consumers are less likely to extend this time by switching stores. Not only the type
of shopping trip, but also the part of the week when this trip is made is also impor-
tant. When the shopping trip is at the end of the week, consumers are less likely to
cancel the purchase of an OOS item than if it was at the beginning of the week
(which still leaves an opportunity to make the purchase at the end of the week).
Thus, retailers should attempt to minimize end-of-the-week OOS as otherwise
they might lead to permanent purchase cancellation rather than just purchase post-
ponement by a few days. A third situation-related antecedent of importance is
Out-of-Stock 245
whether or not the product is purchased for personal use. If it is purchased for
someone else or for a specific situation (i.e., party), consumers are less likely to
switch to a less preferred item or brand. For instance, if a consumer knows that
visitors coming to a party prefer a specific brand of beer, such as Heineken, War-
steiner or Budweiser, s/he will not be inclined to switch to another brand.
Consumer-Related Antecedents
Consumer-related antecedents of OOS reactions include consumer psychographics
and socio-demographic characteristics. For instance, researchers have reported
more store-switching among consumers seeking more shopping fun. Consumers
who like shopping do not mind visiting other stores as this has some value for
them. Another characteristic is store visit frequency. Consumers who often visit
stores will find it less difficult to postpone a purchase until their next visit, which
will probably occur the next day. Finally, OOS responses are affected by age.
Older consumers tend to have more time available than younger consumers.
Hence, older consumers are generally more inclined to switch to another store
than younger consumers.
Some Empirical Findings
We studied the appearance of OOS reactions in eight product categories [for an
extensive discussion see Sloot, Verhoef, Franses (2005) and Sloot et al. (2004)].
We examined the general cross-category reactions as well the occurrence of reac-
tions broken down by product category. These results are displayed in Table 1 and
provide some interesting insights.
Table 1. OOS Reactions in eight Product Categories
Substitute purchased No substitute purchased
Product category
Brand
switch
Item
switch
Category
switch
Store
switch
Post-
ponement
Cancella-
tion
Crisps (n=91) 41% 21% 4% 9% 18% 8%
Cola (n=98) 26% 16% 4% 22% 31% 1%
Eggs (n=97) 58% 14% 3% 5% 19% 1%
Margarine (n=102) 20% 26% 0% 15% 36% 4%
Milk (n=94) 51% 14% 4% 15% 14% 2%
Beer (n=102) 43% 5% 0% 22% 27% 4%
Cigarettes (n=91) 11% 30% 0% 51% 8% 1%
Detergents (n=74) 24% 23% 0% 15% 31% 7%
246 Peter C. Verhoef and Laurens M. Sloot
The results in Table 1 clearly show that OOS responses vary with product cate-
gory. For instance, for cigarettes, the majority of consumers state that they visit
another store when their brand is OOS. However, for eggs, only 5% would do this.
Postponement occurs relatively more frequently for margarine, cola, detergents,
and beer. All these categories can be stockpiled. Hence, customers might have
some quantity of the item in stock at home at the time of the planned purchase.
Using the data reported in Table 1 and data on the antecedents as discussed in
the preceding section, we set out to explain the OOS responses. In our analysis we
focused on the most common responses: brand switching, store switching, item
switching, and cancellation/postponement. Cancellation and postponement were
combined as one reaction, as both mean no purchase. The results of this study are
displayed in Table 2 and provide several interesting insights.
Table 2. Overview of Significant Antecedents of OOS Reactions in Study of Eight Product
Groups
Antecedent
Brand
switch Store switch Item switch Cancel /
postpone
Brand related
Brand strength - + +
Brand loyalty -
Product related
Hedonic nature of product +
Number of alternatives - + +
Stockpiling - - +
Purchase frequency
Store related
Store loyalty
Number of stores
Store type
Situation related
Buying urgency + -
Shopping trip
Part of week + -
Personal use
Consumer related
Shopping fun
Store visit frequency
Age - +
Out-of-Stock 247
First, the most significant antecedents are brand- or product-related antecedents.
Surprisingly, there are no significant store-related antecedents; also, the impor-
tance of situation-related and consumer-related antecedents is not very high. Theo-
retically, this is very interesting. This implies that consumers base their OOS reac-
tion mainly on brand and product category characteristics, and store characteristics
are not that important. That is, brand- and product-related antecedents are much
more important than store antecedents. This also has important practical implica-
tions. Further, OOS responses vary between product categories and brands. Thus,
for some brands and/or product categories, the consequences of OOS responses
are less severe for the retailer than for other brands and/or categories. Hence, re-
tailers may decide to focus their OOS minimization policies on particular product
categories and/or brands. Second, the study reveals a rather important role for
brand strength, which has a negative impact in terms of brand switching and exerts
a positive effect in terms of store switching and item switching. Thus, strong
brands still have such a strong consumer franchise that consumers stick with the
brand even when it is OOS. This implies that brand manufacturers with strong
brands still have negotiation power with their brands, as consumers are willing to
switch stores even when the brand is only temporarily unavailable. For retailers,
this implies that OOS is most problematic when it occurs for strong brands. Hav-
ing brand-loyal customers does not help in this situation. Thus, retailers should try
to minimize OOS for strong brands.
Implications for Retailers
Reduction of OOS. In general, retailers should be fully aware of the negative con-
sequences of OOS, as these occur in approximately 45% of OOS occurrences.
Thus, retailers should aim to minimize, if not avoid OOS. Theoretically, however,
the negative impact of OOS may differ between products, brands, stores, situa-
tions, and consumers. Empirically, variations in OOS responses across product
categories and brands are especially important. Therefore, retailers should con-
sider their OOS reduction policies carefully. Retailers should determine for which
categories and which brands minimizing OOS is especially important. Figure 2
displays an easy-to-use two-by-two matrix which indicates which strategies
should be employed for different brand equity-product type combinations. In utili-
tarian categories, reduction of OOS of low-equity brands should not be a priority
as these OOS have only a small negative impact for retailers. In fact, retailers may
decide to simplify their assortment of low-equity brands in these categories. OOS
should be reduced for high-equity brands in utilitarian categories. However, offer-
ing a large number of high-equity brands in these categories may create more
inventorying problems, leading to more OOS. In order to reduce OOS, and the
consumer annoyance that can result from this, retailers may decide to simplify the
assortment of high-equity brands in these categories by de-listing a few brands.
This may have some negative consequences which, however, may be mitigated by
248 Peter C. Verhoef and Laurens M. Sloot
offering more alternatives under the remaining brand names. Note that this rec-
ommendation holds only for retailers with very extensive assortments. Retailers
with limited assortments made up of only a few high-equity brands should be very
careful about de-listing any of these brands. Next, low-equity or weak brands in
hedonic categories require less attention while reducing OOS of high-equity
brands in hedonic categories should always be a top priority.
OOS also requires more attention in categories with many brands and in cate-
gories with a high buying urgency such as cigarettes. Finally, retailers should also
aim to reduce OOS at the end of the week, as OOS in this part of the week may
more often result in cancellation of purchases.
In general, however, our key message is that retailers should aim to eliminate
OOS completely, as it has strong negative sales consequences. This, however,
might prove to be difficult. Despite the adoption of efficient consumer response
(ECR) by many retailers, OOS is still a common phenomenon. New technology
may perhaps be used in the future to completely avoid OOS. However, in many
instances, OOS does not necessarily imply that the retailer is “out-of-business” for
the consumer.
Table 3. Different OOS Strategies for Brands and Product Categories
Utilitarian products Hedonic products
Low-equity
brands
x Low priority in reducing OOS
occurrences
x Simplify assortment of low-
equity brands
x Medium priority in reducing
OOS
x Stock the main items of a wide
variety of low-equity brands
High-equity
brands
x High priority in reducing OOS
x Simplify assortment by gradu-
ally reducing the number of
listed high-equity brands
x Extend the number of items of
“surviving” high-equity brands
x Top priority in reducing OOS
x Seek cooperation with main
brand manufacturers to reduce
OOS levels
x Use caution in reducing allo-
cated space and listed items for
high-equity brands
(Source: Sloot, Verhoef, Franses 2005)
Policies to Mitigate Effects of OOS
Although several policies can be applied to reduce OOS levels, OOS will remain a
common phenomenon in the next few years. There are several actions retailers can
implement to mitigate negative OOS effects: One important action is the use of
shelf announcements in which the retailer communicates to the customer that the
Out-of-Stock 249
product is OOS. A shelf announcement can be seen as an additional service to
consumers. One might expect that such an announcement might rather exacerbate
the negative effects of OOS. We interviewed some store managers on the use of
announcements. They questioned their effectiveness. One disadvantage of them is
that the OOS becomes more obvious to consumers, especially as it draws it to the
attention of consumers who were not actually planning to purchase the product or
brand that is OOS.
OOS announcements can provide different messages on the OOS:
x they can suggest other products, to increase item or brand switching;
x they can inform the customer of the approximate or exact time when the
product or brand will be available again;
x they can apologize for the OOS;
x they can provide information on the reasons why the product or brand is
OOS; and/or
x they can provide information on additional services or a promotion to com-
pensate consumers for the inconvenience of the OOS. For instance, cus-
tomers could be offered a coupon entitling them to a 50% reduction on the
item that is OOS when they next purchase it.
We investigated the use of OOS announcements in the “Cola” product category
(for an extensive discussion see EFMI 2000). We interviewed 599 consumers on
the use of these announcements. Approximately 50% of the consumers believed
that the announcement provided useful information. We also asked what informa-
tion should be provided in the announcement? More than 50% of the consumers
preferred the expected time of availability and/or apologies for the inconvenience
of the OOS. Almost half of the interviewed consumers also valued information on
the reasons for the OOS. Approximately 30% of the consumers preferred sugges-
tions for an alternative product.
We also tested four announcements. It appeared that the majority of consumers
did not notice the announcement. However, this clearly depends on the color of
the announcements. Orange announcements worked pretty well, while white an-
nouncements were observed to have a much lesser effect. Our test also revealed
that consumers appreciated OOS announcements that offered consumers coupons
or an additional service, such as home delivery of the product that is OOS. We
also investigated whether an OOS announcement created more satisfaction. Our
results show, however, that categories without OOS announcements are rated
significantly higher than categories in which OOS announcements are used. Thus,
the effectiveness of OOS announcements might indeed be questioned. OOS an-
nouncements heighten awareness of the OOS among consumers, making it more
obvious and probably creating more dissatisfaction. At least our results show that
it is perhaps wiser not to inform the consumer; rather, the OOS should be cor-
rected as soon as possible.
250 Peter C. Verhoef and Laurens M. Sloot
Policies to Reduce OOS Levels. As already noted, many retailers could benefit
greatly from reducing OOS levels. In an extensive research project on OOS, the
Coca Cola Retailing Research Council (1996) found that the majority of OOS
occurrences were due to mistakes in stores, 70% of the OOSs having occurred
because store employees had not ordered the product in the last order round. A
more recent study by Roland Berger Consultants also reveals that buyer mistakes
are the number one cause of high OOS levels. Frequent mistakes are:
x order size too small, faulty estimation of sales potential;
x assigned shelf space too small for the product/brand;
x “Gaps” on the shelf filled with other SKUs, so that the (potential) OOS
situation has not been observed during visual inspection of the shelf by the
store’s staff and therefore no order was placed; and
x missing shelf tags, which causes store personnel to overlook the OOS
situation.
The Coca Cola Retailing Research Council suggests several practical solutions for
these mistakes:
x Do not leave gaps on the shelf. Store personnel can then see clearly when
ordering of the product is necessary.
x Tell store personnel in which categories and instances OOS risks are very
high (i.e., sales promotions, fast-moving items).
x Check regularly whether category plans have been correctly implemented
and whether shelf tags are present.
x Create a database on sales of SKUs during the week and use past sales data
to forecast sales. This is especially important during promotions. The fa-
mous SCANPRO model is one that might be used for this purpose.
As discussed, many mistakes are made when store personnel are responsible for
ordering products and brands. An automated ordering system may overcome some
of the problems. Pilot studies have shown that OOS levels can be substantially
reduced by the use of such systems. Roland Berger Consultants (2002) claim that
the OOS level can be reduced by 50% when manufacturers and retailers work
closely together and retailers use an automated ordering system. A pilot study for
the Dutch EDLP chain Jumbo has also yielded good results: In this study OOS
levels decreased substantially, to levels below 2%.
There are also other supply chain-oriented techniques that may substantially
decrease OOS levels (see, e.g., chapter by Huchzermeier, Iyer in this book). These
techniques include:
x application of electronic data interchange (EDI) between retailers and sup-
pliers. In a study in the US, when 31 retailers used EDI, this substantially
lowered their OOS levels;
Out-of-Stock 251
x use of continuous replenishment planning (CRP). Again in studies in the
US, OOS levels were reduced for 55% of the retailers applying CRP, while
at the same time the inventory level of products was decreased by 32%;
and
x application of a cross-docking program; this appeared to reduce OOS sub-
stantially at ShopKo.
Future of OOS: 10 Years From Now. Given that pilot studies of several supply
chain techniques have given positive results, we have expect that OOS can be
reduced to a very low level in the future. With the increasing availability and qual-
ity of store level data, many retailers will adopt automatic store ordering systems
which will result in substantial reductions in OOS.
An important new development in the context of OOS reduction is the use of
RFID by manufacturers and retailers. It is important, however, that RFID tags
are used for all individual products. RFID tags send electronic signals, which
can be recognized by specialized systems. When RFID tags are available for
each individual product, the inventory level of each product per store can be
observed constantly throughout the day. This sounds very easy, but in practice it
is difficult to establish. For instance, even traditionally unpackaged products,
such as vegetables and meat, should have RFID tags when a customer has made
his/her choice and has added the product to the basket. This is rather difficult to
achieve. Note, however, that more and more products are packaged. Further-
more, it is important that there should be a perfect system that observes all
products with RFID tags. This means there should be no products that can pass
an RFID scanner unobserved. Another important issue is the placement of RFID
tags in the package. In urban areas and large cities, thieves may try to get rid of
the RFID tag in order not to be caught, especially when stealing expensive
products such as razor blades, cigarettes, and personal care products. Thus, it is
important that the RFID tags are attached to the product in such a way that it is
almost impossible to get rid of the tags. Small RFID tags can be installed in the
tops of bottles, for instance. Note that an important consequence of good use of
RFID tags is that inventory losses due to theft should be eliminated. Theft is an
important reason for OOS, as theft can cause brands to become OOS without
being noticed by the retailer in the inventory system, leading to fewer orders
than required. When retailers succeed in implementing a perfect system, the
retailer has information on its inventory at both store and warehouse levels. This
information is available in real time and, in order to reduce OOS even further,
should be available to all parties in the supply chain. Suppliers can also use the
real-time information to keep their inventories at a sufficient level to supply
orders from the retailer on a just-in-time basis. When a smart automatic ordering
system is used in the supply chain, fast-moving products can than be ordered on
time and with the required order size.
252 Peter C. Verhoef and Laurens M. Sloot
The use of RFID tags combined with automatic ordering systems can thus sub-
stantially reduce OOS levels in the future. We are inclined to think that 10 years
from now, OOS will hardly occur in modern retailing. However, this view is
probably too optimistic. Although retailers should be able to reduce OOS substan-
tially, there are still economic and practical issues that may function as a barrier.
First, delivery of products to the stores will be fixed in time, to keep supply costs
low. Thus, although the new system observes and/or predicts OOS perfectly, de-
livery of the required products may take some time. Second, retailers will keep
optimizing their shelf space. An improved ordering system will probably cause
retailers to reduce the number of facings of a product so as to create space for
additional items in their assortment. As a consequence, shelf inventory decreases
and the probability of an OOS situation increases. Keeping these caveats in mind,
we still expect that the use of RFID by retailers in Western Europe and the use of
automatic ordering systems will substantially reduce OOS levels in the future. On
the basis of the pilot studies reported, we expect that the current level of approxi-
mately 7% will be reduced to approximately 3% to 4% by 2015.
Conclusion
This chapter has discussed an important topic in today’s retailing: OOS. We
have also briefly discussed the closely related topic of permanent assortment
unavailability because of brand de-listings. Both discussions provide useful
guidelines for retailers. It important for retailers to aim at reducing OOS, as it
severely impacts store profitability. However, although OOS reduction is cur-
rently a top priority of retailers, future technological developments, such as the
use of RFID, may reduce OOS levels substantially. As a consequence, it will
become a less important issue in retailing in the next 10 years, at least insofar as
our expectations become reality.
Note, finally, that the OOS literature also provides interesting insights into
the consequences of brand de-listings by retailers. Brand de-listings mean per-
manent unavailability of a brand. These de-listings have become an important
issue for many retailers, which are forced to increase ROI and to save costs as
they are in competition with very cost-efficient discount chains. Our discussion
shows that even temporary unavailability of a product can have severe negative
consequences for the retailers. Permanent unavailability of brands can perhaps
lead to permanent negative consequences, such as permanent losses in category
and/or store sales. However, the scale of these negative consequences clearly
depends on a number of factors, such as brand equity, remaining assortment
size, and the assortment composition. The findings reported in the OOS litera-
ture can provide retailers with helpful suggestions on de-listing brands without
consequences being too negative.
Out-of-Stock 253
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(2004): “Het Verklaren van Consumentenreacties bij Out-of-Stock”, Jaaboek van
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keting Management, 28 (2), 145-153.
PRICING
Recent Trends and Emerging Practices in
Retailer Pricing
Ruth N. Bolton1, Venkatesh Shankar 2 and Detra Y. Montoya 3
1 W. P. Carey School of Business, Arizona State University, Tempe, USA
2 Mays Business School, Texas A&M University, USA
3 W. P. Carey School of Business, Arizona State University, Tempe, USA
Changing Retail Environment
Profitability in retailer pricing has become a paramount concern. Retailers, espe-
cially, grocery retailers, are operating on razor-thin margins. On average, a super-
market’s margin is about 1% of net sales. A typical supermarket today is bigger
than ever before, with several thousand items – and, owing to mergers and ac-
quisitions, it is part of an even larger retail chain. Prices are set weekly on these
items, so that supermarkets are challenged to develop a coherent and profitable
pricing strategy. Moreover, retailers receive trade allowances from manufacturers
for promotional pricing. Pressured by competition and by consumers who have
come to expect frequent price discounts, retailers have fallen into a price-promotion
trap. Although only about 20% of retail sales come from promotions, supermar-
kets devote about 80% of their week to managing them. The same retail pricing
battle is being waged across department stores, convenience stores, and stores in
other traditional retailing categories.
The current focus on profitable pricing strategies is also due to a changing retail
landscape. Cross-channel consumer shopping is becoming increasingly common
and is altering the pricing practices of many retailers (see also chapter by Sonneck,
Ott in this book) . Competition across retail channels and formats such as grocery
(e.g., Kroger), drug (e.g., Walgreens), mass merchandise (e.g., Wal-Mart), con-
venience and gas (e.g., 7 Eleven), club (e.g., Costco), and dollar (e.g., Dollar Gen-
eral) appears to be much more intense than ever before (for more information on
between-format competition, see chapters by Grewal et al, Fox, Sethuraman in this
book). Ongoing expansion by Wal-Mart’s Super Centers, plus recent growth in
club and dollar stores, have lowered the price floor in many markets and catego-
256 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
ries. Concurrently, the growth of dollar stores is challenging the dominance of the
giant low-cost mass merchandiser Wal-Mart. This phenomenon parallels the rise
of low-cost competitors in other industries. For example, competition in the airline
industry has intensified with point-to-point airlines such as Southwest Airlines and
Jet Blue stealing market share from the long standing hub-and-spoke airlines such
as United Airlines and Delta Airlines.
The goals of this chapter are to outline the trends in retailers’ macro-environment,
discuss current retailer pricing, and derive implications for emerging pricing prac-
tices. The chapter is organized in the following way. First, we describe four envi-
ronmental trends: retail consolidation, changing manufacturer practices, advances in
technology and innovation, and the emergence and growth of e-tailing. We discuss
how each of these environmental factors has influenced current retailer pricing prac-
tices. Second, with regard to current retailer pricing, we address two key questions:
How prevalent are discount prices or “everyday low price” strategies? What retailer
pricing strategies are successful in today’s competitive markets? Our investigation
of these questions yields a typology of current pricing practices. Third, we argue that
our analysis of current pricing practices suggests that retailers are moving toward an
approach we call “customized pricing.” This approach requires each retailer to build
a coherent strategy for its products, based on its strategic position in the market-
place. Last, we close by predicting the widespread adoption of customized pricing as
marketplace trends make it increasingly profitable.
Retail Consolidation and Its Effects on Retailer Pricing
Consolidation and Retail Formats. Mergers and acquisitions (M&A) have result
ed in the consolidation of retail chains, thereby substantially altering the retail
competitive arena. The effects of consolidation on retail formats have varied sub-
stantially. In some cases, mergers involving retailers with the same format have
resulted in retailers with a single dominant format and brand name. For example,
the CVS drugstore chain has renamed and reformatted all the stores acquired from
the Eckerd drugstore chain as CVS stores with a CVS format. In some other cases,
different retail brand names and formats have been preserved. For example, Safe-
way has retained the Randalls retail brand name and style after acquiring all the
Randalls stores. In other cases, retailers have altered their retail formats by in-
creasing the assortment of products and services they offer after acquiring other
chains, as exemplified by Albertsons following their acquisition of Jewel Osco.
Why Consolidation? The financial rationale for consolidation is that retailers can
maintain or strengthen their competitive positions in the marketplace by increasing
their size, thereby lowering costs (by improving their bargaining position vis-à-vis
manufacturers), expanding revenues from consumers and markets, and gaining
market share across channels and formats. For example, the newly merged Kmart-
Sears retailer may be able to compete more effectively against the retailing behe-
Recent Trends and Emerging Practices in Retailer Pricing 257
moth Wal-Mart on costs by improving the bargaining position with manufacturers
through scale economies.
Consolidation facilitates retailers’ efforts to streamline their offerings and ex-
tend their reach. The replacement of the Eckerd brand by the CVS brand in drug-
stores enables CVS to leverage its more popular brand name and efficient store
format in expanded markets, and thus to compete more aggressively against Wal-
greens, its leading drugstore competitor chain.
A third reason for consolidation is to become more attractive to customers by
offering a wider assortment than competing retailers. For example, Albertsons’
addition of Osco pharmacy has expanded its health and beauty selections and
broadened its customer base.
Last, consolidation helps improve the profitability of retailers by increasing the
distribution of retailers’ higher margin private label offerings vis-à-vis national
brands. For example, in Switzerland, five retailers account for 88% of the grocery
market since consolidation. Consequently, among all developed nations, Switzer-
land also has the highest share of private labels (38%) in the grocery industry.
The Effect of Consolidation on Retailer Pricing Practices. How does consolida-
tion affect retailers’ pricing strategies? Retailers span more markets and channels,
but their increased span of control challenges them to manage multiple formats or
integrate (or even eliminate) multiple systems. As a result, consolidated retailers’
decision making is more centralized, whereby strategic distribution, pricing, and
merchandising decisions are set at corporate headquarters and handed down to
each division.
At the same time, however, consolidation is forcing retailers to address the
unique challenges of market-specific competition and clientele for each retail divi-
sion or format in their pricing strategy. Retail divisions and formats must concur-
rently manage their business within corporate guidelines and remain competitive
in their respective markets. Within each division and format, individual stores are
faced with the challenge of simultaneously complying with corporate mandates
and being competitive within their trade areas. Successful retailers appear to be
delicately balancing these apparently conflicting needs of local versus corporate
pricing, division versus store level pricing autonomy, chain versus store level
pricing and promotional tools in attempts to remain competitive.
How Changing Manufacturer Practices Influence
Retailer Pricing
Manufacturers’ Account Management. Since retailer consolidation, manufactur-
ers have treated retailer pricing as a chain-wide coordinated strategic variable.
By focusing on a single buyer for an entire chain, they are able to sell more effi-
ciently with fewer account managers. The end-result is that manufacturers are
directing their selling efforts at the corporate headquarters level, rather than at
the market or store level.
258 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
Retailers typically appoint a specific manufacturer as “captain” for each major
category. They rely on the consumer behavior analysis and pricing recommenda-
tions of the category captain. Since category captains are likely to make pricing
recommendations at the corporate headquarters level, retailers frequently develop
chain-wide pricing guidelines for the category. Retailers expect manufacturers’ rep-
resentatives to possess the skills and resources to deliver business-building informa-
tion and share category goals and objectives. However, manufacturers may not be
knowledgeable about multiple retail formats, market and store differences that are
relevant to the development of a coherent pricing strategy for the retailer.
Trade Promotions. The grocery industry relies heavily on manufacturers’ trade
allowances or promotional funds, which account for about 54% of the marketing
dollars. Trade allowances have traditionally been used to adjust pricing and sup-
port promotions at the retail level. Manufacturers provide trade funds to retailers
in the form of either scan-back allowances, which means reimbursement is based
on units sold by the retailer, or off-invoice allowances, meaning that reimburse-
ment is based on units purchased by the retailer. Manufacturers typically dislike
off-invoice allowances, because they may lead to forward buying or diverting,
rather than supporting their brands. In fact, retailers are not required to pass along
trade discounts to the consumer, and studies have shown that retailers pass on only
a fraction of their trade allowances, typically discounting leading brands to draw
store traffic.
Promotion inefficiencies combined with the conflicting objectives of manufac-
turers and retailers make it likely that trade allowances will be decreased, regu-
lated, or eliminated. Wal-Mart already forgoes all allowances and negotiates a
lower total price or “dead net cost”. However, its aggressive tactics have been
difficult for other retailers to imitate, fueling their disenchantment with trade al-
lowances. For example, Safeway attempted to use dead net cost with a few manu-
facturers, but encountered a high level of resistance from them.
Supermarkets’ heavy reliance on trade allowances has also made it difficult for
them to calculate their true SKU costs, making price wars an unattractive option in
the current environment. Hence, the use of promotional dollars can be disadvanta-
geous for grocery retailers wishing to compete on price. However, promotions do
allow retailers to highlight their strengths vis-à-vis their competitors.
Given the conflicting objectives of manufacturers and retailers and the differ-
ences in trade allowances across retailers, the development of an effective pricing
strategy has eluded retailers in many categories and with different formats. Con-
sider the situation in toy retailing. Toy retailers include specialty retailers, who
carry a variety of toys, and discounters, who carry a smaller assortment at very
low prices. Toys 'R' Us is the leading toy specialty retailer, and Wal-Mart is the
leading toy discounter (as well as the leading toy seller). In 2004, two major spe-
cialty retailers, FAO Schwartz, a small chain selling premium toys, and KB Toys,
a national chain with over 750 stores, declared bankruptcy. More recently, the
profitability of Toys ‘R’ Us has faltered. Thus, specialty toy retailers have not
been able to compete effectively on price with mass merchandisers or discounters.
Recent Trends and Emerging Practices in Retailer Pricing 259
How Advances in Technology and Innovation Influence
Retail Pricing
Adoption of Price Optimization Software. Information management and supply
chain management helped by technological advances have driven retailers’ costs
down. In the 1990s, supply chain tools helped improve efficiencies in the flow of
goods, but did not always ensure that retailers had the right merchandise in the
right stores at the right price and at the right time. Retailers traditionally relied on
rules-based pricing decisions, such as a percentage markup or seasonal pricing
(see also chapter by Simon, Gathen, Daus in this book). More recently, retailers
have embraced optimization methods, such as retail merchandise optimization,
price optimization, retail revenue management. Price optimization software pre-
dicts demand for individual products based on historical price and sales data,
competitive pricing, local demographics, inventory, and promotional data .
Today, retailers are challenging traditional “rules” of pricing with prices gener-
ated from statistical modeling and data mining. The use of price optimization
software has increased gross margin dollars on markdown items for many retail-
ers. Price-optimization software can also help retailers manage nonnegotiated
prices on seasonal items, recommending when prices should be reduced and when
products should be sold at full price.
Pricing Implications for Different Retail Formats and Stores. The shift toward data-
and technology-driven pricing approaches, as opposed to approaches based on “ex-
perience” or “hunches” has been a cultural change for many retailers. Retailers may
feel they are losing control when prices are set by computer software. Some retailers
are still relying on a blended centralized, rules-based pricing strategy. One argument
against price optimization is the potential negative effect on market share. Many
retailers fear that the differences in prices across items within a product line (i.e.,
flavors) may confuse the consumers and possibly drive down sales.
How the Emergence of E-Tailers Is Influencing
Retailer Pricing
The explosive growth in Internet usage has led to the rapid emergence of e-tailing.
In addition to many “pure” e-tailers, many traditional or bricks-and-mortar retail-
ers now use the Internet as an important additional channel (for more discussion of
electronic retailing, see Weitz chapter in this book). Multichannel shopping is also
emerging as a key phenomenon in consumer shopping behavior. These trends
have spawned a stream of research on relative prices of the online and offline
channels and on online price dispersion, defined as the distribution of prices (such
as range and standard deviation) of an item with the same measured characteristics
across sellers of the item at a given point in time (See Pan, Ratchford, and Shankar
260 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
2004 for a review). Higher price dispersion within and across retail channels, in-
cluding the Internet, reflects market inefficiency and greater perception of differ-
ences among retailers by consumers.
Many studies show that online price dispersion is at least as high as offline
price dispersion (e.g., Ancarani and Shankar 2004). Numerous factors contribute
to online price dispersion, including variability in e-tailer service attributes (e.g.,
shopping convenience, product information, shipping and handling), e-tailer visi-
bility and reputation, market characteristics (e.g., number of competitors, time of
online market entry), and category characteristics. Interestingly, e-tailer service
quality attributes explain only a portion of online price dispersion and market
characteristics are important drivers of price dispersion (Pan Shankar and Ratch-
ford 2003). Price dispersion has remained persistent online, narrowing over time
(Pan, Shankar, and Ratchford 2003; Ratchford, Pan and Shankar 2003). Despite
the introduction and growth in use of online shopbots, prices have not converged
and online markets remain inefficient.
Multichannel shoppers are an important segment of shoppers for retailers. They
tend to buy more often, buy more items, and spend more than shoppers using only
one channel. They are also typically younger, more highly educated, and more
affluent. There is mixed evidence on the relative prices of the same item at pure e-
tailers, traditional stores, and multi-channel retailers. Ancarani and Shankar (2004)
found that although listed prices online were lower, when adjusted for shipping
costs online prices were higher. Multichannel retailers have higher average prices
Medium
Online/Offline)
Medium
Online/Offline)
Custom er
Factors
Custom er
Factors
Retailer Cost
Retailer Cost
In-channel
Compet itor
In-channel
Compet itor
Cross-channel
Compet itor
Cross-channel
Compet itor Chain
Positioning
Chain
Positioning
Other Mktg.
Mix Vari ables
Other Mktg.
Mix Variables
Retail er Prices
Retailer Pr ices
RC
RC
CMP
CMP
ATI
ATI
Medium
Online/Offline)
Medium
Online/Offline)
Custom er
Factors
Custom er
Factors
Retailer Cost
Retailer Cost
In-channel
Compet itor
In-channel
Compet itor
Cross-channel
Compet itor
Cross-channel
Compet itor Chain
Positioning
Chain
Positioning
Other Mktg.
Mix Vari ables
Other Mktg.
Mix Variables
Retail er Prices
Retailer Pr ices
RC
RC
CMP
CMP
ATI
ATI
Medium
Online/Offline)
Medium
Online/Offline)
Custom er
Factors
Custom er
Factors
Retailer Cost
Retailer Cost
In-channel
Compet itor
In-channel
Compet itor
Cross-channel
Compet itor
Cross-channel
Compet itor Chain
Positioning
Chain
Positioning
Other Mktg.
Mix Vari ables
Other Mktg.
Mix Variables
Retail er Prices
Retailer Pr ices
RC
RC
CMP
CMP
ATI
ATI
Figure 1. A Framework of Retailer Pricing
RC = Retail Consolidation; CMP = Changing Manufacturer Practices; ATI = Advances in
Technology and Innovation
Recent Trends and Emerging Practices in Retailer Pricing 261
than pure play e-tailers, regardless of whether the price compared is the posted
price or the full price including shipping costs. Overall, it appears that there are
sufficient differences across channels and by price type (list or full price) for re-
tailers to be able to differentiate themselves price effectively across channels.
The different influences on retailer pricing can be captured by a framework
shown in Figure 1. As discussed above, retail consolidation, changing manufac-
ture practices, and advances in technology directly affect both retailer cost and
prices. In addition to the medium or channel (Internet vs offline), other marketing
mix variables, such as advertising and promotion, customer factors, positioning of
the retailer, and competition within and across channels or store formats, influence
retailer prices.
Current Pricing Practices
The preceding discussion of the changes in the retailing landscape leads to two
key questions about current pricing practices:
1. How prevalent are discount pricing or “everyday low price” strategies?
2. What retailer pricing strategies are successful in today’s competitive mar-
kets?
Conventional wisdom says that most retailers use one of two store-wide pricing
strategies: “EDLP or “HiLo”. An EDLP policy involves offering consistently low
prices on many brands and categories and is often perceived to be practiced by
some supermarket chains (e.g., Food Lion and Lucky) as well as by Wal-Mart
(Shankar and Krishnamurthi 1996). A HiLo policy is characterized by steep tem-
porary price discounts with higher “regular” prices for many brands and catego-
ries, and is typically perceived to be practiced by supermarkets such as Kroger and
Safeway. However, retailers are being forced to reexamine their traditional pricing
strategies to allow them to survive in the new retail landscape. Innovations in in-
formation technology and supply chain management and centralized buying have
significantly reduced retailer costs, and lower costs enable retailers to offer consis-
tently lower prices than before. These trends suggest a movement toward an
EDLP policy. However, many retailers seem to be following a Hi-Lo pricing pol-
icy, offering price discounts in response to competitive price pressure – even when
lower prices do not reflect lower costs.
It is also widely believed that retailers’ pricing decisions are primarily driven
by the principles of category management. Category management, identified as
one of the four strategies of the efficient consumer response (ECR) initiative in the
early 1990s, has evolved over time in different retail chains. Under category man-
agement, a retailer first identifies the roles of the different categories, such as des-
tination, support, and ideal roles. For each category, the retailer decides its pricing
policy based on its role. Further, the retailer decides prices and promotions for the
262 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
brands in the category to maximize the profits for the category, given the pricing
policy for the category. While category management principles are still in vogue,
retailer pricing has become more complex and increasingly customized. Surpris-
ingly, successful retailers use an arsenal of different strategies, such as exclusive
pricing, moderately promotional pricing, and aggressive pricing strategies, which
are customized to fit brand, category, and market conditions, according to a large-
scale empirical study of US supermarkets (Bolton and Shankar 2003; Shankar and
Bolton 2004).
Conventional wisdom also suggests that retailers should customize their pricing
to the store clientele’s price sensitivity, and researchers have studied the determi-
nants of consumer price sensitivity (Bolton 1989a, b; Shankar and Krishnamurthi
1996). However, research by Bolton and Shankar (2003) and by Shankar and Bol-
ton (2004) also reveals that successful retailers customize prices with reference to
many other factors, including competitor prices and deals, brand strength, and
category storability. The remainder of this section summarizes the findings from
their two studies (hereafter called “S&B”). The trends in the retailing environment
have accelerated this movement toward customized pricing.
Five Retailer Pricing Strategies. S&B analyzed data from over 200 grocery stores
in 17 chains, including Lucky, Dominicks, Jewel Osco, Safeway, and Food Lion,
in five markets in the United States of America (USA), and also interviewed prod-
uct managers and store managers. Data were collected from three large cities
(New York City, Los Angeles, Chicago) because they represent a diverse sample
of chains and stores (both large and small) and from two medium-sized cities
(Pittsfield, Massachusetts and Marion, Indiana) because they are demographically
representative of the population of the USA. The product categories studied –
spaghetti sauce, bathroom tissue, liquid bleach, ketchup, mouthwash, and frozen
waffles – represent a diverse range of product categories. Altogether, 1364 brand-
store combinations from six categories of consumer packaged goods in five U.S.
markets were studied over a 2-year time period.
Unlike prior research, S&B developed measures of retailers’ pricing strategies
specific to the brand-store combination rather than chain-wide or store-wide
measures. They also measured retailer pricing decisions for given brand and store
combinations using continuous measures rather than viewing pricing policy as a
dichotomous decision (EDLP or HiLo). Moreover, they considered promotion or
deal intensity (i.e., frequency of displays or newspaper features) and the coordina-
tion of promotions with price to be important aspects of retailer pricing decisions.
Thus, S&B characterized store-level pricing decisions for brands along four inde-
pendent dimensions: price consistency, promotion or deal intensity, price-
promotion coordination or support, and relative brand price within category.
Retailer pricing strategies can be characterized as combinations of the four in-
dependent pricing dimensions, where each dimension is a separate continuum.
They discovered that, although chains and stores may use EDLP and HiLo as posi-
tioning or signaling strategies, retailers actually practice five different pricing
Recent Trends and Emerging Practices in Retailer Pricing 263
Table 1. Pricing Strategies and Mean Scores on Dimensions (Clustering by Brand-Store)
Pricing dimensions
Pricing strategy
(% prevalent)
Relative
price
Price
variation
Deal
intensity
Deal
support
Exclusive pricing (8%) High Medium Low Low
Moderately promotional pricing
(14%) Average Medium Medium Medium
HiLo pricing (11%) Average High High High
EDLP (45%) Average Low Medium Medium
Aggressive pricing (22%) Low High Low Medium
(Source: Bolton and Shankar 2003, “An Empirically Derived Taxonomy of Retailer Pricing
Strategy,” Journal of Retailing)
strategies at the brand-store level: exclusive, moderately Promotional, HiLo, EDLP,
and aggressive pricing strategies. Table 1, which is adapted from Bolton and
Shankar (2003), shows a description of each strategy as a combination of the four
underlying pricing dimensions. It also shows the distribution of brand-store com-
binations across the five clusters on each of the pricing dimensions. Each of the
brand-store combinations was classified as high, medium (average), or low on
each of the four pricing dimensions, according to their median scores.
HiLo and EDLP Strategies are Practiced at Brand-Store Level, and Not at Chain
Level. Pricing strategies that are roughly equivalent to HiLo pricing and EDLP
pricing are used by about half (56%) the brand-store combinations in our database.
A HiLo pricing strategy (11%) is characterized by average relative price, high
price variation, high deal intensity, and high deal support. This strategy is compa-
rable to a storewide HiLo pricing strategy, albeit at the brand-store level, with a
combination of dimensions and levels that seems intended to make a retailer com-
petitive with its rivals through promotions. An EDLP pricing strategy (45%) con-
sists of average relative price, low price variation, moderate deal intensity, and
moderate deal support. This strategy is comparable to a storewide EDLP strategy,
albeit at brand-store level. This combination of dimensions seems to be intended
to offer value to customers.
An Aggressive Pricing Strategy is Commonly Adopted. Aggressive pricing is not
reported in the business press, but it is utilized by nearly one fourth (22%) of all
brand-store combinations. It entails offering low prices and medium deal support,
accompanied by high price variation and low-medium deal intensity. In other
words, price, rather than deals (i.e., features or displays), is the key weapon used
for competing. This previously unknown strategy can explain apparently “incon-
264 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
sistent” behavior observed in the market place, such as when a chain that claims to
practice an EDLP strategy offers less stable prices (for some categories) than a
chain that is considered to practice a HiLo strategy for brands in the same cate-
gory. Chains that are positioned as EDLP chains may appear (superficially) incon-
sistent for some brands and categories, but the retailers have simply tailored their
overall strategy to recognize differences in consumer demand and competition
within and across categories.
EDLP pricing and aggressive pricing are the most commonly adopted pricing
strategies at a brand-store level. This finding reflects the competitive nature of the
retailing landscape.
Moderately Promotional and Exclusive Pricing Strategies are Practiced. Moder-
ately promotional pricing – corresponding to an undifferentiated strategy – is also
fairly common (14%). In contrast, exclusive pricing is the strategy least often
adopted (8%). Since it is characterized by low deal intensity, low deal support, and
a high brand premium, this strategy can only be profitable for a small number of
brands. It may be appropriate only for brands with high brand equity and manufac-
turer advertising.
How Retailers Should Approach Pricing
Retailers require new pricing practices to create and sustain a competitive advan-
tage in the marketplace. Having studied successful retailers’ pricing practices,
Bolton, Shankar, and Montoya (2005) claim that a new approach has emerged,
which they call “customized pricing.” This approach requires retailers to build a
coherent strategy for its products based on its strategic position in the marketplace,
just as a house is built by following an architectural plan that has been customized
to a particular geographic site (see Figure 2 from Bolton, Shankar, and Montoya,
2005). The rest of this section is a reproduction and adaptation of their work.
Successful retailers have developed many different pricing practices that are
neither chain nor store wide, such as EDLP and HiLo (See Table 2). Instead, their
strategies are customized to take account of additional factors, such as competitive
activity, brand strength, and category storability. The implementation of custom-
ized pricing is based on the following steps: (1) Understanding key drivers of store
pricing; (2) Segmenting market by store format and channel; (3) Neutralizing
price as a competitive weapon; (4) Managing promotion intensity to avoid head-
to-head competition; (5) Creating distinctive categories; and (6) Tailoring prices
by market, category, customer, competitor, and brand.
Understanding the Key Drivers of Retail Pricing. The first step is to identify the key
determinants of pricing relevant to a particular retailer. These determinants can be
classified under several broad classes of factors: market, chain, store, category,
manufacturer/brand, customer, and competitive retailer. Under each factor, a number
of variables could potentially influence retailer pricing. For example, among chain
Recent Trends and Emerging Practices in Retailer Pricing 265
•
•
•
Foundation: Determinants of Store Pricing
Segment market by store format
Tailor by category storability,
necessity, store size, assortment,
brand strength, price elasticities
•Create distinctive categories
•Manage deal intensity
•Choose positions along the
dimensions of retail pricing
Figure 2. The Architecture of Retail Pricing
(Bolton, Shankar, and Montoya “Building a Profitable Retailer Pricing Strategy – From
the Ground-Up,” Working Paper, 2005)
Table 2. Customized vs. Conventional Retailer Pricing
xLong-term
xStrategic orient ation
xShort and Mediu m-term
xTactical orientati on
Time Horizon
xOverall st ore profitabilit y
xA coherent pricing policy
xNon-pric e attribu tes
xDiscounts, prom otions and final pric es on
myriads of brands every week
Focus
xBased on a balanced set of factors
xNot overl y depend ent on discoun ts
xSpend m ost time in de ciding and
executing pr omotions
xUnprofitable wh en competitors discount
Advantages/Limitations
xIdentify key d eterminan ts of pricing in the
market
xSegment mar ket by store format
xChoose strat egies along four key dimensions
xManage deal intensity
xCreate dis tincti ve categ ories
xTailor by brand……
xDetermine category role
xPrice destination categories low
xDecide on discounts f or each category,
brand
Key Steps
xCompetitor prices, deals
xBrand strength
xCategor y storability
xCustomer price sens itivit y
xStore size an d assortment……
xMarket price sensit ivity
xCosts
Key Det ermin ants
xIncludes Exclusive, Moderately promotional,
Aggressive prici ng in addition t o EDLP and HiLo
xEDLP, and HiLo pricing
Types
Customized Retailer Pricing
Conventional Retailer Pricing
xLong-term
xStrategic orient ation
xShort and Mediu m-term
xTactical orientati on
Time Horizon
xOverall st ore profitabilit y
xA coherent pricing policy
xNon-pric e attribu tes
xDiscounts, prom otions and final pric es on
myriads of brands every week
Focus
xBased on a balanced set of factors
xNot overl y depend ent on discoun ts
xSpend m ost time in de ciding and
executing pr omotions
xUnprofitable wh en competitors discount
Advantages/Limitations
xIdentify key d eterminan ts of pricing in the
market
xSegment mar ket by store format
xChoose strat egies along four key dimensions
xManage deal intensity
xCreate dis tincti ve categ ories
xTailor by brand……
xDetermine category role
xPrice destination categories low
xDecide on discounts f or each category,
brand
Key Steps
xCompetitor prices, deals
xBrand strength
xCategor y storability
xCustomer price sens itivit y
xStore size an d assortment……
xMarket price sensit ivity
xCosts
Key Det ermin ants
xIncludes Exclusive, Moderately promotional,
Aggressive prici ng in addition t o EDLP and HiLo
xEDLP, and HiLo pricing
Types
Customized Retailer Pricing
Conventional Retailer Pricing
(Source: Bolton, Shankar, and Montoya, 2005, “Building a Profitable Retailer Pricing
Strategy – From the Ground-Up,” Working Paper)
266 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
factors, chain positioning and chain size could be important determinants for a re-
tailer. Similarly, among competitor factors, the deal frequency and price level of
competitive retailers in the same channel, those of retailers from other channels in
the geographic neighborhood could be driving retailer prices for a retailer. A retailer
could use point-of-sale store level scanner data over the past several weeks to deter-
mine the key factors that drive prices at its store and other stores.
Segmenting by Store Format and Store Cluster. After competitor factors, category
and chain factors are the factors that most influence retailer pricing strategy. A
retailer tends to coordinate price and promotion when the store is located in met-
ropolitan cities (as opposed to smaller cities), and when it is part of a large chain
or a chain that is positioned as having a HiLo strategy. Price promotion coordina-
tion is greater for brands in large stores and with large category assortments. Price
promotion coordination is likely to yield greater benefits in such situations due to
the large scale of retail operations. These observations suggest that a successful
retailer segments its stores by format (e.g., Kroger, Dillon, Fry’s and Ralph’s are
four store formats operated by the same retailer) and by store cluster (e.g., upscale,
ethnic). Variable pricing can then be applied to each format and cluster by varying
markups on items and/or categories to attract targeted customers to their stores. At
the same time, retailers should take into account chain size and store size. Larger
chains and stores have scale economies and cost efficiencies that enable them to
price and promote more aggressively.
Positioning along Key Pricing Dimensions and Neutralizing Price as a Competitive
Issue. Retail competition comes from multiple channels (supermarkets, mass-
markets stores, club stores, convenience stores, online stores, etc.), and it has a per-
vasive influence on retailers’ pricing decisions. However, although competition has
a dominant influence, retailer pricing decisions are also influenced by category char-
acteristics (e.g., storability and necessity), chain positioning and size, store size and
assortment, brand preference and advertising, and customer factors (e.g., price sensi-
tivity). When these factors come into play, retailers have some pricing latitude – and
they should exploit them by positioning along these factors! The key to neutralizing
price is to set competitive price points on “known value items” (that have high
household penetration, large annual purchases, and high purchase frequency) and
feature or display them. On other items, it may be possible to obtain a small (say, 5–
9%) percent premium over mass-market prices and still maintain share.
Managing the Intensity of Promotions to Avoid Head-to-head Competition. The
intensity of retailer promotions and the extent of price-promotion coordination
depends on market type, chain size, chain positioning, store size, category assort-
ment, storability, necessity, brand preference, relative brand advertising own deal
elasticity, cross-price elasticity, and cross-deal elasticity. Retailer pricing and
promotion strategies were found to be less closely coordinated for storable catego-
ries and more so for necessity categories. In contrast, price-promotion coordina-
tion is also higher when consumers are less own-price and own-deal inelastic yet
still willing to switch.
Recent Trends and Emerging Practices in Retailer Pricing 267
Retailers need not match competitors’ price and deal decisions if a product is
not a known-value item. Instead, they should look for categories and brands that
present opportunities to build store traffic and loyalty, etc. For example, retailers
seem to use higher price-promotion intensity and coordination for necessity cate-
gories, for brands with high preferences, and in markets where consumers are not
price sensitive, but can still be enticed to switch. Trade promotion management
software may help monitor promotion effectiveness (Kontzer 2004).
Creating Distinctive Categories. Retailers must differentiate their categories from
those of competing retailers through distinctive product assortments. A large cate-
gory assortment is associated with price inconsistency and less intensive promo-
tion, but high levels of coordination of price with promotions and low relative
prices. Retailers targeting price sensitive shoppers typically carry a greater as-
sortment of brands in a given category and promotional elasticities are lower for
categories with more brands, so that a retailer with a large assortment can more
effectively utilize its resources by reducing promotions while, however, closely
coordinating price and promotion activities. Highly storable and necessary catego-
ries such as bathroom tissue have high price-promotion intensity. Thus, they can
serve as a “traffic builders,” which tend to be promoted more intensely. In con-
trast, perishable categories such as ketchup and spaghetti sauce may require a
more consistent pricing strategy to ensure steady rotation of the inventory. House-
hold necessities have lower price consistency and higher price-promotion intensity
than do nonessential categories.
Tailoring Prices to Customers, Brands, and Stores. Retailers charge lower prices
when consumers are more own-price elastic and less own-deal elastic. This obser-
vation may explain why pricing decisions differ across stores in the same chain –
individual outlets may have different clienteles. Which brands should be promoted
together (see chapter by Gedenk, Neslin, Ailawadi I this book for more informa-
tion on this issue)? Which brands does your clientele respond to? Prices are typi-
cally lower when brand preference and relative brand advertising are lower, and
when chains position themselves as EDLP rather than HiLo stores. At the same
time, retailers seem to be flexible. For example, they may choose to be less price
consistent for brands in discretionary (nonstorable, nonessential) categories, where
it is possible for price changes to stimulate increases in primary demand (rather
than simply stockpiling).
Pricing Strategies in the Future
In the preceding section, we described how current pricing practices seem to reflect
a fundamental change in retailers’ approach to pricing, namely the emergence of
customized pricing. We believe that customized pricing will be increasingly adopted
by retailers in the coming years. However, we also predict that customized pricing
will become increasingly profitable, owing to the following four trends.
268 Ruth N. Bolton, Venkatesh Shankar, and Detra Y. Montoya
Evolution Away From Traditional Trade Allowances. Both manufacturers and
retailers realize the undesirability of current trade allowance practices. Retailers
are interested in shifting away from trade deals and toward dead net costs, so that
they can assess the effectiveness of price and promotions. However, this shift will
not lead to wide-scale adoption of EDLP pricing practices. Instead, pricing strate-
gies that reflect different competitive positions – accompanied by unique differen-
tial advantages – are likely to emerge in the marketplace. Retailers will develop a
better understanding of their unique features (scale, product assortment, service,
and so forth) for which customers are willing to pay and will alter their pricing
practices accordingly. The conversion to dead net cost, which is required to im-
plement more sophisticated pricing practices, may not be easy for traditional re-
tailers. However, software systems offered by outside suppliers may be particu-
larly useful during the transition period.
Increased Adoption of Pricing Customized to Local Market Conditions. Retailer
pricing software tends to ignore the pricing activities of competing retailers and
clientele characteristics. We predict that retailers will eventually adopt customized
or variable pricing – albeit relying on sophisticated pricing software, rather than
intuition and pricing heuristics – to respond to market conditions. We predict that
future pricing practices will reflect a better balance between the cost efficiencies
obtained over the past decade and the revenue benefits that can be derived from
increased flexibility to respond to local market conditions.
Greater Pricing Flexibility. In the future, retailers will be less price consistent
for brands in discretionary (nonstorable, nonessential) categories in which it is
possible for price changes to stimulate increases in primary demand (rather than
simply encourage stockpiling). We expect that, as pricing software allows more
sophisticated strategies, retailers will exhibit increasing flexibility across brands,
categories and stores, as well as over time. The use of electronic shelf labels
(ESL) is sometimes offered as an example of how retailers are trying to improve
customer service. However, they also enable retailers to change prices on any
item at anytime based on the time of day, week, season, competition, or even
current weather conditions. Although the implementation of ESL has been slow,
based on costs, electronic labels may be a glimpse into the future of the execu-
tion of in-store pricing.
More Multichannel Price Consistency. Retailers are interested in optimizing prices
on each item across channels: Internet, bricks-and-mortar stores, and catalogs (or
direct mail). A few studies have examined retailer pricing practices across multi-
ple channels (e.g., Ancarani and Shankar 2004; Pan, Ratchford, and Shankar
2005). They indicate that there are ample opportunities for retailers to differentiate
themselves from one another and compete on nonprice attributes. Hence, despite
price dispersion across retailers within a channel and across channels, we believe
that the same retailer will price consistently across its different channels.
Recent Trends and Emerging Practices in Retailer Pricing 269
Summary
The retail landscape is being significantly altered by retail consolidations, changes
in manufacturers’ practices, advances in technology, and the emergence of e-
tailing. In this new retailing environment, there is a renewed emphasis on profit-
able pricing strategies. We have described the effects of these trends on retailer
pricing and analyzed successful pricing strategies, which point to the increasing
use of customized pricing practice. A customized retailer pricing strategy based on
a six-step pricing architecture might be useful for retailers. In the future, we an-
ticipate a movement away from heavy trade allowances, increased customization
to local conditions, greater pricing flexibility, and more multi-channel consistency
of retailer pricing.
References
Ancarani, Fabio and Venkatesh Shankar (2004): Price Levels and Price Dispersion Within
and Across Multiple Retailer Types: Further Evidence and Extension, Journal of
Academy of Marketing Science, 32 (2), 176-187.
Bolton, Ruth N. (1989a): Relationship between Market Characteristics and Promotional
Price Elasticities, Marketing Science, 10 (1), 24-39.
Bolton, Ruth N. (1989b): The Robustness of Retail-Level Price Elasticity Estimates, Journal
of Retailing, 65 (2), 193-218.
Bolton, Ruth N. and Venkatesh Shankar (2003): An Empirically Driven Taxonomy of
Retailer Pricing and Promotion Strategies, Journal of Retailing, 79 (4), 213-224.
Bolton, Ruth N. and Venkatesh Shankar and Detra Montoya (2005): Building a Profitable
Retailer Pricing Strategy – From the Ground-Up, Working Paper, Arizona State Uni-
versity, Tempe, AZ.
Pan, Xing, Brian T. Ratchford and Venkatesh Shankar (2002). Can Price Dispersion in
Online Markets be Explained by Differences in e-tailer Service Quality? Journal of the
Academy of Marketing Science, 30 (4): 443-456.
Pan, Xing, Brian T. Ratchford and Venkatesh Shankar (2004): Price Dispersion on the
Internet: A Review and Directions for Future Research, Special Issue on Online Pric-
ing, Journal of Interactive Marketing, 18 (4).
Pan, Xing, Venkatesh Shankar, and Brian T. Ratchford (2002): Price Competition Between
Pure Play vs. Bricks-and-Clicks E-Tailers: Analytical Model and Empirical Analysis,
Advances in Microeconomics: Economics of the Internet and e-Commerce, 11, 29-62.
Pan, Xing, Venkatesh Shankar, and Brian T. Ratchford (2003): The Evolution of Price
Dispersion in Internet Retail Markets, Advances in Applied Microeconomics: Organiz-
ing the New Industrial Economy, 12, 85-105.
Ratchford, Brian T., Xing Pan, Venkatesh Shankar (2003): On the Efficiency of Internet
Markets for Consumer Goods, Journal of Public Policy and Marketing, 22 (1), 4-16.
Shankar, Venkatesh and Ruth N. Bolton (2004): An Empirical Analysis of Determinants of
Retailer Pricing Strategy, Marketing Science, 23 (1), 28-49.
Shankar, Venkatesh and Lakshman Krishnamurthi (1996): Relating Price Sensitivity to
Retailer Promotional Variables and Pricing Policy, Journal of Retailing, 72 (3), 249-73.
Retail Pricing – Higher Profits Through
Improved Pricing Processes
Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Simon Kucher & Partners, Strategy and Marketing Consultants Bonn, Germany
The Retailing Industry Crisis and How to Get Out of It
The average profit margin of European retailers is a mere 0.7%. Most companies
blame the difficult economic environment for this low profitability. Yet the disas-
trous situation is largely self-inflicted, as is indicated by two facts.
First, for years growth has been slower in the retailing industry than in private
consumption, indicating a structural problem within the industry. In Germany, for
instance, while private consumption grew by some 3.2% p.a. from 1994 to 2003,
revenue growth in the retailing industry stagnated during the same period and even
decreased, by 2.8% in 2002 and 1.0% in 2003 (see Figure 1). Traditional retailers
were hit particularly hard, and their profits were depleted by massive price wars
induced by competition for customers and market shares.
100
110
120
130
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Gross Domestic Product Germany
Private Consumption Germany
Revenues Retailing
Industry Germany
105
115
125
90
Index 1994 = 100
Year
Fig. 1. Revenues in the German Retailing Industry Relative to GDP and Consumption
Growth (Source: M+M Eurodata)
272 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Secondly, some companies have been able to grow despite the trend. Hypermar-
kets and discounters such as Metro, Carrefour and Aldi, and also focused retailers
such as IKEA, Zara, and Hennes & Mauritz have grown. These retailers have
continued to increase their revenues and profits year after year. They prove that a
difficult economic environment is not necessarily an obstacle to growth.
Large price decreases and structural changes in the market cause severe prob-
lems for traditional forms of retailing. But how can retailers escape the crisis and
improve their profit situation? In the fundamental profit formula there are only
three profit drivers: price, volume, and costs.
x In the area of costs, many advances have been made. In fact, cost cutting
has so far been the principal instrument used to improve profits in the re-
tailing industry. Retailers were able to reduce general expenses and capi-
tal costs. Furthermore, they reduced purchase costs directly and indi-
rectly, e.g. by pushing manufacturers to increase allowances for
advertising. However, most gains in cost reductions were immediately
passed on to the consumers via lower prices. Consequently, profit mar-
gins did not improve. At the same time, the potential for further cost re-
ductions decreased. Further cost cuts are now no longer possible without
large prior investments in technology.
x In saturated markets, an increase in volume is only possible through a gain
in market share. In an effort to increase their market share, many discount-
ers applied aggressive expansion strategies. This eventually led to an over
proportional area expansion relative to revenue growth. Huge excess ca-
pacities were created in the market. To compensate for the decrease in area
productivity, most competitors tried to increase revenues via aggressive
pricing. However, the possibilities of boosting profits through increases in
volume are limited for most retailers.
x Price is the third profit driver. Price has a more pronounced leverage in
profit than does volume (assuming marginal costs greater than zero), be-
cause a price increase directly affects profits, whereas an increase in vol-
ume raises profits only by the additional revenue minus marginal costs.1
Figure 2 (see next page) shows how dramatically a price increase of only
1% (with constant volume) would improve the profit situation of selected
retailers. A company such as Metro, for instance, could improve profitabil-
ity by 66% through a price increase of 1%. The figure also indicates that
even the market leaders are earning profit margins of only 1% or 2%, de-
spite massive cost-cutting efforts over the last few years.
1 An example: Assuming a profit margin of 5% and constant volume, a 2% increase in
price would lead to a 40% increase in profit. In contrast, an increase in volume by 2%
would lead to a profit increase of only 20%, assuming constant price and marginal
costs of 50% of the price. In both cases, revenue increases by 2% but the effect is very
different.
Retail Pricing – Higher Profits Through Improved Pricing Processes 273
70%
66%
36%
25%
25%
20%
19%
15%
Kroger
Metro
Costco
Albertson
Carrefour
Tesco
Wal-Mart
Aldi
A price increase of 1% leads to the following increases in profit:
Fig. 2. Profit Improvement from a 1% Price Increase – No Volume Reaction Assumed2
(Source: Annual Reports of 2003, for Aldi Data from F.A.Z. 2004)
In summary, it can be said that price is the biggest profit driver in the retailing indus-
try. Hence, for most retailers improvement of their pricing process offers the best
way out of the disastrous profit situation. In the following sections we will first dis-
cuss exactly what a pricing process is and how improving such a process is different
from price optimization in general. We will then give a short overview of current
pricing practices and pricing trends in the retailing industry. Finally, based on the
analysis of current pricing practices, we will indicate some starting points for im-
proving each phase of the pricing process within a company, from the definition of
strategic guidelines via price determination to controlling and monitoring.
The Paradigm Shift: From Price Optimization to Pricing
Process Improvement
Past pricing research has focused on price optimization. Economists designed
models to find the optimal profit-maximizing price for a specific product. In these
models, concepts for determining prices were traditionally adapted from micro-
economic pricing theory (“classic pricing theory”). The objective of microeco-
nomic pricing, however, is to explain the behavior of market participants and to
draw conclusions about the efficiency of markets or economies. Therefore, many
price optimization models have only limited relevance for business practice (Wilt-
inger 1998). Furthermore, most models cannot be applied, or only with difficulty,
in situations in which companies need to price not just one but thousands of prod-
ucts within a short period.
2 The profit increase due to a 1% price increase with constant volume is calculated as the
ratio of the price increase to the company’s actual profit margin.
274 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
For instance, at Kaufhof Warenhaus AG, a major German retail chain, almost
half a million products have to be priced every season, and some managers are
individually responsible for pricing more than 15,000 products. Obviously, in such
an environment it is not feasible to calculate price elasticities and price-response
functions for all products.
As a result, companies that offer many products or have highly standardized
prices should not focus their attention solely on price optimization at individual
product level (“What is the correct price for Product X?”). Instead, they must
broaden their view of pricing and take the entire pricing process into account,
including all preliminary and subsequent activities (“How are prices determined
and implemented?”). Only by taking a holistic approach towards pricing can such
companies tap their full profit potential.
Wiltinger (1998) defined the term “pricing process” as a decision-making proc-
ess within a company taking account of one or more price components. Price
components can be list prices, discounts, rebates, bonuses, etc. The entirety of
price components is considered in determination of the transaction price (“pocket
price”), which is the final price of a product that the customer actually pays.
Hence, according to Wiltinger, the results of a pricing process are the components
of a transaction price. We suggest that this definition should be enlarged. The
result of a pricing process is not just the components of a price, but both the entire
transaction price and its implementation in the market; that is to say that a pricing
process is a set of rules and procedures that helps a company to determine and
implement (transaction) prices.
Although the structure of pricing processes is industry specific and might
differ even from company to company, we suggest dividing pricing processes
into five phases (Figure 3): (1) strategy development, (2) review of internal
processes, (3) determination of prices, (4) implementation, and (5) controlling
and monitoring.
1. Strategy
Development
3. Determination
of Prices
4. Impl emen-
tation
5. Controlling
and Monitoring
• Object ives
• Positioning/
Differ entiat ion
• Competit ion
• Price Structure
• Price Level
• Bundling
•Organization/
Responsibilities
•IT
•Incentives
• Confir mation/
Verifica tion
• Correction/
Adaptat ion
What do we
want? How
can we
achieve it?
How do
we do it
today?
How can the
price be
enforced in the
market?
What prices
have been
achieved and
why?
Increase in
Profitability
Feedback Loop
2. Review of In-
ternal Processes
•Objectives
• Positioning/
Differ entiat ion
• Competition
What i s the
optimal price/
price structure?
Fig. 3. Phases of the Pricing Process
(Source: Simon
Kucher & Partners, Strategy & Marketing Consultants)
Retail Pricing – Higher Profits Through Improved Pricing Processes 275
Phase 1 is the start of the pricing process, where strategic requirements are de-
fined and targets set with respect to profit, volume, general price level, market share,
and positioning. Within Phase 2, a thorough review of the status quo and of existing
processes is performed. Prior to any reorganization of the pricing process, issues
such as current practice, internal competencies, price structures, and price differen-
tiation must be carefully analyzed. Phase 3 consists of determining price levels
through developing clear sub-processes relating to price structure, price level, and
price differentiation. This will also determine what information and what decision
models are needed to support pricing decisions. Implementation, Phase 4, is often
neglected by organizations. Key success factors to be aware of are clear definitions
of responsibility, application of target-oriented incentives, and development of sup-
porting IT tools. Finally, controlling and monitoring processes are developed in
Phase 5 for the purpose of sustaining the pricing process implemented.
From experience we can say that, in most retail companies, money is wasted
because there are inefficiencies and malfunctions in all phases. Consequently,
there is potential for profit improvement in all phases. The sum of improvements
usually leads to profit increases of one to two percentage points (not percent) – an
enormous effect for any retailer!
If we look at what happens in each phase it becomes apparent that the im-
provement of pricing processes covers a wide range of topics, such as:
x IT-supported data sourcing, processing and data analysis with models,
methodologies, and rules. Data used for analysis can have subjective com-
ponents (e.g., estimates and experience) as well as objective components
(e.g., market and competitor data).
x The involvement and training of personnel, the development of competen-
cies, the definition of responsibilities, and the creation of suitable incentive
structures within the company.
x Internal and external negotiations and the development of decision-making
guidelines and success standards, and also the introduction of controlling
and monitoring systems.
Despite its complexity, however, the improvement of pricing processes is an ex-
tremely attractive alternative to cost-cutting measures, because – in contrast to
cost cutting – it leads to quick (but long-lasting) improvements in profits. These
quick gains result from three effects (see Figure 4). First, an investment advantage
is created because no costly severance payments or store closures are necessary. A
time advantage is created because price has an immediate impact on profit and
cash flow, whereas the profit effects of cost cutting are often do not become no-
ticeable until several three-month periods have passed. Third, improving pricing
processes has a profit advantage over cost cutting. As already pointed out, our
experience shows that a professional reorganization of pricing processes increases
the rate of return by one to two percentage points. The impact of pricing process
improvement is therefore often much more far reaching than that of cost cutting.
276 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Profit
Time
Up-front
Investments
Break-
even
Pricing Process
Improvement
Cost Cutting
1. Investment
Advantage
1. Investment
Advantage
3. Profit Advantage
3. Profit Advantage
2. Time
Advantage
2. Time
Advant age
Fig. 4. Quick Gains Through Pricing Process Improvement Relative to Cost Cutting
(Source: Simon
Kucher & Partners, Strategy & Marketing Consultants)
Despite their great importance for managers, pricing processes have so far very
rarely been examined in academic studies. (The only investigations of pricing
processes within companies were conducted by Wiltinger 1998 and Dutta, Bergen,
Zbaracki 2002.) This is partly because marketing research has traditionally had a
microeconomic perspective on pricing, as discussed above. Furthermore, in most
companies pricing processes are regarded as highly sensitive executive manage-
ment issues and it is extremely difficult to gain access to adequate information.
Our model of the pricing process therefore represents an important step forward in
the direction of an integrative and holistic view on pricing and may serve as a
framework for future pricing research.
Current Pricing Practices in Retailing
Before discussing concrete approaches to improving retailers’ pricing processes in
the next section, we will first focus on current pricing practices and characteristics of
the retailing industry (see also the chapter by Bolton, Shankar, Montoya in this book).
Most retailers are organized by product categories. Buyers have the operative re-
sponsibility for these product categories, which often comprise hundreds or even
thousands of items. These buyers (as opposed to sales people or executive managers
in other industries) also set the final product prices. Often the manufacturers of con-
sumer goods aggressively enforce recommended retail prices for their brand labels
and leave no room for price decisions to be made by retailers.3 Therefore, most buy-
3 Although resale price maintenance is officially not allowed by Fair Trade Acts in Europe
and the USA, de facto powerful consumer goods manufacturers succeed in imposing
their prices on retailers.
Retail Pricing – Higher Profits Through Improved Pricing Processes 277
ers make price decisions primarily for private label brands. Store managers, in con-
trast, have no price-setting power in most retailing companies – only at the end of a
season or during promotions are they allowed to alter prices within certain prede-
termined ranges. For example, at the German-based discounter Aldi, price decisions
are centralized, but regional managers are allowed to lower prices for a limited
number of promotional products, for instance if their turnover rate is low.
In most retail companies, strategic pricing decisions are made by the execu-
tive management of the company. In a top-down approach, the chief executive
and heads of the purchasing department develop general pricing guidelines and
adopt overall target revenues and target profits for the company. These general
targets are then broken down into revenue and profit targets as well as target
price levels for each purchasing department, product category, and product
group (see Figure 5).
During this process many factors are taken into account, such as competition,
shifts in consumer demand for each product group, price image aspects of the
company, etc. Often the price positioning is differentiated along channel lines
(e.g., retail outlets, catalog, Internet) and regions. For instance SportScheck, a
leading retailer of sports goods, differentiates catalog prices according to product
sizes (the same tee-shirt costs more in size XXL than in size L), whereas store
prices for tee-shirts do not vary with size.
The purchasing departments then develop operative targets for a certain period
based on the strategic targets for each product group. To accomplish this, product
groups are differentiated into price segments, e.g., high-, medium-, and low-price
products. For each of these price segments, the range of prices is predetermined.
Quantities for each price segment are determined on the basis of previous
years/seasons and estimates of market development.
On the basis of the targets for volumes, profits and final price levels for each
price segment, buyers determine the range (e.g., the proportion of private brand
products, the number and kind of products within each price category, etc.) and
Management Boa rd
Purchasing
Purchasing Dept. 2
Product Category 2
Purchasing Dept. 1
Product Category 1
Purchasing Dept. N
Product Category N
Buyer B
Product Group C
Buyer A
Product Groups A + B
Buyer C
Product Groups D + E
PRICE DECISION
TARGETS:
• Revenue
• Profits • Price Level
Fig. 5. Typical Organizational Structure and Pricing Responsibilities in Retail Companies
278 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
start sourcing the products from regional or global markets. Therefore, since
prices are practically determined before products are selected and sourced/bought,
this process can also be described as price-led target costing (Swenson et al.
2003). This target-costing approach – and all pricing practices that result from it –
is very typical for the retail industry in general. It explains why most retailers
adjust volumes rather than prices. For example, during a soccer world champion-
ship, virtually all retailers purchase and sell larger volumes of soccer balls to meet
the higher demand, rather than increasing prices.
Retailers see their biggest challenge in determining volumes and reducing pur-
chase costs to a minimum. They do not yet see the challenge in optimizing retail
prices or, least of all, in improving pricing processes. When will they finally rec-
ognize that price is the biggest profit driver? Up to now, most retailers have
passed up chances of improving their profit situation at virtually every phase of
the pricing process. In the following section we will show retail companies the
starting points for analyzing and eventually improving their pricing process within
the company.
Reorganizing the Pricing Process in Retailing
Pricing processes are complex and company specific. Although many retailers
have common characteristics – large ranges, a purchase-driven product-category
organization, volume adjustments rather than price adjustments, etc. – their start-
ing points for the reorganization of pricing processes might be entirely different.
Following the structure of the pricing process shown in Figure 3, the following
paragraphs illustrate where and how pricing processes can be improved.
Phase 1: Strategic Guidelines
As shown in Figure 3, in the first phase both the strategy and the positioning of the
company and its products (price policy, price level, price sequence, etc.) must be
defined. A well-formulated strategy and clear positioning are crucial parts of an
effective pricing process. In practice, however, many companies have no clear
strategy and pursue several objectives at once though these might be at odds with
each other (e.g., market share, profitability, revenues). For instance, there are typi-
cally conflicts between volume and profit targets. Figure 6 indicates that price
increases lead to increases in profit and volume only in very specific circum-
stances (Quadrant I). More often, trade-offs between volume and profit growth
have to be made (Quadrants II and III).
This simple lesson seems to be ignored by many retailers. When discounters
such as Wal-Mart, Metro or Aldi enter the stage with aggressive everyday low
price (EDLP) strategies, established retailers mostly react by reducing their own
prices (cf. Shankar,Bolton 2004; Bolton, Shankar 2002). Instead of accepting
Retail Pricing – Higher Profits Through Improved Pricing Processes 279
Negative
Volume Growth
Volume
Growth
Profit
Growth
Negative
Profit Growth
Quadrant I:
Quadrant III:
Quadrant II:
Quadrant IV:
Trade-off
Zone
Trade-off
Zone
Manager's
Nightmare
Manager's
Nightmare
Trade-off
Zone
Trade-off
Zone
Manager's
Dream
Manager's
Dream
Fig. 6. Profit-Volume Matrix (Dolan/Simon 1996)
small falls in market share and relatively moderate decreases in profits, they en-
gage in price wars leading to drastic profit losses.
Discounters, in contrast, are in a good position to compete by way of prices ow-
ing to their smaller ranges. German discounters Aldi and Lidl, for example, sell
the most profitable products in each product category (mostly products with high
turnover rates) and have only about 670 items on offer. Items with unattractive or
even negative margins are not kept in their ranges, whereas traditional retailers
offer several thousand articles, including highly unprofitable, image-building
products (Huchzermeier, Iyer, Freiheit 2002). Discounters with small ranges not
only have larger margins; in addition, their purchasing costs are lower because of
their lower number of suppliers (increased purchasing power), lower logistics
costs and lower merchandising expenditures. Consequently, traditional retailers,
which cannot ever enjoy the same cost advantages as the discounters, simply
should not try to compete via price, because they will eventually lose any price
war. This is also illustrated by the breakeven analysis in Figure 7 (see next page).
It shows that retailers must reduce costs drastically in order to adopt an EDLP
pricing strategy successfully.
When designing a price strategy, retailers must keep in mind that lower prices
are not the only way to differentiate. They should highlight other attributes that are
of value to the customer and cannot be easily imitated by competitors, such as supe-
rior product quality, additional services (e.g., home delivery, a nursery for small
children), a unique shopping environment, additional marketing activities (e.g., loy-
alty programs (e.g., see chapter by Reinartz in this book), non-price promotions, and
so on (Shankar, Bolton 2004; Shankar, Krishnamurthi 1996). British grocery retail-
ers have answered the discount challenge successfully in recent years by offering
well-targeted economy/value ranges and intelligent services and loyalty programs.
280 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Hoch/Drèze/Purk (1994) calculated the needed change in operating costs for a food retailer as a
function of changes in unit volume. They assumed an initial gross margin of 25% and operating
costs of 24% (as a percentage of the original price). The graph shows the results for a price
decrease of 7%:
A volume increase of 39% is required for an EDLP strategy to deliver break even-profits without
having to decrease operating costs. Costs must be reduced dramatically if volume increases
resulting from price reductions are lower: for a 20% increase in volume, operating costs have to be
reduced by more than 14%. If the volume increase is merely 3% – a realistic amount for most
competitive retail markets – operating costs have to be decreased by as much as 27%! Hence, for
most retailers, price wars are bound to end in disaster.
% Change in Operating Cost
% Change in Unit Volume
0% 10% 20% 30% 40%
5%
15%
25%
0%
Assumptions:
25% Gross Profit Margin
1% Net Margin
7% Decrease in Net
Price
Why EDLP Pricing Strategies Are Bound to Fail for Normal Retailers
Fig. 7. Breakeven Cost Reduction Analysis for an EDLP Pricing Strategy
(Source: Hoch, Drèze, Purk 1994)
Phase 2: Review of Internal Processes
As Figure 3 shows, Phase 2 consists of a review of the existing pricing process
within the company. There is no doubt that this phase is very important. However,
it often proves to be unexpectedly complex and time-consuming. The reason for
this is that most companies do not understand pricing as a closed-loop process.
Hence, different pieces of information and data about pricing activities have to be
collected meticulously from many departments, which can be a tedious process.
For example, data might come from the accounting department, the purchasing
department, and marketing, and others besides. And it then often has to be disag-
gregated into customer, region or product category units. There may be several
areas in which information that is crucial for making sound price decisions is not
available in the right quantity within the company, is not present at the right loca-
tions, or is even completely lacking.
Retail Pricing – Higher Profits Through Improved Pricing Processes 281
Table 1. Starting Points for Pricing Process Improvements and Resulting Profit Increases
- Clas sifying cus tomer and produc t groups based on pric e elastici ties
- Ant i-discount i ncentives for the sales force
- Reconfi guration of the selli ng process and guidelines
- St ronger centralizat ion
- Sy stematic quantification of value-to-c ustomer
- More comprehensive and reliable competitive intelligence
- Far-reac hing extracti on of brand value
- Rais ing the pricing c ompetenc e of the c ustomer represent atives
- More s trongly differentiat ed price s tructure
- Indic ator-support ed identificati on of opportuni ties with profit potenti al
- Use of value-pric ing inst ead of cost-plus for innovations
- Bet ter forecasting of c ost developments for long-t erm c ontracts
- Sy stematic recognition and eli minati on of loss -making bus iness
- Internat ional price disc ipline, control ling, and m onitoring
- More t horough analysis of m ulti-s tage custom er value chain
- New pric e-decision hierarc hy and use of key ac count management
-Reduction i n overengineering through t arget valuing/t arget cos ting
-Standardiz ation of process es, especial ly for limited/ small -run series
Starting Points for Process Improve me nt
Increase in R eturn on
Sales in Pe rcentage
Points
RevenueIndustry
2.0
8.0*
*from -3.0 to +5.0
1.0
1.6
1.6
1.2
1.5
1.1
1.5
Wholes aler
Engineering
Bank
Tour is m
Supplier
Machinery
Express
service
Chemical
specialties
Software
solutions
$1-5 bn.
$100-500 m.
$5-10 bn.
$1-5 bn.
$100-500 m.
$5-10 bn.
$5-10 bn.
$5-10 bn.
$0.5-1.0 bn.
(Source: Simon
Kucher & Partner, Strategy & Marketing Consultants)
In most cases, merely reviewing existing pricing processes shows flaws and weak
spots within the company and highlights a wide scope for improvement. It comes as
no surprise that the starting points for pricing process improvements discovered
during this review phase differ very widely from industry to industry and even from
company to company. Table 1 shows different starting points for pricing process
improvements for selected projects in different industries. As discussed above, in
most cases increases in return on sales resulting from such improvements differ by
one to two percentage points.
In summary, it can be said that the improvement of pricing processes cannot be
seen as a standard procedure. Instead, the unique situation of each company has to
be analyzed individually. A thorough review of the internal processes shows start-
ing points for efforts to improve pricing processes.
Phase 3: Determination of Prices
Phase 3, the determination of prices, is definitely the most complex and difficult
phase of the pricing process. When pricing their products, most retailers already take
into account that customers are more price sensitive in certain product categories
and regions than in others. However, most retailers do not quantify how a variation
in prices affects customer demand or profit margins. Instead of this, they apply sim-
ple decision rules (see Figure 8) or base their price decisions on intuition (Simon
1989). To optimize prices, however, price elasticities, profit margins, cross-product
effects, and the intensity of competition have to be taken into account.
282 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
1. The lower the price in absolute terms, the higher the mark-up.
2. The higher the turnover rate, the lower the mark-up.
3. For products with a high price perception (“political” products
such as bread, milk, butter) the mark-ups should be very low.
4. Mark-ups should be lower for commodities than for specialities.
5. Mark-ups should be geared towards the competition
(“shop-window calculation”)
Fig. 8. Rules of Thumb in Retailer Pricing (Simon 1989)
When reorganizing pricing processes, first price elasticities (i.e., the effects of
prices on volumes) should be quantified. They should only be measured per prod-
uct category and per region. Only for the most important products in terms of
revenue might it be worthwhile to measure price elasticities at product level. Fur-
thermore, the most important drivers of price elasticity per product category
should be identified.
Historical scanner data might yield the required information. Scanner technology
is an excellent tool to support quantitative analysis, because every purchase is regis-
tered by date, article, and price. Prices can be changed without major effort by
means of a computer command and a change to the pricing tags on the shelves.
These are ideal preconditions for conducting price tests and an analysis of price-
quantity effects. Prices can be changed systematically, and the effects on sales vol-
ume can be measured.
Alternatively, price elasticities can be deduced by looking at price variations
over time or for different points of revenue (Simon 1992). Figure 9 (see next page)
gives an example of a price analysis for a coffee brand. If no data is available or if
no trained personnel is available for analysis and interpretation of the data, it is
permissible to substitute expert interviews with store managers, as these also yield
useful information on price effects.
Price elasticity is influenced to a large extent by the price image. The price im-
age is defined as each customer’s individual perception of a retailer with regard to
the price level (Simon 1992). A study conducted by Ahlert, Kenning,Vogel (2003)
revealed that only about 40% of all consumers have an idea of the real prices of
items that they buy regularly, and a mere 20% (16%) of all consumers could name
the lowest (highest) price of 1 out of 91 articles. Throughout all item and product
groups, prices were overestimated by as much as 15% on average. Since custom-
ers usually remember very few prices, usually only a few products have very high
price elasticity, while most products do not. Consequently, when consumers
choose the retailer with the best price image for their shopping this retailer is not
necessarily the cheapest one.
Retail Pricing – Higher Profits Through Improved Pricing Processes 283
Relative Price
Profits
Market Share
0.00
0.05
0.10
0.850.80 0.940.89 1.030.98 1.08 1.12 1.17 1.22 1.26
Optimal Price
Market
Share
Data was collected over 24 weeks from a retaili ng chain with 58 stores. Overall, 58 x 24 = 1,392 observations of
price-market share points were col lected (the numbers in the diagram show how often each price-market share
point was observed).
Assuming that the price-response functi on is linear, an analysis of the data yields the following results:
Market Share = 0.205 – 0.169 x Relative Price,where
Relative Price= Price of the Brand/Avg. Market Price
If the price of the brand equals the average market price (relative pri ce = 1), the brand yields a market share of
0.205 – 0.169 x 1 = 3.60%. With a relative price of 0.9, market share grows to 5.29%. Thus, price elasticity for
this price change is 8.24 (i.e. if the price is lowered by 1%, market share increases by 8.24%).
For scanner-measured price elasti cities, such a high price elasticity is quite typical. However, one has to keep in
mind that these are short-term price elasti cities that do not take competitors' reacti ons into account.
The level of significance of scanner data is usually almost 100%. This im plies that recommendations that are
based on scanner data are very reliable. In this example, the optimal price is about 0.955. If the price were set
at the level of the market average (relative price = 1), profits would be 3% lower.
Fig. 9. Example of a Price Analysis for a Coffee Brand (Source: Simon 1992)
Once price elasticities have been determined, the profit margin structure has to
be analyzed in a second step; profit margins for all product categories have to be
determined. This is a fairly complex process, because potential effects of vol-
ume increases or decreases conditional on price variations have to be taken into
consideration.
Third, cross-product effects (i.e. cross-elasticities different from zero) have to
be examined. Cross-product effects such as product substitution or complementary
effects (e.g., improvement resulting from loss leaders) exist because customers
generally concentrate their shopping activities on a few retail outlets owing to time
limitations or geographical restrictions (“one-stop shopping,” see Simon 1992).
Because of cross-product effects, maximizing the profits of all products in an as-
sortment does not necessarily lead to maximization of profits over the entire range
284 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
(cf. Basuroy, Mantrala, Walters 2001)! During promotions, cross-elasticities play
an especially important role, since promotions have an effect (a) on the reduced
articles themselves, (b) on substitutes, and (c), on all other products in the range
(because customers make future purchases earlier and because promotions attract
new customers, e.g., see chapter by Gedenk, Neslin, Montoya in this book).
In a fourth step, it is necessary to analyze the intensity of (local) competition (Bol-
ton, Shankar 2002). For this purpose, expert interviews can be conducted and the
intensity of competition can be measured with the aid of predetermined indicators.
Selective price comparisons are regularly carried out by most retailers; however,
these might be misleading if the wrong items or product categories are compared.
Once all this information has been gathered, a forecasting model can be devel-
oped that allows managers to forecast volumes, revenues, and profits as functions
of variations in price and promotional activities. In the forecasting tool, the degree
of price variation should be in agreement with the price elasticities and profit mar-
gins within the product categories (see Figure 10). Different price scenarios ide-
ally also include the reaction of competitors to price variations (see chapter by
Bolton, Shankar, Montoya in this book). The results of this modeling must be
discussed thoroughly. In general, it is advisable to define upper and lower price
limits, to guarantee strategically constant positioning of the company on the one
hand and to prevent unwanted competitor reactions on the other.
low
low
Profit Margin per Product Group
Price Elasticity per Product Group
Price
Increase
Price
Increase
Price
Increase
Price
Increase
Price
Decrease
Price
Decrease
medium high
medium high
Fig. 10. Optimizing Prices According to Price Elasticity and Profit Margin per Product
Group
Retail Pricing – Higher Profits Through Improved Pricing Processes 285
Phase 4: Implementation
After the determination of prices comes the implementation phase, as shown in
Figure 3. In the implementation phase it is necessary to define how the pricing
process should be organized and which employees are responsible for which price
decisions.
For example, a food retailer with 1,000 retail outlets did not have a pricing
manager responsible at either product group level or company level. As a conse-
quence, while the company believed that its prices were based on competitors’
prices, in reality prices had evolved historically and corresponded to neither the
customer nor the competitor situation, ranging from 10% below to 30% above the
prices of the price leader.
The following questions helped this retailer and provide a good illustration of
the diversity of decisions that have to be made during the implementation phase:
x Who makes the decision on the price positioning of the company/certain
product lines/products? Who decides on guidelines and rules for pricing?
x What should a buyer’s area of responsibility encompass? What responsibili-
ties do department heads have? and so on
x What decisions are made centrally/locally?
x Who decides on special offers, seasonal prices, etc.?
x Who decides when and under what conditions prices have to be adapted?
Who decides when and how to react to competitor activities?
x Who is responsible for contacting the media and communicating prices and
price changes to the market?
As already pointed out, most retailing companies are organized according to
product categories. This organizational structure reflects the (internal) product
group structure, but not necessarily the (external) view that customers have of
products and service offerings. Customers do not usually think in categories
such as “refrigerated foods,” “alcoholic beverages,” and “household articles”
when buying vegetables, red wine, and candles. Customers think rather of
events such as “romantic dinner” or “day at the beach” for which they need cer-
tain items. Therefore, cross-price elasticities between products should be taken
into account. When pricing processes are restructured, mechanisms should be
integrated that ensure communication between departments and consideration of
cross-product effects.
Such structural (and cultural) changes call for strong support from executive
managers. Especially in medium-sized businesses we have often experienced a
lack of price-related incentive systems, which are absolutely necessary for proper
implementation of prices. In the end, organizational responsibilities must be de-
fined clearly for each phase of the pricing process.
286 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
Phase 5: Controlling and Monitoring
The controlling and monitoring phase is the last phase of the pricing process. At
this point, the selection of adequate data and the design of viable decision support
tools are absolutely crucial so as to guarantee that pricing is not just a “one-off”
but is repeated as a continuous process in the company.
Figure 11 shows key performance indicators that are used in practice, according
to a survey conducted among 50 managers of leading retail companies. In many
cases, retail managers have decision-support systems in place that embrace reve-
nue data, area productivity, inventory turnover, etc. However, essential price-
related key performance indicators are often lacking. For example, cross-product
effects and price elasticities of product categories are almost never captured quan-
titatively. Furthermore, important price-sensitivity-related key figures, such as
image indicators, are used by only about one third of all retailers.
32%
38%
42%
47%
49%
54%
72%
74%
78%
79%
85%
100%
Image Effect
Fulfillment of Demand
Quota of L oyal Customers
Buying Frequency
Size of Shopping Basket
Customer Coverage
Avg. Stock of Inventory
Market Share
Price Index Compet itors
Area Prod uctivit y
Gross Profits
Revenue
Fig. 11. Percentage of Selected Key Performance Indicators Used by Retailers
(Source: University of Essen/ Mercer Management Consulting 2003)
Even if data on price sensitivity is collected (e.g., via scanner), it is often not used
because employees are unable to interpret it. This lack of information or qualifica-
tion of personnel is instead “replaced” by the experience and intuition of the deci-
sion makers, as described above.
The same holds true for information on competitor prices. Although almost
three-quarters of all retailers state that they use some form of competitor price
indices (usually adapted from market research studies), in most cases information
is inadequate for making price decisions. Often, information on competitor prices
is neither systematically prepared nor captured in patterns that facilitate the deci-
sion-making process.
Retail Pricing – Higher Profits Through Improved Pricing Processes 287
Ultimately, constant quantitative monitoring of the pricing process is indispensa-
ble to the identification of starting points for improvement and exploitation of full
profit potential. Starting points for price process improvement can also be detected
by carrying out so-called lost-order analysis. Why did customers not purchase cer-
tain products? Is price really the reason, or are there other more important factors,
such as long waiting times, shopping environment, arrangement of racks?
Conclusion
In the face of the overall low profitability in the retailing industry we strongly
encourage retailers to devote more attention and energy to pricing. Among the
three profit drivers volume, costs, and price, price is by far the most effective one.
Price increases without a loss in volume lead to much greater profit improvement
than volume increases without price reductions. Compared with cost, price has an
investment advantage because no upfront investment is required. It also has a time
advantage, since the profit effects of a better price are seen without a time lag.
And price offers an overall profit advantage since, after the cost-cutting spree of
recent years, the potential for profit improvement is higher on the price side than
on the cost side.
The textbook paradigm of price optimization is not applicable to retailers, with
their typically large ranges, frequent price changes, and price promotions. Rather,
we suggest the adoption of a process view of pricing. The pricing process includes
all aspects of the determination of the final transaction price. It starts with the
strategy, which comprises objectives related to profit, volume, market share, posi-
tioning, general price level, etc. The reorganization of pricing processes requires
careful and critical examination of current practices and understanding of the ex-
isting price structures, price differentiation, the competition, and the internal com-
petencies. Phase 3 of the pricing process addresses the determination of prices:
what rules are applied, what information is used, and how price levels, price struc-
tures, discounts, or bundle prices are determined. These rules are followed by the
organizational aspects of Phase 4: responsibilities, incentives, and information
technology. Last but not least, a continuous process for monitoring and controlling
prices and margins has to be set up.
Our experience as pricing consultants has proved many times that profits can be
greatly increased through a reorganization of pricing processes. Considering the
state of actual price decision-making, this is not too astonishing. Retail pricing in
practice is rather far from what we call a “Six Sigma Approach” to pricing, i.e. a
process during which price determination and implementation are comprehensively
and unequivocally organized. With regard to pricing processes, retailers can learn a
lot from other industries, e.g. pharmaceuticals, airlines, telecommunications, and
hotels and tourism. An increasing number of companies in these industries are reor-
ganizing their pricing processes and are surprised by the positive effects on profits.
This is the way retailers should go to achieve higher profitability.
288 Hermann Simon, Andreas von der Gathen, and Philip W. Daus
We are convinced that after the eras of cost reduction, supply chain improve-
ment and information technology upgrading pricing will become the predominant
area for profit improvement. The tools and processes are here. Retailers only have
to use them. Quick wins and sustainable higher returns are almost certain.
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am Beispiel des deutschen Lebensmitteleinzelhandels, Lehrstuhl für Betriebswirt-
schaftslehre, insb. Distribution und Handel, Muenster.
Basuroy, S./ Mantrala, M.K./Walters, R.G. (2001): The Impact of Category Management
on Retailer Prices and Performance: Theory and Evidence, Journal of Marketing, 65
(October), 16-32.
Bolton, R. N./Shankar, V. (2002): An Empirically Driven Taxonomy of Retailer Pricing
and Promotion Strategies, Journal of Retailing, 79 (4), 213-224.
Dolan, R. J./Simon, H. (1996): Power Pricing – How Managing Price Transforms the Bot-
tom Line, New York, The Free Press.
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Variables and Pricing Policy, Journal of Retailing, 72 (3), 249-73.
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den, Gabler.
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Gabler.
DISTRIBUTION (PLACE)
Current Status and Future Evolution of
Retail Formats
Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
University of Muenster, Germany
Introduction
Present-day consumers are faced with an ever-growing variety of retail formats to
satisfy their needs and want. The emergence of new retail formats can be ex-
plained in at least three ways: First, it can be argued that the changing demand
patterns of consumers may lead to different formats. For example, there are value-
oriented shoppers, price-oriented shoppers and convenience shoppers. Each type
of consumer may cause the retail industry to consider new retail formats. Sec-
ondly, retailers themselves may decide to develop a certain format that best fits
their internal strength. By so doing, they hope to obtain a competitive advantage.
A third explanation for the emergence of new retail formats may be the changing
role of the manufacturing industry. Excess product supply can force prices down,
which in turn may lead retailers to purchase opportunistically.
Whatever the reason for the emergence of new retail formats, it is certain that
new formats offer opportunities for both traditional and new retailers to increase
their market share and their profitability. On the other hand, it may also cause
erosion in the retail landscape. Those players who are unable to take the chances
that come with a change in the market may lose market share or even disappear
(see chapter by Fox, Sethuraman in this book for more insights into between-
format versus within-format retail competition).
One way for retailers to evaluate the chances for certain retail formats is to take
an international perspective. While most developed countries share the same basic
retail formats, their importance and dissemination vary substantially across differ-
ent countries.
This chapter attempts to provide an overview of the dissemination of retail
formats in the “G8” countries. A classification of retail formats provides the ter-
minological basis used to describe the evolution of these formats between the year
1999 and today. A closer look at an individual country gives an indication of what
290 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
particular format is dominant in that country. This in turn offers retailers in other
countries the opportunity to identify gaps in their own national retail landscape
and suggests possible ways of identifying best practices for certain retail formats.
Without attempting to be comprehensive, this paper concludes by identifying
some future trends in retailing.
Classification of Retail Formats
In order to explain the existence and the dynamics of retail formats, we first attempt
a classification of such formats. On the basis of how their marketing instruments
have developed, five formats can be distinguished (M+M planetretail 2004):
x Cash & carry stores and warehouse clubs
x Convenience and forecourt stores
x Discount stores
x Hypermarket and superstore operators
x Supermarket and neighborhood store operators
Cash & carry stores and warehouse clubs.Cash & carry is a membership-based
type of wholesale trade level, which depends on retailers and commercial custom-
ers. In the area of food, the proprietors of independent businesses are especially
likely to use this concept. It is usually based on self-service, resembling a super-
market in this, with cash payment of goods at the checkout (a point of difference
from a wholesale supplier). In some countries, particularly some eastern European
countries, this type of outlet also sells to private customers. Therefore, this article
analyzes the development of this format, although it is mainly a wholesale concept
(see, e.g., description of Metro Cash & Carry stores in the chapter by Mierdorf,
Mantrala, Krafft elsewhere in this book). The format of warehouse clubs is also
extensively organized and depends on both business customers and private cus-
tomers on a membership basis. Normally an annual contribution has to be paid,
which gives the customer the right to purchase.
Convenience and forecourt stores. The convenience store is a small self-service-
based format sited in highly frequented locations and has long opening times. The
focus is on convenience products such as ready-to-serve food and fast food, but in
most cases a small selection of regular food and nonfood products is also offered.
Aforecourt store is also a convenience business; it is often tied to petrol stations
and sometimes run in association with petrol companies. It depends on customers
who have forgotten things during their regular weekly shopping trips.
Discount stores. Discount stores are characterized by efficient background sys-
tems enabling them to offer their customers only a limited breadth of assortment,
but this efficiently at a high turnover speed. Consequently these businesses are
Current Status and Future Evolution of Retail Formats 291
often run in less than 1,000 square meters. This concept has its origins in Germany
and for this reason has become most widespread in Europe. It appears to take one
of two forms. The hard discounter sells his own brands exclusively and concen-
trates on the price, whereas soft discounters offer a mix of manufacturer’s and
own brands in their ranges.
Hypermarket and superstore operator hypermarkets. These retail outlets are self-
service shops with a selling area exceeding 5,000 square meters and a correspond-
ingly high turnover. As a rule, they offer a comprehensive range of nonfood items in
addition to a complete food range. Depending on the individual design, the nonfood
area can be equivalent to that of a department store. The superstore is a self-service
store with a selling area of between 2,500 and 5,000 square meters. Superstores are
similar to hypermarkets in that they offer a comprehensive range of food, but the
nonfood range is limited owing to the smaller area. The discount superstore is an
extensive format occupying an area exceeding 2,500 square meters and offering a
selection of nonfood items, such as household goods and health and toiletry prod-
ucts, but also food. This format typically has a strong focus on low prices, and it is
mainly found in North America.
Supermarket and Neighborhood Store Operators. The supermarket is a self-
service store with a food range; it occupies an average of between 400 and 2,500
square meters, in which the particular size determines whether nonfood products
are on offer and in what quantities. The neighborhood store is a small food store
with less than 400 square meters of floor space. In principle, this format is similar
to that of a supermarket; nevertheless there are also still many full-service
neighborhood stores. The food department is a separate food area in a department
store, often occupying a complete floor of the building. It can either be rented to a
supermarket operator or run by the department store itself. Apart from a mass
market-orientated version, operators are also found in the premium area.
Analysis of Retail Formats in G8 Countries
National Market Share of Different Retail Formats
Canada
Up to 2002, Canada was able to show constant economic growth at an average
rate of 6%, which is the strongest since 1999 (M+M planetretail 2004). This de-
velopment was promoted in particular by the sound domestic economic data, and
also by growing domestic investments and consumer spending. The leading retail
businesses in Canada are the two Canadian companies Loblaw and Sobeys, which
have at their disposal comprehensive portfolios with various distribution outlets
ranging from hypermarkets (1999: 48%; 2003: 51%) to small neighborhood stores
(1999: 32%; 2003: 28%).
292 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
12%
7%
1%
48%
32%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
11%
7%
3%
28%
51%
2003 1999
Fig. 1. Canada: Evolution of Retail Structures
(Source: M+M planetretail 2004)
Despite the growth of numerous companies the Canadian food trade remains
fragmented (M+M planetretail 2004). One of the facts responsible for this is that
the mostly small Canadian communities are spread all over the country. The larg-
est Group in the country, Loblaw, ranks merely second compared with the inde-
pendent retailers. This is also due to the large area in which it occurs in interna-
tional comparison, because of the dense distribution of cash & carry markets as
well as warehouse clubs (1999: 12%, 2003: 11%). This is why most smaller, inde-
pendent retailers organize their buying mainly via wholesalers, which enables
them to stand their ground in the market. In addition to this, large-scale formats
have a long tradition in North America.
Wal-Mart entered the Canadian market by taking over the Woolco chain. Safe-
way, in contrast with the extensive Wal-Mart markets, runs mainly a supermarket
chain designed to meet luxury, up-market requirements. The German company
Tengelmann is also represented by its A&P line. The trend towards discounters
seen in the European countries seems to be beginning in Canada, albeit at a very
low level so far (1999: 1%; 2003: 3%). If the growth of the discounter sector does
continue, this will be mainly at the expense of the classic supermarkets. The other
operators represented in Canada originate mainly from the American market. For
the time being, the most important are still Loblaw, A&P (Tengelmann), Sobeys,
Wal-Mart, Metro-Richelieu, Costco, and Safeway (world of retail 2004).
France
The French economy has received a boost in recent years from an increasing number
of tax cuts, which have caused a rise in consumer spending. The household goods
area is the one that has profited most from this development, however (M+M planet-
Current Status and Future Evolution of Retail Formats 293
retail 2004). In European comparison, France has been ensured one of the leading
positions, helped by a moderate rise in inflation. Only the rising unemployment has
had a negative effect on growth, as it puts pressure on consumer spending.
In the recent past the French government has introduced tighter legislation con-
cerning the construction of large-area hypermarkets, so that the financially strongest
French retailers have switched increasingly to convenience (1999: 6%, 2003: 7%)
and discount concepts (number of outlets in 1999: 8,259; in 2003: 12,375) (Bordier
2004). Nevertheless, France is the home of the classic hypermarkets and the country
of origin of numerous successful operators who, apart from a high market share
(1999: 48%; 2003: 46%), also show high area productivities (Myers 2003).
The French food trade is determined decisively by the company Carrefour. This
strong position of Carrefour was reached in 1999 when it merged with Promodès in
response to the increasing presence of Wal-Mart in the European market (Myers
2003). This further speeded up the concentration process in the country (Colla 2004).
The next two places in the ranking are occupied by Alliances Leclerc and Inter-
maché, both of which were formed by mergers of independent retailers. Although
France is the home of several companies that have achieved worldwide success,
foreign companies, especially the German discounters Aldi and Lidl, are endeavor-
ing to gain a share of the market by opening numerous markets, at the expense of
supermarkets and traditional retailers. In the same way, the German company Metro
successfully has entered the market with its cash & carry concept (number of stores
in 1999: 3,558; in 2003: 4,450). The own-brand-name share has been able to grow
owing to the progressive concentration in the trade, this growth has further increased
Metro’s gain in power. Despite the increasing pressure of competition from foreign
operators, the most important companies in the French market at present are Carre-
four, Intermarché, Leclerc, Auchan, and Casino (World of Retail 2004).
48%
37% 6%
6%
3%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
7%
46%
38%
3%6%
2003 1999
Fig. 2. France: Evolution of Retail Structures
(Source: M+M planetretail 2004)
294 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
Germany
During the past few years the German economy has been characterized by low
growth rates and rising unemployment, resulting in a negative consumer climate.
This negative development has already been forced numerous trading companies
out of business (M+M planetretail 2004). Therefore, the already high degree of
concentration in the German market has intensified further. Despite this, the Ger-
man market remains the largest in Europe and at the same time the one with the
highest share of discounters (1999: 30%, 2003: 38%). The worldwide leading
discounters Aldi and Lidl originated in Germany (Colla 2004). Forced by this
tense situation, smaller independent retailers have often had no option but to
merge with larger groups, such as Rewe or Edeka. The large trading groups fol-
lowed a strategy of excessive diversification for a long time, which is why they
now have numerous outlets in the form of hypermarkets (1999: 25%, 2003: 25%)
through supermarkets (1999: 33%, 2003: 25%) and discount stores (Myers 2003
and Bell 2001).
After many years of clearing up the market and rationalization, the German
food trade is in the hands of just a few large companies, although a small number
of independent operators also remain in the market (M+M planetretail 2004).
Metro, Germany’s largest trading company, also owns a comprehensive portfolio
of outlets, among which the cash & carry format in particular has proved very
successful, due to the technological advantage enjoyed by the group. For all these
reasons, the German market is the most difficult market in Europe.
Not only Wal-Mart from the USA, but also the French company Intermarché and
Marks and Spencer from the UK, have already attempted to gain access to the mar-
ket in Germany, but failed owing to the extremely difficult competitive conditions.
30%
25%
33%
7%5%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
38%
25%
25% 5%
7%
2003 1999
Fig. 3. Germany: Evolution of Retail Structures
(Source: M+M planetretail 2004)
Current Status and Future Evolution of Retail Formats 295
Both companies are still showing losses, which should scare off further retailers
from attempting to enter the market. At present, the leading trading companies are
Metro, Rewe, Edeka, Aldi, Lidl, and Tengelmann (World of Retail 2004).
Italy
Since the 1990s, growth rates had remained stagnant in Italy. From 2000 onward, an
improvement can be noted (M+M planetretail 2004). Within the country there are
still considerable differences between the industrialized North and the rural South.
The differing regional subsidies to companies still remain a political issue contribut-
ing to distortion of the retail landscape. Inflation used to be one of the main prob-
lems in Italy but is now under control following introduction of the Euro. Not only
consumer spending, but also retail turnover have undergone moderate development.
The yields in the retail trade, however, have been stable since new outlets were
opened, and economies of scale may have been secured by this means (M+M
planetretail 2004). This trend toward increasing professionalism in the Italian
retail landscape has met with strong fragmentation of the market (Bordier 2002).
Apart from the high number of independent retailers, which is typical for the Ital-
ian market, particularly in the rural areas, modern trading formats have been im-
plemented mainly in the North of the country, not least due to the massive influ-
ence of French hypermarkets (1999: 28%; 2003: 30%) and German discounters
(1999: 6%; 2003: 7%) with high levels of ability in logistics, in the management
of product ranges, and also in offering better private labels than the traditionalists
(Myers 2003). For these reasons, established companies are trying to defend their
position by exploiting their knowledge of Italian customers and their regional
origins (Colla 2004).
6%
28%
51%
9%
6%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
7%
30%
50%
8%
5%
2003 1999
Fig. 4. Italy: Evolution of Retail Structures
(Source: M+M planetretail 2004)
296 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
Despite the massive influx of the French companies Carrefour and Auchan, the
Italian cooperative alliance Coop Italia still dominates the food trade at present.
Therefore, the concentration in the market is lower than the European average.
With intensified concentration, the Italian retail landscape will, however, catch up
with those in the other European countries (Bordier 2002). The most important
operators in the Italian market to date are Coop Italia, Carrefour, Auchan, Esse-
lunga, and METRO AG (World of Retail 2004).
Japan
Japan was once the world’s booming economic center, but it now bears the hall-
mark of deflationary tendencies, which have forced numerous weaker trading
companies out of business (M+M planetretail 2004). The Japanese consumer at-
taches great importance to quality and convenience. Despite the very low interest
rate, Japanese consumer spending is stagnating. The strong convenience orienta-
tion of Japanese consumers (1999: 35%; 2003: 38%) makes it difficult for more
traditional retail concepts to grow. Moreover, consumers are highly demanding
with respect to new trading concepts. For instance, French hypermarkets did not
do well in Japan because the consumers were prejudiced against low prices. They
assumed that it would not be possible to offer good quality at these prices being
asked. The cash & carry area is relatively underdeveloped and does not even have
a market share of 1%. The rather small land mass area of Japan is one factor re-
sponsible for this development, as is the exceedingly high population density. The
cost of land for development, especially in the mega-cities, is very high, so that in
many cases retailers cooperate to create networks of small convenience stores and
2%
48%
15%
35%
0%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
1%
44%
17%
0%
38%
2003 1999
Fig. 5. Japan: Evolution of Retail Structures
(Source: M+M planet retail 2004)
Current Status and Future Evolution of Retail Formats 297
supermarkets (1999: 15%; 2003: 17%). For this reason, Japan is the home of the
most stores based on modern convenience concepts. Extensive formats, such as
hypermarkets and superstores, on the other hand, are beset with problems. Despite
the volume they turn over, established hypermarkets and superstores are rather
few in number and are rather small and limited to the larger cities. Correspond-
ingly, hypermarkets accounted for only 12% of the total number of outlets, but for
44% of the total turnover in 2003.
Even though the general merchandise superstores with floor areas of over
5,000 square meters in the large towns have an important role in the Japanese
retail landscape, the overly expensive locations are a hurdle for foreign opera-
tors wishing to gain access to the Japanese food retailing market (M+M plane-
tretail 2004). This explains why this market is still in the hands of the estab-
lished Japanese trading companies: Ito-Yokado, Aeon, Uny, Daiei, and Lawson.
In the past these companies were able to build and defend a complex network of
outlets and differing retailing chains (World of Retail 2004). However, both
Costco and the French operator Carrefour have been able to build up a steady
presence in Japan.
Russia
Despite Russian politicians’ declared intention of liberalizing and privatizing the
Russian economy, there are still considerable structural problems in the trade market
(M+M planetretail 2004). The Russian retail landscape is still under pressure from
the weak economy, which is itself due to the immense financial burdens of the late
1990s, which led to a collapse of domestic demand (outside of the black market).
The present high inflation is also a problem for retailing turnovers. As in Canada,
the rural areas are particularly thinly populated, so that turnover there is low.
The larger domestic and foreign trading companies still aim their concepts at
the more densely populated areas of Russia, such as Moscow, in order to appeal to
wealthier consumers. If one compares the trading structures of 1999 and 2003 a
radical change becomes visible. While the retailing trade in 1999 was character-
ized first and foremost by networks of small independent retailers and kiosks,
these formats were steadily losing ground by 2003 (1999: 83%; 2003: 57%).
Modern formats such as hypermarkets are expanding, mostly in the cities (1999:
7%; 2003: 20%), while discounters do not yet have a substantial share of the mar-
ket (1999: 7%, 2003: 1%). The large portion of cash & carry markets can be at-
tributed to the existence of the numerous independent retailers, who organize their
procurement via this format
In the future, operators of the newer formats can expect substantial growth rates
in Russia. Auchan is already present in Russia, and other companies, such as Cora,
Leclerc, and Carrefour, are considering taking this step. Edeka, Metro (with the
cash & carry area), and Tesco are also expected to increase their presence. The
most important companies at present are Ramstore Hyper, Obi Diplomat, Perekry-
ostok, Sam Holding, and Sadko (World of Retail 2004).
298 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
83%
7%
5%
5%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
1%
20%
57%
3%
19%
2003 1999
Fig. 6. Russia: Evolution of Retail Structures
(Source: M+M planetretail 2004)
United Kingdom
The British market is growing steadily, and the companies operating there are
achieving considerable growth in turnover (M+M planetretail 2004). In particular,
the segments electronics, household goods, and DIY are enjoying above-average
growth. This positive development began in the early 1990s and has continued to
the present time. Only the rising real estate prices can slow down further growth.
The British retail landscape has always been characterized by restrictive con-
struction regulations, which is why the extensive superstores have a long tradition
of having a high-quality range of products (1999: 65%; 2003: 64%) (Myers 2003).
Owing to the high concentration of operators and the resulting adaptation of the
formats, the established companies have been able to claim a high proportion of
total turnover. This situation has led the traditional formats also to stock a wide
range of high-grade products, which is reserved in the other European countries
for specialized superstores. At present there is a comprehensive network of mar-
kets in the suburbs, as well as superstores and hypermarkets on green-field sites.
This is why the leading operators in the past have limited themselves to the expan-
sion and conversion of existing markets rather than opening new ones (M+M
planetretail 2004).
At present the British retail landscape is experiencing increasing differentiation
of trading formats. Therefore, new concepts such as convenience stores (1999:
8%; 2003: 10%) are concentrated especially in the suburbs in addition to the high
streets (Bordier 2004). Although the soft discounter has so far not been able to
register noticeable gains in market share, the hard discount format will slowly
conquer market shares (Colla 2004).
Current Status and Future Evolution of Retail Formats 299
5%
65%
18% 8%
4%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
5%
64%
14%
10%
7%
2003 1999
Fig. 7. United Kingdom: Evolution of Retail Structures
(Source: M+M planetretail 2004)
Since Carrefour pulled out of the UK, there have been no further attempts by
French operators to enter the market. Apart from this the market is strikingly cos-
mopolitan, with the German discounters Aldi and Lidl accompanied by the Danish
chain Netto, and also Dunnes from Ireland. The largest foreign operator with the
highest growth potential is Wal-Mart (Colla 2004). The most important companies
remain Tesco, Asda, Sainsbury, Morrisons/Safeway, and Somerfield (World of
Retail 2004).
USA
The US economy is one of the richest and most influential in the world. While it
has recently been through a weaker period, it is meanwhile well on the way to
recovery (Murray 2004). The important indicators, such as inflation, real wages,
productivity, interest rates, and business profits, reveal a return to positive trends.
This development is also reflected in retail trade turnover. By virtue of this, the
American retail trade has been able to increase turnover further in recent years
(M+M planetretail 2004).
The retail trade sector in the USA, with its immense network of superstores and
hypermarkets (1999: 80%; 2003: 76%), department stores and large-scale consumer
markets, large-floor-area discount stores, warehouse clubs (1999: 10%; 2003: 12%),
and convenience stores (1999: 6%, 2003; 8%), is virtually immeasurable in terms of
both number and diversity (see also Weitz, Whitfield, in this book). The leading
companies in the American market are characterized by diverse innovation and high
standards. For this reason, it is not surprising that many of the formats developed in
the USA have since been successful in other parts of the world. It is also no surprise
that the leading retailer in the USA is also the largest worldwide: Wal-Mart. The
300 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
3%
6%
1% 10%
80%
Cash and Carry
stores & Warehouse
Clubs
Convenience &
Forecourt Stores
Discount Stores
Hypermarkets &
Superstore operators
Supermarket and
Neighbourhood Store
operators
3%
76%
8%
12%
1%
2003 1999
Fig. 8. USA: Evolution of Retail Structures
(Source: M+M planetretail 2004)
only foreign companies worth mentioning are Ahold, Delhaize, and Sainsbury. The
American market is clearly dominated by Wal-Mart, Safeway Inc., Kmart, Albert-
sons, and Costco (world of retail 2004). In future, the question to ask is whether the
other operators can continue to compete against Wal-Mart.
Evolution of Retail Formats
Cash and Carry Stores & Warehouse Clubs
Those tracking the distribution of cash & carry stores and warehouse clubs across
the “G8” nations between 1999 and 2003 will discover that their percentage in-
creased by 3% during this period. Among other things, this change has been trig-
gered by the rapid growth of this format in the Russian market.
In North America, stores with large floor areas, in particular those taking the
form of membership-based warehouses, have a long-standing tradition. The strong
increase in the number of cash & carry stores in Russia and in some areas of Can-
ada can be explained by the large number of independent retailers organizing their
sales activities by way of this format. If the current trends for concentration in the
various trade environments continue in the future, the market share of independent
retailers can be expected to decline, which will also result in reducing the market
share of cash & carry stores. In addition, wider distribution in other countries is
difficult, since this concept requires large shop floor areas. How quickly this con-
cept will spread in the individual regions will depend on the legal framework in
the country considered and on the availability of attractive locations. The legal
conditions and the availability of suitable premises in Japan, for example, are un-
favorable for this concept and for other large-area formats.
Current Status and Future Evolution of Retail Formats 301
3%
6%
4%
7%
12%
10%
3%
7%
5% (-1%)
7% (+3%)
11% (-1% )
12% (+2%)
19% (+19%)
Japan
France
Italy
UK
Germany
Canada
USA
Russia
Cash and Carry Stores & W arehouse C lubs 2003
Cash and Carry Stores & W arehouse C lubs 1999
AVERAGE 2003: 11%
1999: 10%
0%
0%
0%
Fig. 9. Cash and Carry Stores & Warehouse Clubs: Development
(Source: M+M planetretail 2004)
Convenience and Forecourt Stores
The concept of convenience stores originated in Japan, and such stores have in-
creased their market share by 1% over the past five years. In Japan, in particular,
where this concept has always been widespread, it has experienced additional
growth. In addition, it has continued to expand in the UK and in the US. In coun-
tries where a strong focus on price has always prevailed and supported the spread
of discounters, or where consumers have relatively little spending power, how-
ever, it has not yet become very popular.
The widespread presence of this trading format in Japan and in the United
Kingdom is attributable mainly to the availability of adequate areas (Bordier
2004). In addition, both the US and the UK are countries where there has always
been a high degree of quality and service orientation, a situation that favored the
spread of convenience stores. It is therefore realistic to assume that along with any
growing economic focus on the third sector, convenience stores will become in-
creasingly widespread.
Discount Stores
Whereas convenience stores are widespread mostly in countries where consumers
place little focus on price, the situation is exactly the reverse for discounters.
Although the latter have increased their market shares in almost every country,
resulting in a total increase of 2% over the past 5 years, they have begun to spread
mainly in European countries, and in Germany in particular (Bell 2001).
302 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
5%
6%
7%
6%
9%
8%
5%
6%
7%
35%
5%
8% (+2%)
8% (-1%)
10% (+2%)
38% (+3%)
3% (-2%)
Russia
Germany
France
Canada
USA
Italy
UK
Japan
Convenience and Forecourt stores 2003
Convenience and Forecourt stores 1999
AVERAGE 2003: 8%
1999: 5%
Fig. 10. Convenience and Forecourt Stores: Development
(Source: M+M planetretail 2004)
In addition, owing to their insignificant space requirements, discount stores have
no reason to worry about any major restrictions based on the legislation in the
respective countries. The growth of discounters usually proceeds at the expense of
supermarkets. However, consumers who are not prepared to satisfy their basic
consumption by restricting their purchases to a limited number of products might
slow the growth of discounters.
The increasing price competition that has become apparent in all countries, re-
inforced by the market entry of international trade systems, favors discounters.
Discounters also continue to flourish in countries facing a relatively tense eco-
nomic situation.
Hypermarket and Superstore Operators
Hypermarkets and superstores stagnated in the years 1999 through 2003. Only the
recent developments in Russia, where the percentage of hypermarkets has in-
creased from 7% to 20%, have made it possible for this format to boost its market
share to 45%.
These concepts have always been present more in the Anglo-American coun-
tries, in which Wal-Mart operates. Thanks to its strong local market position in the
UK, Tesco has been able to make progress in these areas and has begun to restruc-
ture its formats in the face of increasing competition. The same applies to Carre-
four in France and the spread of its formats. All competitors make use of knowl-
edge about their customer base in order to customize their product ranges and
services (Murray 2004).
Current Status and Future Evolution of Retail Formats 303
3%
5%
6%
6%
30%
3%
5%
1%
1%
1%
2% (+1%)
3% (+2%)
5% (+4%)
7% (+1%)
7% (+1%)
38% (+8%)
Japan
USA
Canada
UK
Russia
Italy
France
Germany
Discount stores 1999 Discount stores 2003
AVERAGE
2003: 9%
1999: 7%
Fig. 11. Discount stores: Development
(Source: M+M planetretail 2004)
7%
25%
28%
48%
46%
48%
65%
80%
20% (+13%)
25%
30% (+2%)
44% (-4%)
48% (+2%)
51% (+3)
64% (-1%)
76% (-4%)
Russia
Germany
Italy
Japan
France
Canada
UK
USA
Hypermarket and Superstore operators 2003
Hypermarket and Superstore operators 1999
AVERAGE 2003: 45%
1999: 43%
Fig. 12. Hypermarket and Superstore Operators: Development
(Source: M+M planetretail 2004)
304 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
In the future, competing discounters will be a vitally important factor. Both for-
mats use low prices to distinguish themselves from their competitors. In Ger-
many, for example, discounters are more widespread, whereas Wal-Mart has not
yet been very successful. In the US and France, however, the opposite holds
true.
Supermarket and Neighborhood Store Operators
The market share held by supermarkets and neighborhood stores has declined to
29% over the past five years. Even without the marked decline in Russia, this
trend would still have been negative, albeit not as marked.
Supermarkets are typical for countries that continue to boast a large number of
independent shops. As a result of increasing competition, these enterprises feel the
need to join cooperative groups. It might be worth mentioning, however, that trad-
ing companies with more than one subsidiary tend to experience accelerated
growth, whereas the formation of cooperative systems frequently results in defi-
ciencies in efficiency and effectiveness arising from problems involved in achiev-
ing conformity in the management of independent enterprises. Consequently, su-
permarkets have little image-creation potential.
Restrictive legal requirements restrain the growth of large-floor-area systems
and support supermarkets. These general trends will not necessarily lead to a total
disappearance of this format in the future, provided that the current deficits are
eliminated in the years to come.
18%
15%
33%
32%
37%
51%
83%
1%
1%
57% (-26%)
50% (-1%)
38% (+1%)
28% (-4%)
25% (-8%)
17% (+2%)
14% (-4%)
USA
UK
Japan
Germany
Canada
France
Italy
Russia
Supermarket and Neighborhood Store operators 2003
Supermarket and Neighborhood Store operators 1999
AVERAGE 2003: 29%
1999: 34%
Fig. 13. Supermarket and Neighborhood Store Operators: Development
(Source: M+M planetretail 2004)
Current Status and Future Evolution of Retail Formats 305
Future Trends in Retailing
The retail landscape is different now from how it looked ten years ago, and it will
most likely look different again ten years from now. Making long-term predictions
is a hazardous endeavor. Therefore, we will just outline some possible future
trends on the basis of our observations of the current status of the retail landscape,
without trying to be comprehensive (see also chapters by Dawson and Larke else-
where in this book). We do not consider the impact of demographic change, which
may lead to more convenience-orientated formats, or the role of emerging econo-
mies (e.g., China as the world’s upcoming “workbench”) in the global division of
labor. Neither trend is yet fully understood, and hence predicting future scenarios
would be like looking in a crystal ball. Therefore, we take an evolutionary ap-
proach to explaining the emergence of the trends in new retail formats. In particu-
lar, three related trends can be anticipated:
1. Retailers striving for success may consider filling gaps in the national retail
landscape.
2. The quest for differentiation may lead to retail branding strategies.
3. New technologies may induce changes in distribution channels.
Gaps in the National Retail Landscape
A closer look at the dissemination of retail formats in the G8 countries leads to
two major conclusions: the dissemination of convenience stores and of discount
stores is unevenly, across nations and there may therefore be opportunity for com-
petitive advantages.
Convenience stores have enjoyed steady growth in Japan over the years. It can
be anticipated that convenience stores will gain market shares especially in coun-
tries that have a tradition in higher service orientation in retailing, such as the
United States and the United Kingdom. The format “convenience store” may turn
into a profitable niche in less service-oriented countries, especially Germany.
There is a gap between discounter and supermarket. Legal restrictions in some
countries (e.g. operating hours in Germany) may encourage cooperation between
filling stations and convenience stores.
The next striking observation involves discount stores. It seems that Germany
in particular is leading this trend in retailing, with a market share of 38% for this
format. The average proportion in G8 countries is less than 10%. It can be antici-
pated that discount stores will gain market shares from supermarkets – as has been
the case in Germany – especially in Russia and Italy. Russia is still searching for a
national retail landscape. It is the fastest changing G8 market. Hard and soft dis-
counters based in Germany may have a good chance of entering the market suc-
cessfully. Italy, on the other hand, is not changing dramatically. Nevertheless, the
306 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
slow economic growth and the unfavorable situation in southern Italy may also
mean an opening for discount stores.
On the basis of these observations, it can be anticipated that German discount-
ers are likely to export their retail formats to other countries, especially in the food
retail market. A decline in the number of neighborhood stores, in Russia in par-
ticular, makes room for expansion of discounters. Also, it is likely that the popu-
larity of convenience stores seen in Japan will spread to other G8 countries, and
especially to Germany. In Germany, neighborhood stores are losing market share,
and since discount stores are already very well represented there may be a com-
fortable niche for convenience stores. The relaxation of regulations governing
store operating hours will also intensify this trend.
Retail Branding
A large proportion of a retailers’ revenues come from selling (national) brands.
Since most of any retailer’s competitors also sell the same brands, finding a way
of differentiating itself from the competition is particularly challenging. One pos-
sible response to this challenge is the introduction of private labels. Yet another
answer is retail brand equity, meaning that the retailer’s own brand is accepted as
one to which consumers respond more favorably than to those offered by compet-
ing retailers. In retail practice, both options can be found: mainly large retailers
have developed strong private-label merchandise (particularly in the UK), while
others have such a strong brand name that the average consumer does not make a
distinction between store and brand (e.g., the discounter Aldi from Germany).
The rise of the retailer as a brand is one of the most important trends in retail-
ing. Understanding the image of a retailer as a brand and an appreciation of how
brands impact on its image and ultimately on customer loyalty and profitability are
important issues both for retailers and for the manufacturers of branded products,
who rely on them to sell their own branded merchandise. Therefore, it can be an-
ticipated that the market share for private labels will increase and larger retailers
will position themselves as retail brands.
Trends Emerging from New Technology
It is generally believed that Internet technology will redefine the role of retailing.
It will open up the way for new retail formats and new retail strategies. While, for
instance, the share of US Internet retail sales is still less than 4% of total US retail
sales (US Census Bureau 2004), the share of e-commerce sales is steadily growing
throughout the world. According to Taylor Nelson Sofres Interactive's “Global e-
Commerce Report,” the world-wide increase in e-commerce activity is most evi-
dent for certain product categories, such as books, music CDs, videos, electrical
and electronic goods, sports equipment, and toys, and for services such as con-
sumer banking and finance and health information. The global growth in Internet
Current Status and Future Evolution of Retail Formats 307
activity has been attributed to the rapidly increasing number of computer users and
the progressive development of Internet infrastructure in most countries, and espe-
cially the G8 countries.
Internet retailing is most likely to influence consumers’ shopping behavior. E-
Satisfaction, E-loyalty, and E-patronage are not only emerging fields of research
in retailing, but also bring challenges to retailers with them. It can be anticipated
that the “hybrid customer” will play an ever more dominant role. Retailers in par-
ticular must adapt to the buying behavior of “channel-hoppers,” who use multiple
channels to satisfy their needs and wants (see, e.g., Weitz chapter on electronic
retailing in this book). This is a challenge especially for solitary retailers, since
they are not embedded in a larger network of outlets operating a common data-
base. A trend to more horizontal cooperation, as exemplified by franchising, can
be anticipated.
RFID (radio frequency identification), a method of remote storage and retrieval
of data using devices called RFID tags will also have a technology-induced influ-
ence on the evolution of retail formats. An RFID tag is a small object that can be
placed on a product. It contains antennas to enable them to receive and respond to
data from an RFID transceiver. Therefore, RFID tags allow a product to be
tracked individually as it moves from location to location, even up to the point
where it is in the consumer's hands. RFID may help retailers to decrease logistic
costs. It may also be used to replace cashiers with an automatic system that needs
no barcode scanning. Because of its logistical significance, discounters may profit
from this innovation.
On trend rooted in new technologies is the emergence of ever more sophisti-
cated loyalty programs. For instance, Tops, a wholly owned subsidiary of Central
Retail Corp., will become the first supermarket chain in Asia to utilize loyalty-
card technology that offers personalized benefits – including discounts, financing
and personal shopping lists – while at the same time creating a vast database about
the shopping patterns of its customers. Such CRM strategies enable retailers to
create convert shoppers into loyal customers (for more information on loyalty
programs in retail see chapter by Reinartz in this book).
Conclusion
The retail and trade market is one of the most important drivers of national
economies. Therefore, it is necessary to develop it, especially in postmodern
economies with highly demanding consumers and intense competition. In this
paper, the current status quo of the retail landscape in the G8 countries has been
shown. It can be noted that retailers are in a seemingly constant state of flux. The
dominant player worldwide is clearly still Wal-Mart. When it comes to retailing,
however, what works today will very probably not work tomorrow. The challenge
is to identify the next development while it is still the next. Therefore, analysis of
the current status of the retail landscape offers a good insight into the future shape
of this extremely important market.
308 Dieter Ahlert, Markus Blut, and Heiner Evanschitzky
References
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pp. 25-29.
Bordier, A. (2002): Size is not everything in European Retailing, European Retail Digest,
35, pp. 1-3.
Bordier, A. (2004): European convenience retailing: a changing market, European Retail
Digest, 42, pp. 66-70.
Colla, E. (2004): The Outlook for European Grocery Retailing: Competition and Format
Development, The International Review of Retail, Distribution and Consumer Re-
search, 14, pp. 47-69.
Murray, F. (2004): America, European Retail Digest, 42, pp. 71–73.
Myers, H. (2003): European Food Retailers: Paths for growth, European Retail Digest, 38,
pp. 1–5.
M+M planetretail (2004): http://www.planetretail.net/, 22.12.2004.
U.S. Census Bureau (2004), United States Department of Commerce E-Stats,
http://www.census.gov/estats.
World of Retail (2004): http://www.kamcity.com/WOR/, 22.12.2004.
Electronic Retailing
Barton A. Weitz
University of Florida, Gainesville, USA
Introduction
Perspectives on electronic retailing have changed dramatically over the past seven
years. In 1998, most analysts predicted that a new breed of high-tech, web-savvy
entrepreneurs would dominate the retail industry. Everyone would shop over the
Internet, stores would close owing to lack of traffic, and paper catalogs would
become obsolete. The prospects for electronic retailing were so bright that compa-
nies invested, and lost, billions of dollars in Internet retail entrepreneurial ventures
such as Webvan, eToys, and Garden.com – companies that are no longer on the
retail landscape.
Even though online retail sales continue to grow much faster than retail sales
through stores and catalogs, we now realize the Internet is not a revolutionary new
format replacing stores and catalogs. Although the Internet continues to provide
opportunities for entrepreneurs, in the retail industry it is primarily used by tradi-
tional retailers as a tool, complementing their store and catalog offerings, for
growing revenues and providing greater value for their customers. For the major-
ity of retailing activity, the Internet is a facilitating rather than a transformational
technology (Weitz 2001).
For example, REI’s website enables its customers to buy merchandise that is
available in its stores online. Orders can be shipped to the customer or be picked
up at a store. Besides providing this e-commerce capability, the Web site has more
than 45,000 pages of schedules for events and clinics in local stores, extensive
product information, comparison charts, and how-to articles on a comprehensive
range of outdoor sports and activities. As a result, REI offers online shoppers
across the world an experience that complements its stores, where its staff pro-
vides personalized assistance in selecting the right outdoor gear, apparel, and ac-
cessories.
This chapter first describes the unique benefits and limitations offered by an
electronic channel relative to store and catalog channels – factors affecting the
potential growth of electronic retail. Then it reviews the approaches electronic
310 Barton A. Weitz
retailers are taking to exploit the advantages of an electronic channel and ad-
dresses its limitations. The chapter concludes with a discussion of issues associ-
ated with electronic retailing, such as the types of merchandise that can effectively
be sold online, the potential increase in price competition resulting from the low
search costs associated with online shopping, and what firms are best positioned to
exploit the potential for an electronic retail channel.
Potential Growth of Electronic Retailing
Even though the annual growth of electronic retail sales is more than 30%, the
electronic channel accounts for slightly less than 3% of retail sales in the United
States and Europe, and an even smaller percentage in Asia. The relative benefits
and limitations of Internet shopping as against shopping through traditional chan-
nels (stores and catalogs) will affect the future penetration of electronic shopping
(Alba et al 1997).
Benefits of Shopping over the Internet
The following, somewhat futuristic, scenario illustrates the potential benefits of
shopping online. Laurie Waters wants to buy a present for her son Allan, whose
13th birthday is in a few days. On her home computer, she accesses her personal
shopper program called FRED, and has the following dialog:
FRED: Do you wish to browse, go to a specific store, or buy a specific item?
[Menu appears and Laurie selects]
LAURIE: Specific item
FRED: Occasion? [Menu appears and Laurie selects]
LAURIE: Gift
FRED: For whom? [Menu appears]
LAURIE: Allan
FRED: Type of gift? [Menu appears]
LAURIE: Toy/Game
FRED: Price range? [Menu appears]
LAURIE: $75–$100
[FRED shops the world electronically, visiting the servers for companies sell-
ing toys and games in Europe, Asia, Africa, Australia, and North and South
America.]
Electronic Retailing 311
FRED: 121 items have been identified. How many do you want to review?
[Menu appears]
LAURIE: 5
[FRED selects the five best alternatives on the basis of information about
Allan’s preferences, typical preferences for children Allan’s age and Laurie’s
preference for nonviolent, educational toys. Details of five toys appear on the
screen, with the price and brand name of each. The retailers selling the toy are
also listed beneath each one, along with the nearest store with the toy in stock.
Laurie clicks on each toy to get more information about it, including evalua-
tions by Consumer Reports and comments from parents who have bought the
toy. With another click, she sees a full-motion video of a child Allan’s age
playing with the toy. Finally, she selects a toy.
FRED: The nearest stores that have the toy in stock are listed below along with
the prices. Do want to pick the toy up at a store, have it shipped to your home,
or shipped to your office? [Menu appears]
LAURIE: Pick up at Toys “R” Us store near Perimeter Mall
FRED: Toys “R” Us suggests several books that appeal to children who like
the toy you have selected. Do you want to review these books?
LAURIE: Yes
[The books are displayed on the screen. Laurie reviews the books and decides
to order one.]
FRED: Would you like this gift wrapped?
LAURIE: Yes
[The different designs for wrapping paper are displayed on the screen and Lau-
rie selects a baseball motif.]
FRED: How would you like to pay for this? [Menu appears]
LAURIE: American Express
More Alternatives. This scenario illustrates that, besides the benefits offered by all
nonstore channels (convenience and security of shopping from home or work at
any time), the electronic channel has the potential for offering a greater selection
of products. However, the benefit of having many more alternatives has diminish-
ing returns for consumers. It is unlikely that anyone would look through all 121
alternatives located by FRED. Having many alternatives is only meaningful if
customers have access to intelligent agents such as FRED that can identify consid-
eration sets based on the consumer’s preferences.
More Information. The electronic channel also has the potential for providing
customers with as much information as they need to make a decision. Customers
shopping online can drill down through web pages until they feel comfortable with
their choice. Also, the information on the electronic channel database can be fre-
312 Barton A. Weitz
quently updated and is available all day and night. Finally, the electronic channel
can format the information so that customers can use it effectively when evaluat-
ing products.
Personalization. Perhaps the most significant benefit of the electronic channel is
the ability to use the Internet’s interactive capabilities to economically personalize
information. Service-oriented retailers such as department and specialty stores
hope their sales associates will provide this benefit. They would like their sales
associates to know or find out what their customers want and then recommend
appropriate merchandise. However, an electronic agent such as FRED can be
more effective in searching through an extensive range of alternatives, selecting a
small set, and providing the information that the customer typically considers
when making a purchase. Also, FRED is never in a bad mood, is paid nothing, and
is always available – 24/7.
In the future, electronic agents such as FRED may be computer software pro-
grams bought by consumers or offered as a service to their customers by retailers
or third parties. These agents could learn about a consumer’s preferences by ask-
ing questions or analyzing past search and purchase behaviors.
Problem Solutions. The electronic channel also offers an opportunity to go be-
yond the traditional product information offered in stores to provide tools and
information for solving customer problems and selling ancillary services. For
example, online wedding sites, such as www.weddingchannel.com, offer cou-
ples and their families planning guides, tips, and an opportunity to chat with
other couples getting married. The site sells wedding dresses, invitations, and
flowers. Couples can create gift registries, featuring Federated stores, and
broadcast them to their guests by e-mail. They can select potential reception
locations by looking at photos. Finally, they can have their personal area on the
site, on which they can post their own wedding pictures.
Limitations of Electronic Shopping
Although the electronic channel offers some unique benefits, it also has some
limitations relative to stores and catalogs. Some of these limitations are the oppor-
tunity or ease with which consumers can: (1) browse through the retail offering,
(2) locate information needed to evaluate merchandise, (3) use all five senses –
touching, smelling, tasting, seeing, and hearing – when evaluating merchandise,
(4) receive personal attention, (5) have their privacy protected, (6) provide a
stimulating experience that can be shared with others, (7) purchase merchandise
with cash, and (8) get the merchandise when they buy it. These issues do not arise
or are less difficult for consumers to deal with when shopping in stores. For ex-
ample, if a store shopper wants to know whether a store stocks an item that the
shopper cannot find, the consumer can simply ask a store employee. However,
when shopping online, the consumer has to send an e-mail to the retailer and
sometimes wait days for a response.
Electronic Retailing 313
Factors Affecting the Growth of Electronic Sales
Two important factors affecting the growth of electronic retailing are: (1) the
number of people with broadband access and (2) the degree to which electronic
retailers exploit the benefits and address the limitation of electronic shopping.
Internet Access
A substantial number of people worldwide have access to the Internet and thus can
potentially engage in electronic shopping. According to the Computer Industry
Association Factbook, in 2004, 934 million people had Internet access, and it es-
timated that this figure will increase to 1.35 billion by 2007. The countries with
the greatest access are the United States (185.5 million people), China (99.8 mil-
lion). Japan (78.1 million), Germany (41.5 million), United Kingdom (33.1 mil-
lion), South Korea (31.7 million), France (25.5 million), Italy (25.5 million), Bra-
zil 22.3 million), Russia (21.2 million), and Canada (20.5 million).
In August 2004 in the US, about 75% of people with Internet access were clas-
sified as active at-home users. Nielson/Net Ratings estimates that, in July 2004,
50%t of the US homes with access had broadband connections. Broadband’s
prevalence is important, because consumers need such connections to take advan-
tage of many of the innovations in electronic retail offering discussed below.
Nielson/Net Rating also reported that the 2004 average monthly usage for member
of their US panel was 25 hours in 31 separate sessions visiting 52 domains. How-
ever, in the US in 2004, only 26% of active Internet users (64 million people)
bought products and/or services over the Internet. Thus, there is a substantial
number of active Internet users who do not shop over the Internet.
Exploiting the Benefits and Addressing the Limitations –
Electronic Retailing Best Practices
Given the significant penetration of Internet usage in industrial counties, the pri-
mary factor driving the growth of online retail sales will be the degree to which
electronic retailers exploit their benefits and address their limitations (Putnam
2003). This section reviews some of the steps retailers using an electronic channel
are taking to make shopping online more appealing.
Security Concerns. Perhaps the biggest challenge for online retailers is establish-
ing and maintaining trust. Spam, fraud, identity theft, and fly-by-night e-retailers
threaten consumers’ fragile trust in online marketplaces. However, reputable re-
tailers have taken steps to offer secure connections and protect their internal data.
Also, as consumers become more accustomed to placing orders over the Internet,
their concerns about security are diminishing. Retailers offering customers the
option of calling in an order rather than ordering online report that the vast major-
ity of orders are placed online.
Although consumer security concerns are declining, online retailers face in-
creasing losses owing to credit card fraud. It is estimated that credit card fraud will
314 Barton A. Weitz
cost online US retailers more than $1 billion in 2004. Online retailers use a variety
of fraud management techniques, including using in-house or commercially avail-
able screens, requesting card verification numbers, and checking orders with credit
card authentication services.
Browsing – Navigation and Search. Before an electronic channel was offered,
consumers rarely described their shopping process as searching for a product they
needed. They used terms such as browsing and window shopping, behaviors that
often lead to unplanned purchases. Such browsing is more difficult for consumers
shopping online.
When using an electronic channel, customers have a much more limited visual
field than they do in a store. Only a limited number of items can be featured on the
first web page and subsequent web pages viewed by shoppers. In contrast, in a
store, many other items are in a shopper’s sight line beyond the items prominently
displayed on an end-cap or on mannequins. Although shoppers in stores do not
mind walking a few steps to look more closely at merchandise, there is a substan-
tial reduction in “foot traffic” on secondary Web pages.
Online retailers are addressing this limitation in two ways: (1) customizing the
main page to display items of interest to the customer and (2) improving the
search function. We shall discuss the customization of the main page in the section
below on personalization.
The ease of navigation and quality of the search function facilitate browsing
through a web site as well as locating specific merchandise. More than half of
online purchasers use the search function to locate products. The search function
is typically the second most heavily trafficked page on a retail Web site.
Traditional web site search functions rely on the exact words the shopper has
entered in the search box. Many retailers now use “intelligent” search functions
that respond to natural language inquiries such as “sweater under $100” and then
refine the search by responding to secondary questions such as “ones that are red.”
These intelligent search functions also interpret the words and grammar to match
responses to the retailer’s merchandise assortment. For example, when searching
the website of an automobile part retailer for an “air filter,” a search function will
not include coffee filters but may include links to related products, such as “engine
cleaners.” This search capability enables the retailer to accommodate the shop-
per’s initial inquiry and also cross-sell and up-sell more effectively. Finally, these
intelligent search functions get better over time as they learn the terminology used
by the retailer and its customers.
However, implementing an intelligent search function can cost millions of
dollars, along with an annual maintenance cost. For retailers with less complicated
product lines, these costs may not produce an acceptable ROI.
Provision of Sufficient Information and Customer Service. At many points during
the shopping process, consumers may need information before making a purchase.
Service-oriented store retailers satisfy this customer need through their sales asso-
ciates. However, providing timely information is more challenging for electronic
retailers.
Electronic Retailing 315
Consumers find the traditional online solution, posting web pages with retailers’
policies and FAQs, fails to meet their needs. It is often difficult to comb through a
list of FAQs to locate the information needed. Another standard feature addressing
this need is the offer of an 0800 number or an e-mail address for asking questions.
However, these solutions often fail to provide the timely information customers
seek and may not be feasible for the consumer using the house’s only telephone-
line with a dial-up connection to access the retailer’s website. Two new applica-
tions for responding to customer information needs in an efficient and timely
manner are live, online chat and automated self-service solutions:
Online chat provides customers with the opportunity to click a button at any
time and conduct an instant messaging e-mail conversation with a customer-service
representative. Other applications allow a consumer to initiate a voice conversa-
tion with a customer-service representative. These applications also enable elec-
tronic retailers to automatically send a proactive chat invitation to customers on
the site. The timing of these invitations can be based on the time the visitor has
been on the site, the specific page the customer is viewing, or a product on which
the customer clicked.
These self-service solutions are economically attractive. The average cost per
customer service session for self-service is $1.17, as opposed to $7.80 for live
chat, $9.99 for e-mail, and $33 for a telephone customer session.
Electronic retailers vary in how they make the tradeoff between stimulating
sales and increasing customer satisfaction with the cost of providing online instant
chat. Some online retailers make this service option available and highly visible
on their home page and highly trafficked pages, while others deliberately make
these services hard to find to encourage customers to use less costly options such
as FAQs and self-service applications.
Overcoming the Need for Sensory Information. When evaluating some types of
merchandise, information about “look-and-see” attributes, such as grams of fat
in a breakfast cereal or color and style of a wool scarf, can be effectively com-
municated over the Internet. However, “touch-and-feel” attributes are more dif-
ficult to communicate online. Owing to the problems of providing “touch-and-
feel” information, apparel retailers experience returns rate of more than 20% on
purchases made through an electronic channel and only 10% for purchases made
in stores.
3-D/Zoom Imaging. Electronic retailers are taking steps to overcome this limita-
tion by converting “touch-and-feel” information into “look-and-see” information.
Online customers now expect large, accurate product images. However, electronic
retailers are going beyond offering the basic image to giving customers the oppor-
tunity to view merchandise from different angles and perspectives using 3-D im-
aging and/or zoom technology. Although only a limited number of electronic re-
tailers are employing these technologies for a few products, the use of these
image-enhancing technologies has increased conversion rates (the percentage of
consumers who buy the product after viewing it) and reduced returns.
316 Barton A. Weitz
However, these imaging technologies can frustrate consumers using dial-up
connections because of the slow download times. Also, some of the technologies
require plug-ins that have to be downloaded and may not work effectively with all
browsers. Finally, some retailers initially utilized these imaging technologies but
have now removed them because visitors were not using them.
Virtual Models. To overcome the limitations experienced because apparel obvi-
ously cannot be tried on, online apparel retailers have started to use virtual mod-
els. These virtual models enable consumers to see how selected merchandise looks
on an image with similar proportions to themselves and then rotate the model so
the “fit” can be evaluated from all angles. The virtual models are either selected
from sets of “pre-built” models or constructed on the basis of the shopper’s re-
sponse to questions about their height, weight, and other dimensions.
For example, at Landsend.com, online shoppers choose a model that looks like
them. The customer then dresses the model using a “click-and-drag” interface. Items
are suggested while the customer “tries on” apparel. Land’s End reports that cus-
tomers using the virtual model feature are 28% more likely to make a purchase and
spend 13% more on the average purchase. When JCPenney offered this feature on
its website, more than 100,000 customers saved their model for future visits.
In a similar way to the imaging technologies discussed previously, the virtual
model technology is complex and results in slow download speeds for consumers
who have no broadband connections. Also, the present applications are not true fit
predictors, but provide some information about how combinations of apparel and
accessories look together and what apparel styles might flatter a specific figure.
However, these applications are harbingers of future applications in which cus-
tomers can have a personal, 3D, digitized body scan serve as an actual model
rather than a virtual model. Also, the measurements for the body scan could be
inputted along with information about the garment to a predictive model advising
customers on how well a specific item fits using a five-star rating system and then
suggesting the appropriate size.
Personalization. One of the attractive features of Laurie Waters’ online shopping
experience, previously described, was the personalized service offered by FRED.
This personalization assisted Laurie in satisfying her need for a gift. Had FRED’s
services been offered by a retailer, the personalization would have engendered
Laurie’s loyalty to the retailer. When a retailer has a thorough understanding of
her preferences and uses this it effectively to facilitate Laurie’s shopping experi-
ence, she has little incentive to switch to other retailers lacking this capability.
Although not achieving the level of personalization offered by FRED, Ama-
zon.com is clearly on the forefront in terms of personalizing its offering. Visitors
are greeted by a personalized “store” featuring their name and recommending
products based on their past purchases, click-stream data, or expressed prefer-
ences. Besides personalizing the websites, customers can elect to receive e-mails
announcing the availability of new product in which they might be interested.
However, an important issue related to personalization is that of privacy concerns.
Electronic Retailing 317
Privacy. Although detailed information about individual customers helps retailers
to provide more benefits to their better customers, consumers are concerned about
retailers violating their privacy when they collect this information. These concerns
are particularly acute for online customers, because many of them realize the ex-
tensive amount of information that can be collected without their knowledge. Be-
sides collecting transaction data, electronic retailers can collect information by
placing cookies on visitors’ hard drives.
In the US, legal protection for individual privacy is limited. Existing legislation is
limited to the protection of information in a few specific contexts, including gov-
ernment functions and practices in credit reporting, video rentals, and banking.
However, the European Union (EU) is much more aggressive in protecting con-
sumer privacy. Some of the provisions of the EU directive on consumer privacy are:
x Businesses can only collect consumer information if they have a clearly de-
fined the purpose, such as completing the transaction.
x The purpose must be disclosed to the consumer from whom the informa-
tion is being collected.
x The information can only be used for that specific purpose.
x The business can only keep the information for the stated purpose. If the
business wants to use the information for another purpose, it must initiate a
new collection process.
Businesses operating in Europe can only export information from the 25 EU coun-
tries to importing countries with similar privacy policy. Thus, US retailers cannot
transfer information from Europe to the US, because the US does not have similar
privacy policies. Basically, the EU perspective is that consumers own their per-
sonal information. Retailers must get consumers to explicitly “opt in” and agree to
share this personal information. On the other hand, personal information in the US
is generally viewed as being in the public domain and retailers can use it any way
they desire unless consumers explicitly “opt out.”
There is a growing consensus that personal information must be fairly collected
and the collection must be purposeful. The information should be relevant, main-
tained as accurate, essential to the business, subject to the rights of the owning
individual, kept reasonably secure, and transferred only with the permission of the
consumer. To address these concerns, most online retailers that collect customer
information have posted privacy policies.
Cash Purchases. The lack of credit cards inhibits teens and tweens, a sizable and
fast growing retail segment, from shopping online. However, several Internet ser-
vice providers let parents establish an account for children using a credit card to
set the initial balance. The teenager logs onto the site using a password, browses
the site’s electronic retailer partners, selects desired merchandise, and puts it in an
electronic shopping cart. The shopping site takes care of the payment. Using their
own passwords, parents can check up on their teens’ buying habits and balance.
318 Barton A. Weitz
Although online retailers are using technology to address the limitations of
online shopping, the store channel continues offer superior benefits to an elec-
tronic channel, such as providing information about “touch-and-feel” product
attributes and ability to get products immediately after purchasing them, and offer-
ing a stimulating, social experience. Thus, most analysts project that online retail
sales will only be 4–5% of total retail sales by 2010. However, retailer websites
play a major influence on retail shopping behavior. A recent survey of a represen-
tative sample of Internet users found that more than 40% of consumers shopping
for consumer electronics, books, PCs and peripherals, clothing, and CDs visited a
retailer’s website and then shopped at its store. This synergy between electronic
and store channels is one factor leading to the growth of multi-channel retailing
that will be discussed briefly at the end of this chapter and in more detail in the
chapter by Sonneck and Ott in this book.
Electronic Retailing Issues
What Types of Merchandise Will Be Sold Effectively Through the
Electronic Channel?
Presently, the greatest penetration of Internet sales is for travel services, com-
puters and peripherals, and books. In purchasing these products and services, con-
sumers feel the “look-and-see” information provided is sufficient. Other product
categories, such as automobiles and houses, have had limited Internet sales, be-
cause the information available over the Internet is insufficient to make high-risk
purchase decisions. Also, one suspects that products with important “look-and-
see” attributes will not be purchased over the Internet (Zeng, Reinartz 2003).
Even though it is limited to providing “look-and-see” information, in some
situations the electronic channel might even provide better information than
stores. For example, if Laurie Waters went to a store to buy a toy for Allan, she
might just see a picture on the side of the box containing the toy. However, by
shopping online, she can get superior information from the full-motion video clip
showing a child playing with the toy.
The difficulty of providing “touch-and-feel” information online suggests that
jewelry, clothing, perfume, flowers, and food, products with important touch-and-
feel attributes, will not be sold successfully through an electronic channel. This
type of merchandise is presently sold through nonstore channels, such as catalogs
and TV home shopping and, as discussed previously, electronic retailers are using
technology to convert “touch-and-feel” attributes into “look-and-see” attributes.
Branded Merchandise. Branding, both the branding of the merchandise and the
retailer’s brand image, overcomes many of the uncertainties in purchasing mer-
chandise without touching and feeling it. Consider branded merchandise such as
Nautica perfume or Levi’s 501 jeans. It is not possible to smell a sample of the
perfume or try on a pair of the jeans before buying, but this need not matter since
the brand insures that each bottle smells the same and each size fits the same.
Electronic Retailing 319
The retailer’s brand reputation can also provide information about the consistency
and quality of merchandise. For example, consumers might be reluctant to buy pro-
duce online because they cannot see fruits and vegetables before purchasing. How-
ever, the same consumers would be likely to feel comfortable buying fruit from the
Harry and David catalogs or Internet site, because Harry and David has established a
reputation for selling only the highest quality fruit (Ba, Pavlou 2002). Branding even
provides enough information to facilitate the sales of high-risk products with
important “touch-and-feel” attributes, such as high-fashion apparel (bluefly.com
and Neimanmarcus.com) and expensive jewelry (bluenile.com).
Gifts. In other situations, “touch-and-feel” information might be important but the
information in a store is not much better than the information provided electroni-
cally. Since the gift-giver lacks complete information about the recipient’s prefer-
ences, stores offer little benefit over an electronic channel.
Thus, the critical issue determining what types of merchandise can be sold suc-
cessfully online is whether the electronic channel can provide enough information to
make sure customers will be satisfied with the merchandise once they get it. There
are many buying situations in which an electronic channel can provide sufficient
information even though the merchandise has important “touch-and-feel” attributes.
Will Offering an Electronic Channel Lead to More Price Competition?
Many store-based retailers offer similar assortments of branded merchandise and
thus have difficulty differentiating themselves on the basis of their merchandise
offering. However, price competition between these store-based retailers offering
the same merchandise is reduced by geographical constraints. When using the
Internet, the number of stores that consumers can visit to compare prices is no
longer limited by physical distance. Also, the ease of searching for price informa-
tion is facilitated by shopping bots.
Although consumers shopping online can collect price information with little
effort, they can get information about the quality and performance of products at a
low cost. The additional information about product quality might lead customers
to pay more for high-quality products, thus decreasing the importance of price
(Lynch, Ariely 2000). Also, online retailers can differentiate their offering by
providing better services and information. Even with the low search cost, research
shows that significant price dispersions for online retailers persists (Ancarani,
Shankar 2004, see also Bolton, Shankar, Montoya in this book).
What Resources Are Needed for Successful Operation of an
Electronic Channel?
A consideration of the critical resources needed to profitably sell merchandise
online explains why so many of these retail Internet entrepreneurs have failed and
the evolution to multi-channel retailing. The key resources needed, shown in
320 Barton A. Weitz
Table 1. Resources Needed for Selling Merchandise Online
Resources
Internet retail
entreprenuer Catalog retailer
Store-bas ed
retailer Manufacturer
Brand reputation NO YE S YES YES
Retail skills NO YES YES NO
Customer
information NO YES YES NO
Complementary
merchandise YES YES YES NO
Unique
merchandise NO YES YES YES
Web-Based
information
systems YES NO NO NO
Fulfillment
systems NO YES NO NO
Table 1, are (1) well-known brand name and trustworthy image to attract custom-
ers to its website and reduce customer uncertainty in purchasing information, (2)
retail skills for developing assortments and managing inventory, (3) customer
information to personalize merchandise presentations, (4) complementary mer-
chandise and services to provide a one-stop shopping experience, (5) unique mer-
chandise to reduce price competition, (6) information systems for effectively pre-
senting information on web pages and managing the fulfillment process, and (7) a
fulfillment system to efficiently ship merchandise to homes and receive and proc-
ess returns (Levy, Weitz 2004).
As indicated in Table 1, catalog retailers are best positioned to exploit an elec-
tronic retail channel. They have efficient systems for taking orders from individual
customers, packaging the merchandise ordered for shipping, delivering it to homes,
and handling returned merchandise. They also have extensive information about
their customers and the database management skills needed to effectively personal-
ize service. Finally, they have the visual merchandising skills used for preparing
catalogs that are similar to those needed in setting up an effective website.
Many store-based and catalog retailers have established brand reputations and
the capability of developing assortments and efficiently managing merchandise
inventories – resources that most manufacturers and pure electronic retailers lack.
Also, store-based and catalog retailers typically have more credibility than manu-
facturers when suggesting merchandise, since they offer an assortment of brands
from multiple suppliers. These traditional retailers also have relationships with
vendors, purchasing power, and information/distribution systems to manage the
supply chain from its vendors to the retailers’ warehouses. Finally, some catalog
and store-based retailers sell unique merchandise – they have developed private-
label merchandise.
However, most store-based retailers and manufacturers lack the appropriate
systems for shipping individual orders to households. Their warehouse systems
Electronic Retailing 321
are designed to fill large orders from retail firms or stores and deliver truckloads
of goods to retailers’ warehouses or stores. To address this problem, store-based
retailers such as Target, Borders, and Toys “R” Us outsource their fulfillment for
online orders to Amazon.com and third parties. However, store-based retailers can
use their stores as convenient places for online shoppers to pick up their merchan-
dise and return unsatisfactory purchases.
Internet retail entrepreneurs were immersed in Internet technology and had
considerable skills in the design of Web sites and developing systems to manage
transactions. However, they did not have the wealth of past-purchase data that
store-based and catalog retailers had. Also, the electronic-only retailers lacked the
retailing skills necessary in building merchandise assortments, managing inven-
tory, and fulfilling small orders to households. Finally, they also lacked the brand
reputation to attract consumers and reduce their uncertainty.
Manufacturers also lack some of the critical resources needed to sell merchandise
online directly to consumers, by-passing retailers. Retailers are more efficient than
manufacturers in dealing with customers directly. They have considerably greater
experience than manufacturers in distributing merchandise directly to customers,
providing complementary assortments, and collecting and using information about
customers. Retailers also have an advantage in that they can provide a broader array
of product and services to solve customer problems. Finally, manufacturers lack
information and distribution systems to fulfill individual consumer orders.
What Motivates Traditional Store-Based Retailers to Evolve in
Multi-channel Retailers?
Traditional store-based and catalog retailers are placing more emphasis on their
electronic channels and are evolving into multi-channel retailers for five reasons
(see also chapter by Weitz, Whitfield in this book). First, the electronic channel
gives them an opportunity to reach new markets, expanding their market beyond
the locations of their stores. Second, they can gear up their skills and assets to
grow revenues and profits. Third, an electronic channel overcomes some limita-
tions of their traditional formats, for example by way of the convenience and secu-
rity of shopping from home 24/7. Fourth, an electronic channel enables retailers to
gain valuable insights into their customers’ shopping behavior. Finally, providing
a multi-channel builds “share of wallet” and customer loyalty (Hyde 2001).
Adding an electronic channel is particularly attractive to firms with strong
brand names but limited locations and distribution. For example, retailers such as
Tiffany’s, Harrod’s, Saks Fifth Avenue, Bloomingdale’s, and Neiman Marcus are
widely known for offering unique, high-quality merchandise, but, before they
launched an Internet channel, customers had to travel to England or major US
cities to buy many of the items they carry.
Store-based retailers can exploit their assets to greater effect when they add an
electronic channel. For example, traditional retailers can use their existing format
322 Barton A. Weitz
to economically create awareness for an electronic channel. For example, they can
advertise the URL of their Web sites on in-store signs, shopping bags, credit card
billing statements, POS receipts, and print or broadcast advertising used to pro-
mote their stores. The physical stores and catalogs also serve as advertisements for
all the retailer’s channels.
Store-based retailers can also utilize their stores to lower the cost of fulfilling
orders and processing returned merchandise. The stores can be used as “ware-
houses” for gathering merchandise for delivery to customers. They can offer cus-
tomers the opportunity to pick up and return merchandise at the stores rather than
paying shipping charges.
One of the greatest constraints facing store-based retailers is their store size.
The amount of merchandise that can be displayed and offered for sale in stores is
limited. By blending stores with Internet-enabled kiosks, retailers can dramatically
expand the merchandise assortment they offer.
An electronic channel can provide valuable insights into how and why custom-
ers shop and are dissatisfied or satisfied with their experiences. For example, in-
formation on how customers shop a merchandise category would be useful for
designing a store or a website. The store and website layouts need to reflect
whether customers shop by brand, size, color, or price point. Customer willingness
to substitute one brand for another is valuable information for assortment plan-
ning. The task of collecting this information from store or catalog shoppers would
be quite difficult. Someone would have to follow the customers around the store
or observe them going through catalog pages. However, collecting data as cus-
tomers navigate through a website is quite easy.
Although offering an electronic channel may lead to some cannibalization, us-
ing an electronic channel synergistically with other channels can result in consum-
ers making more purchases from a retailer. The electronic channel drives more
purchases from the stores, and the stores drive more purchases from the website.
Retailers report that multi-channel customers spend 30% more than customers
who shop only in the retailers’ stores (Myers, Pickersgill, Van Metre 2004); how-
ever, it is unclear whether this effect is caused by the availability of an Internet
channel.
Evolution of Electronic Retailing
Compared with shopping in stores and through catalogs, online shopping has
both benefits and limitations. The store channel enables customers to touch and
feel merchandise and to use the products shortly after purchasing them. Catalogs
enable customers to browse through a retailer’s offering at any time and any-
where. A unique benefit offered by the electronic channel is the opportunity for
consumers to search across a broad range of alternatives, develop a smaller set
of alternatives based on their needs, and get specific information about the alter-
natives they want.
Electronic Retailing 323
To some extent, retailers operating an electronic channel are using new tech-
nologies to address these limitations. But, the penetration of online sales is ex-
pected to be limited owing to the inherent advantages offered by in-store shop-
ping. Although the bubble burst for most Internet retail entrepreneurs, traditional
store-based and catalog retailers are adding an electronic channel and evolving
into integrated, customer-centric, multi-channel retailers. This evolution toward
multi-channel retailing is driven by the increasing desire of customers to commu-
nicate with retailers any time, anywhere, from any place.
By offering multiple channels, retailers overcome the limitations of each chan-
nel. Retailers can use websites to extend their presence and the assortment offered
by the store channel. They can also use websites to update the information they
provide in catalogs. Stores can be used to provide a multiple sensory experience
and an economical distribution capability supporting the electronic channel.
References
Alba, Joseph., John. Lynch, Barton Weitz, Chris Janiszewski, Richard Lutz, Alan Sawyer,
and Stacy Woods (1997): Interactive home shopping: Consumer, retailer, and manu-
facturers incentives to participate in electronic marketplaces, Journal of Marketing,
61(July), 38-53.
Ancarani, Fabio and Venkatesh Shankar (2004): Price levels and price dispersion within
and across multiple retailer types: Further evidence and extension, Journal of the
Academy of Marketing Science, 32, 2, 176-187.
Ba, Sulin and Paul (2002): Evidence of the effect of trust building technology in electronic
markets: Price premiums and buyer behavior, MIS Quarterly, 26(September), 243-269.
Hyde, Linda (2001): Multi-channel integration: The new battleground. Columbus, OH:
Retail Forward
Levy, Michel and Barton Weitz (2004): Retailing management, Chapter 3, Fifth Edition,
New York: McGraw-Hill, 2004.
Lynch, John and Dan Ariely (2000): Wine online: Search costs affect competition on price,
quality, and distribution, Marketing Science, 19(Winter), 83-104.
Putnam, Mandy (2003): E-Retailing: Levers for success. Columbus, OH: Retail Forward
Myers, Joseph, Andrew Pickersgill, and Evan Van Metre (2004): Steering customers to the
right channels, McKinsey Quarterly, Issue 4, 36-48.
Weitz, Barton, Electronic retailing: Market dynamics and entrepreneurial opportunities, in
G. Libecap (ed) Entrepreneurship and economic growth in the american economy,
Volume 12. Elsevier Science, 2001, 211-234.
Zeng, Ming and Werner Reinartz (2003): Beyond online search: The road to profitability,
California Management Review, 45(Winter), 107-131.
OPERATIONS, PROMOTION,AND MARKETING COMMUNICATIONS
Supply Chain Management in a Promotional
Environment
Arnd Huchzermeier1 and Ananth V. Iyer2
1 WHU, Otto-Beisheim Graduate School of Management, Vallendar, Germany
2 Purdue University, Krannert Graduate School of Management, West Lafayette, Indiana, USA
Introduction
Supply chain management deals with the effective and efficient coordination of
flows of inventory, information and cash to lower the total cost of ownership. The
supply chain view always starts with the point of purchase or consumption, e.g., at
the retail level and follows orders upstream and product flow downstream from
wholesalers, distributors, manufacturers and suppliers.
Since 1993, the fast moving consumer goods (FMCG) and the retail industry
have formed an alliance to drive out waste out of their supply chains. The initial
goal was to reduce the overall supply chain inventory by at least 5 %. This was
triggered by the early successes at Procter & Gamble and Wal-Mart in the U.S. in
using category management and supply chain collaboration approaches (including
information sharing). At the same time, discounters emerged in Germany, i.e.,
Aldi and Lidl, and challenged big and small stores alike. By 2004, discounters
accounted for 37.4 percent of the overall market. Currently, due to a lasting reces-
sion, grocery sales are declining and promotion intensity and frequency are stead-
ily increasing across all store formats, including discounters. Retailers that refuse
to collaborate with their suppliers but frequently adopt high-low pricing to attract
customers to their stores (and lure them away from the every-day-low-pricing
(EDLP) stores) are typically suffering from high inventory costs in their supply
chains and large forecast error mostly for promotion items (see also chapter by
Bolton, Shankar and Montoya in this book).
Influential references in this area consist of two studies conducted in the U.S.,
one by the Coca Cola Research Council (1993) and the other by the Food Market-
ing Institute (1993). In the mid 1990s, two cross-industry organizations emerged:
Efficient Consumer Response in Europe (ECR Europe) and later the Global
326 Arnd Huchzermeier and Ananth V. Iyer
Commerce Initiative (GCI) in the U.S. The official ECR slogan is “working together
to fulfill consumer wishes better, faster and at less costs.” Since then, the 25 larg-
est retailers (responsible for the demand side) and the 25 largest branded goods
manufacturers (responsible for the supply side) are jointly coordinating the various
supply chain initiatives. Besides supply and demand side issues, the management of
integrators (communication processes) and enablers (technologies and standards) are
also being considered (for further information see, e.g., www.globalscorecard.net).
There is strong evidence that the initial goal of reducing pipeline inventory by at
least 5 % has been reached and surpassed through the reorganization of the supply
chains, the build-up of customer and consumer knowledge, management of new
product introductions as well as the (electronic) exchange of mostly sales and
inventory data and information.
Through the ECR initiative, a number of innovations (and standards) have been
proposed and introduced for the management of supply chains: continuous replen-
ishment or vendor managed inventory policies, cross docking, retail warehouses
with efficient pickup and / or distribution logistics systems, extended barcodes for
tracking and tracing of inventory, joint forecasting practices, advanced dispatch
notification, radio-frequency-identification (RFID) tagging of pallets and cases,
online retail exchanges, electronic product codes and catalogs, category manage-
ment (CM), consumer relationship management (CRM), just to name a few new
practices. As of January 1, 2005, according to an EU directive, European food
manufacturers and grocery retailers must be able to trace their inbound and out-
bound material flows. The uncontrolled spread of genetically modified food and
CRM & CM
RFID, RFID Labs, EDIINT
Advanced Retailing
Future Store Initiative
Demand Driven Supply Chain
Customer Relationship Management
CPFR, Collaborative Category Management
Collaborative Systems & Processes
Shop-in-Shop Solutions
Cross-Category Category Management,
Electronic Market Places
Cross Docking, Web EDI, XML-Tests
CRP, EDI-Classic, Category Management Projects, Best Practices
Category Management Pilots, EDI, Supply
Start of the Cooperation
19932004
Fig. 1. Joint Projects on Supply Chain Collaboration of METRO Group with Procter &
Gamble over the Past 11 Years
Supply Chain Management in a Promotional Environment 327
feed had triggered this legal requirement. Thus, in this case, information integra-
tion and exchange along the firm’s supply chain is even mandated by law to en-
sure product safety for consumers.
One example of successful supply chain collaboration between a retailer and a
manufacturer is that between the METRO Group and Procter & Gamble in Ger-
many (Huchzermeier, Burkhardt and van Wickeren 2005). Initially, the retailing
company knew very little about its customers. As one Metro manager states it:
“Ten years ago, we knew nothing about our consumers, the manufacturers told us
how to attract customers into the stores. Today this situation has totally changed
by us collecting systematically information on inventory and consumers through
loyalty cards, purchase and market data.” Like most retail companies, METRO
Group started with the introduction of category management (see Figure 1). To-
day, METRO Group’s Real hypermarket, for example, utilizes more than 50 cate-
gory advisorships. A category advisor is responsible for the continuous optimiza-
tion of the retailer’s assortment within a category. In addition, supply chains were
reorganized by using central warehouses as central delivery points for suppliers.
The CEO of METRO Group, Dr. Hans-Joachim Koerber, emphasizes that his
company will continue to focus on gaining more supply chain benefits to improve
its economic value added (EVA) performance. The introduction of RFID tags to
track inventory in the supply chain (and consequently monitor out-of-stock situa-
tions in retail, e.g., see chapter by Verhoef and Sloot in this book) as well as de-
veloping the ability to target marketing activities directly to consumers, e.g., as
demonstrated with personal shopping assistants in its Future Store in Rheinberg,
are examples of the use of technology to improve retailing performance (see also
chapter by Kalyanam, Lal and Wolfram in this book). This new kind of a direct
marketing initiative for stores is labeled CRM & CM, since it combines key ele-
ments of both customer relationship management and category management.
A recent study in Germany on ECR implementation suggests that so far only
large retailers and FMCG companies have been able to reap the benefits of supply
chain collaboration. The following results have been collected in a survey of in-
dustry representatives (the data are presented as percent of total respondents).
Given the above data, it is clear that learning from best practice cases, e.g., the
supply chain collaboration of Procter & Gamble with METRO Group, is essential
to transition from the current adversarial relationships prevalent in the industry. In
this chapter, we suggest that the exchange of information on retail promotions,
combined with improved forecasting capabilities, can lead to sustainable win-win
situations in the supply chain, i.e., increase sales and market share as well as lower
total cost of ownership.
In Section 2, we review the recent literature on collaboration and coordination
in a retailer-manufacturer supply chain. Section 3 discusses the potential benefits
of information sharing for retail promotions in a competitive environment and
collaboration using the CPFR framework as proposed by the Voluntary Interin-
dustry Commerce Standards Association (VICS) in the U.S. Section 4 discusses
the channel benefits of information sharing. In particular, we discuss a forecasting
328 Arnd Huchzermeier and Ananth V. Iyer
Table 1. Study on ECR
See ECR as a means for process changes only : 77 %
Expect high rewards from new technologies: 60 %
Do not yet exchange their product data files: 40 %
Have not adopted CRM: 50 %
Could not lower their out-of-stock levels at retail
significantly:
70 % of manufacturers
Have implemented Collaborative Planning, Forecast-
ing and Replenishment (CPFR) practices successfully:
Only 10 % of retailers and 15 %
of manufacturers
Adopted cross-docking: 30 % of FMCG companies and
retailers.
View ECR not as a top management issue: 50 %
model for promotion items called S.M.A.R.T.S. which stands for Supply Man-
agement Advances Retail Traffic Strategy. The empirical study utilizes sales data
of diapers from Procter & Gamble for a variety of retail stores in Germany. Sec-
tion 5 concludes with managerial insights.
Supply Chain Coordination
The Bullwhip Effect in Grocery Supply Chains
A key concept that establishes the need for coordination in a retailer’s supply
chain is the concept of the “bullwhip effect”. The bullwhip effect describes the
situation whereby the demand forecast error increases as we move from the re-
tailer to the wholesaler to the manufacturer and then to the supplier i.e., the de-
mand variance is amplified as we move upstream in the supply chain. The best
description of this effect is in a paper by Lee, Padmanabhan and Whang (1997).
Lee et al. (1997) provide four examples of the bullwhip effect, starting with a
dataset from Procter & Gamble (P&G) in the U.S.. We focus on two examples
from that paper – the first example, depicted in Figure 2, shows a fairly steady
customer demand for diapers reflected in the retailer’s related orders to the whole-
saler; with increasing variability in subsequent orders from the wholesaler to the
distributor, from the distributor to P&G (greater variability) and finally from P&G
to its suppliers (very high variability). Thus, a fairly steady demand stream has
been transformed into a highly variable demand upstream. Such variability has
significant costs and service level effects.
What is the cause for the bullwhip effect? A supply chain structure with infor-
mation lags (for order transmission upstream), delivery lags (for physical goods
Supply Chain Management in a Promotional Environment 329
Retailer‘s Orders to Wholesaler Wholesaler‘s Orders to Distributor
Distributor‘s Orders to Factory Factory Orders to Suppliers
Fig. 2. The Bullwhip Effect or Increasing Variability and Size of Orders Up the Diaper
Supply Chain
Fig. 3. Trade Promotions can Generate the Bullwhip Effect
movement), and no forecast-related information sharing, can be shown to easily
create such demand variability amplification. Specifically, whenever the retailer
observes demand and adjusts his order upward, the distributor has to interpret
whether this is a longer-term uptick (thus requiring an order to fill up the pipeline)
or a temporary spike, in which case safety stock can fill this order and it just has to
be replenished. When there is no accompanying explanation for the order size, the
resulting uncertainty in order interpretation can potentially lead to order amplifica-
tion and variability as shown in Figure 2.
A second example provided in Lee et al. (1997) shows the impact of price pro-
motions in contributing to the Bullwhip Effect. In this example, the authors show
retail sales versus manufacturer orders for Campbell’s chicken noodle soup. His-
330 Arnd Huchzermeier and Ananth V. Iyer
torically, the product does see a seasonal effect on consumption with a small in-
crease during the winter months. However, Campbell’s Soup also offers a trade
promotion during this period, prompting retailers to stock up on product causing
40 % of annual sales to occur over two weeks. In this example, we see that manu-
facturer trade promotions, which offer temporary price cuts to boost sales, are
converted into an opportunity to build up stocks in the warehouse by the retailer
and thus create a demand amplification. This means that if the manufacturer did
not anticipate and plan for this lift in sales and the associated forecast error, there
can be a large increase in costs and service levels.
What can one do to alleviate the bullwhip effect? Lee et al. (1997) summarize
three strategies, namely, operational improvements,information sharing and chan-
nel alignment. First, operational improvements include lead time reduction for
manufacturing, efficient order transmission (through electronic data interchange
(EDI) links etc.) and physical delivery (through streaming loading, packing, ship-
ping etc). Reductions in lead time always reduce the bullwhip effect and thus con-
tribute to supply chain improvements. Second, information sharing deals with
efforts such as CPFR (whereby protocols have been developed for companies to
share not just their point-of-sales scanner data, but also their logic for orders each
period, their revision of upcoming forecasts etc.). Incidentally, an experimental
investigation by Steckel, Gupta and Banerji (2004), that examined the impact of
only sharing customer demand information in a supply chain, showed that under
certain conditions, overall supply chain costs increased with information sharing.
The results show that it is not merely information sharing but a discussion of the
logic for orders that plays an important role in decreasing costs, an issue that is
stressed by the CPFR initiatives. Third, channel alignment focuses on changing
the supply chain decision making location regarding order placement. For exam-
ple, vendor managed inventory is a common example of such a channel alignment
strategy in the grocery industry. By eliminating the need for the downstream loca-
tion to place orders, and replacing it by a contract for the upstream entity to man-
age downstream inventory subject to service level and inventory level constraints,
the bullwhip effect can be mitigated.
Supply Chain Coordination Through Contracts
A key stream of research and practice deals with the issue of coordinating the
supply chain. Consider a supply chain with different parts owned by separate enti-
ties. Assume that they all worked together as if they were owned by one single
entity and thus worked to maximize the performance of the overall supply chain.
This is the maximum attainable supply chain performance. Now compare it to the
performance that can be achieved with the existing contractual agreements. The
difference is called the “supply chain loss” due to less-than-perfect coordination.
There are two important takeaways from this research stream. First, there are
certain commonly observed contracts e.g., the wholesale price contract, that may
not permit supply chain coordination. Second, there are contracts, such as a buy-
Supply Chain Management in a Promotional Environment 331
back agreement, that can coordinate a supply chain and can generate Pareto im-
proving profits i.e., profit improvements for all participants in the supply chain.
These two implications suggest that in many supply chains, it is a useful strategy
to examine if the supply chain is coordinated and if not, to devise contractual ad-
justments that can expand the performance pie and thus permit a win-win solution
to be developed that is accepted by all parties, e.g., see Cachon and Terwiesch
(2006). In what follows, we focus on issues related to supply chain coordination in
a promotional environment.
Improving Promotion Forecast Accuracy and
Collaborative Planning
The current European grocery retailing and manufacturing environment is marked
by intense competition coupled with a significant loss in consumer loyalty to
stores and brands. A current WHU-INSEAD Shopper Research study (Huchzer-
meier and Van der Heyden 2002) investigated the impact of the Euro on the con-
sumer four months after its successful introduction. They found over 67 % of the
consumers interviewed believed that retail prices have increased while 66 % state
that they now spend more on groceries in stores. Consequently, 63 % of the con-
sumers claimed to have become more price sensitive, 40 % buy more products on
promotion, 33 % check more stores than before and 24 % buy more store label
products. All this suggests that customers in Euro-Land are becoming smarter
about the choice of store formats as well as the value offered by store label goods
relative to branded goods.
Promotions and the Consumer
Why have promotions in a grocery environment? The serious customer movement
to purchase of private labels from discounters is putting pressure on manufacturers.
The latter are striving to improve service for their products while having little pric-
ing flexibility. At the same time, retailers such as hyper- and supermarkets have to
either match discounters’ prices or stimulate customer demand through promotions.
As indicated by the Huchzermeier and Van der Heyden study, consumers have be-
come more price conscious since the advent of the Euro and are now more likely to
respond to promotions than in the past. Thus, in today’s European grocery retailing
environment, retail promotions are a fact of life.
In many cases, there are no persistent sales and revenues increases derived from
retail promotions by either the manufacturer or the retailer. Usually, in such situa-
tions, the consumer is the only beneficiary. However, the hypermarket Real of
METRO Group has recently used a high-low pricing strategy for premium brands,
e.g., diapers of Procter & Gamble, to i) effectively raise the market share in the dia-
per category and ii) to lure price-sensitive customers, e.g., the attractive 3+ house-
332 Arnd Huchzermeier and Ananth V. Iyer
Fig. 4. Bundling of P&G Products Increased Loyalty for the P&G Brand and the Hyper-
market Chain Real of METRO Group
hold, away from discounters, e.g., Aldi and Lidl. To curtail the negative impact from
price-based promotions, boxes of diapers are bundled with Fisher Price toys, Lego
blocks, P&G wipes and other toys or books. This way, loyalty (demonstrated by
buying up to 4 large units) is being rewarded. As indicated in Figure 4, within a
short period of time, the share of Pampers in the diapers category could be raised (to
the benefit of the manufacturer P&G) from 70.8 to 79.2 %; while Real’s category
sales of P&G diapers increased from 9.4 to 11.2 % (benefiting the retailer).
Efficient Promotion Forecasts
We next focus on understanding two key ideas that can dramatically improve overall
supply chain performance in a promotional setting: (a) “information sharing may
permit the manufacturer and the retailer to both benefit from retail promotions” and
(b) “a smart customer choice model needs to be a part of the forecasting process”.
More specifically, in order to improve accuracy of promotion forecasts, four key
features need to be addressed: i) information sharing between the manufacturer and
the retailer, ii) variety effects, i.e., the effects of offering multiple package sizes, iii)
customer segmentation, e.g., store traffic is composed of loyal and nonloyal custom-
ers and iv) consumer stockpiling behaviour, e.g., price sensitive customers tend to
buy in bulk. We will discuss each feature in detail. Subsequently, in Section 4, we
propose a forecasting model of promotion demand that includes a smart customer
choice model incorporating these key features.
Information Sharing
Forecasting promotion demand is a rather difficult task due to the fact that i)
manufacturers plan capacity allocations in the long term, e.g., on a quarterly basis,
and ii) retailers make last-minute decisions on promotion prices. Therefore, forecast
Supply Chain Management in a Promotional Environment 333
Fig. 5. Retail Promotions, Even with Information Sharing, Can Make the Manufacturer
Worse Off
error occurs and impacts the effects of promotions. As pointed out by Iyer and Ye
(2000), on the one hand, as forecast error (ı) increases, promotions can make the
manufacturer worse off as shown in Figure 5. On the other hand, coordination
through information sharing between manufacturer and retailer could make pro-
motions more profitable than having no retail promotions at all like Wal-Mart or
discounters.
To elaborate, promotions create big demand swings which have to be fore-
casted by the retailer. Then, lack of knowledge of the retailer’s planned promo-
tion depths and timing can cause large supply costs for the manufacturer. For
instance, imagine the inventory levels at a manufacturer who has no visibility
into the retailer’s promotion plans. Intuitively, each time a retail promotion con-
cludes, the manufacturer has to stock up and wait for the next big spike to occur.
Such high levels of manufacturer inventory will clearly drive up carrying costs
and thus decrease manufacturer profits associated with retail promotions. In fact,
the manufacturer may prefer a nonpromotional retail environment over a promo-
tional retail environment when there is no retail promotion information sharing.
Figure 5 shows the manufacturer profits are higher with no retail promotion than
with retail promotions when there is no collaboration between the manufacturer
and retailer.
Now consider the same situation with the manufacturer and retailer collaborat-
ing with regard to the timing and depth of promotions. What can the manufacturer
do with this information? Assuming that the related link between retail promotions
and retail sales is shared, the manufacturer can now synchronize his production
and inventory to match retail demand stimulated by promotions. The effect of
334 Arnd Huchzermeier and Ananth V. Iyer
such synchronized movement of retail demand and manufacturer inventories is to
significantly reduce manufacturer costs associated with promotions. In fact, the
manufacturer now prefers the retail promotions to a no retail promotions situation.
For example, Figure 5 shows that the manufacturer profits with information sharing
and a promotional environment are greater than when there are no promotions. In
short, we now have a channel where the manufacturer prefers the retailer’s promo-
tion plans and thus benefits from the corresponding promotional environment.
Variety Effects
Frequently, manufacturers offer multiple package sizes of a good, e.g., regular and
family packs. Consequently, discerning customers switch during times of promo-
tion to the large package size, i.e., the one with a lower price per unit. Thus, any
forecasting model must account for the consumer choice process. Forecasting
individual stock-keeping-units is of little value, since small package items will
usually be demanded less during times of promotion. Thus, key drivers of promo-
tion effectiveness are i) the fraction of customers with high reservation prices to
switch to the large package items, ii) the store traffic generated by non-loyal cus-
tomers and iii) the tactic of maintaining a relatively high price for the small pack-
age item, i.e., price segmentation.
Customer Segmentation
Figure 6 shows that a two segment customer model (as opposed to an aggregate
log-linear model of price and demand) fits the data more closely (see Iyer and Ye
2000). As stated above, non-loyal customers account for an increasing share of
promotion demand and thus should be explicitly accounted for. See also the dis-
cussion in the following subsection.
Stockpiling Behavior
As discussed earlier, retail promotions can cause significant swings in retail demand.
For example, the variation of retail sales of canned tomato soup for one store (solid
line) across time is shown in Figure 6. In this case, retail sales can increase from 300
cases to over 3,000 cases as a result of retail promotions (Note that since the y-axis
in Figure 6 uses a logarithmic scale, we have to take an exponential to obtain these
sales figures.). This significant lift in retail sales suggests the need to model the tim-
ing and impact of promotions. In addition, for the same retail price level, observed
retail sales may vary significantly. This suggests the need for a model that takes into
account temporal details in the price paths and corresponding customer behavior. A
recent paper (Iyer and Ye 2000) uses the concept of a consumer level stockpiling
model to provide an effective model of retail sales and its linkage to promotions.
Understanding the model requires us to explain three concepts – the reservation
price, holding cost and a customer breakeven calculation.
Consider the set of all customers coming to a store – assume that they can be
divided into two segments (we use two as an example, e.g., see Figure 7; more
Supply Chain Management in a Promotional Environment 335
Fig. 6. Predicting Weekly Sales of Canned Tomato Soup in a Store over Two Years Using
a Two Segment Customer Model
Manufacturer Retailer
Loyal
Customers
Walking
Customers
holds inventory in order
to buffer against
uncertainty in production
and variability in retailer
orders
holds inventory in order
to buffer against
uncertainty in demand
hold inventory in order
to satisfy demand from
one promotional period
to the next
hold no inventory, but
buy every period
Fig. 7. A Manufacturer-Retailer Supply Chain with Loyal and Unloyal Customers
336 Arnd Huchzermeier and Ananth V. Iyer
segments may be warranted to model more complex demand environments). One
segment purchases at a constant rate and is indifferent to retail prices as long as
they are below a certain level. The second segment (non-loyal) will not purchase
unless prices are below a certain level (their reservation price) and in addition, will
typically stockpile product (when retail prices are low) and thus consume from
individual inventory. This is the segment we focus on.
How does this segment of non-loyal customers decide how much to buy? Con-
sider the following calculation that these consumers may carry out. They have a
reservation price above which they will not purchase. They have a holding cost
they posit to capture the limitations on their storage space (at home or in the car),
their liquidity constraint, etc. Now imagine such a customer is being faced with a
promoted product whose price is below their reservation price. Intuitively, a
breakeven calculation is done by this segment to determine the number of days of
consumption to purchase now. Let us use an example to calculate the breakeven
number of days of consumption to purchase. For example, if the reservation price
is € 1.00, holding cost is € 0.01 and the price during promotion is € 0.90, then the
breakeven number of days is (reservation price – promotion price) / holding cost
or (€ 1.00 – € 0.90) / € 0.01 = 10 days. Thus, faced with a price of € 0.90, this
consumer will buy 10 days worth of consumption today. It is clear that a lower
holding cost suggests a greater purchase for the same retail price. It is also clear
that a lower promotion price encourages greater purchases from the same cus-
tomer segment.
Now suppose the promotion price is € 0.90. How should a retailer promote in
such an environment? Intuitively, promoting every ten days will get the segment
one customers to pay the regular price most of the time and segment two
customers to pay the promoted price of € 0.90 every 10 days (the breakeven
number of days of consumption). Consequently, it would generate 2-segment
purchase patterns similar to Figure 6, offering a rationale for promotion by the
retailer.
Given the proposed stockpiling model, we can use statistical approaches to fit
its parameters to a given dataset such as that in Figure 6. Observe that the stock-
piling model provides a much better fit than a log-linear regression model of
prices against actual demand (which is a textbook approach suggested by mar-
keters and economists). The main observation is that the fitted model generates a
forecasting model that explains over 74 % of the demand variation using a sim-
ple stockpiling model. In simple terms, we can now explain a significant portion
of the link between sales and prices. Note, however, that in Figure 6, we still
have cases where the observed sales are different from the model suggested
sales. This requires us to know the forecast accuracy of the model and thus
know the associated forecast error suggested by the model. Once we get that
information, we can choose the retail inventory that provides a hedge against
this model forecast error, and thus guarantee a relatively high in-stock avail-
ability at the store.
Supply Chain Management in a Promotional Environment 337
Collaborative Planning, Forecasting and Replenishment (CPFR)
What all of the above suggests is that any collaborative initiative between the
manufacturer and the retailer has to account for demand swings due to promo-
tions and cannot be content with regular price-based demand forecasts. Collabo-
rative planning, forecasting and replenishment offers an interesting approach to
find a way for manufacturers and retailers to manage their affairs through in-
formation sharing and collaborative planning. Typically, the focus of CPFR is
on regular sales forecast error and not on promotions, as indicated in Figure 8.
In this figure, “Strategy and Planning” refers to a formal agreement to collabo-
rate on joint business plans between a manufacturer and a retailer. “Demand and
Supply Management” imply frequent exchange of sales and order forecasts.
“Execution” deals with accuracy in order generation and fulfillment. Finally,
“Analysis” promotes exception handling and performance assessment on a con-
tinuous basis.
Fig. 8. Collaborative Planning, Forecasting and Replenishment (CPFR)
338 Arnd Huchzermeier and Ananth V. Iyer
The European retailer Metro, however, decided to focus only on promotions in its
pilot CPFR program with Procter & Gamble. (The day-to-day business of managing
non-promoted items is performed by the manufacturer. This strategy is termed “co-
managed inventory”). The supply chain collaboration team describes this choice as
self-evident as it offered the highest improvement potential and further enhancement
of the relations between retailer and manufacturer. The primary objective of this
pilot study is to improve efficiency by using the VICS recommended CPFR business
model (for further information see www.vics.org). On a weekly basis, Metro and
Procter & Gamble collaborate on promotion plans and sales forecasts with a twelve-
week timeframe. Their rolling horizon planning system includes forecasts by each
party, reconciliation daily to update forecasts with observed sales and continuous
monitoring. The associated key performance indicators (KPIs) include service level
at the warehouse, store and shelf, reduction in depot stock of promotional goods and
order accuracy. Today, due to its complexity, the CPFR process has been reduced to
only a few steps with a strong focus on frequently exchanging sales and order fore-
casts as well as continuous performance assessment.
The S.M.A.R.T.S. Model
The Fallacy of Forecasting Single Stock-Keeping-Units
Can one apply a forecasting model of promotion demand such as that of Iyer and
Ye 2000) blindly to forecast demand for a single stock-keeping-unit (SKU)?
Consider a retail environment where entering customers are presented the same
product in different package sizes with different per-unit prices. Furthermore,
suppose the prices vary over time. Customers would then be faced with package
sizes whose price difference varies over time. We would then expect to see an
environment in which customers switch their preference for package sizes at dif-
ferent points in time, withhold purchases until prices are low enough, stockpile
inventory, and monitor price movements (see Huchzermeier, Iyer and Freiheit
2002).
In the following example, we focus on the diaper brand Pampers produced by
Procter & Gamble. MADAKOM, a German retailing services firm, provided us
with weekly POS data from several grocery retailers located throughout Ger-
many. We selected this particular product since it accounts for 81 % of sales in
its category, is an expensive and promotion-intensive item and it triggers store
traffic. We plotted price against demand over a period of one year for one stock-
keeping-unit (see Figure 9). As can be seen in Figure 9, there does not seem to
be a clear relationship between customer demand and price variations for this
particular SKU: the points A and B have the same price level but significantly
different demand levels and point C shows that when price decreases, the quan-
tity sold decreases as well. These are rather counterintuitive or idiosyncratic
observations.
Supply Chain Management in a Promotional Environment 339
0
200
400
600
800
1.000
1.200
9809
9812
9815
9818
9821
9824
9827
9830
9833
9836
9839
9842
9845
9848
9851
9901
9904
9907
Week
Units
0.46
0.47
0.48
0.49
0.50
0.51
0.52
0.53
0.54
0.55
0.56
0.57
Unit price (DM)
Demand
Price
A
B
C
Fig. 9. Idiosyncracies in the POS Data for a Single Stock-Keeping-Unit
Premiums
0
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
50.000
9809
9812
9815
9818
9821
9824
9827
9830
9833
9836
9839
9842
9845
9848
9851
9901
9904
9907
We e k s
Unit s sold
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Avg . P ri c e
Units sold
Avg. P r ice
Fig. 10. Aggregated Demand (all Package Sizes) in Units and Price per Unit (in DM)
340 Arnd Huchzermeier and Ananth V. Iyer
Package Size Switching and Stockpiling Behaviour
These idiosyncracies lead us to believe that one needs to incorporate a consumer
choice model where sales are affected by the price differences between package
sizes each period. Consequently, we aggregated demand of all packages and deter-
mined the average price paid as the demand-weighted price across the various pack-
age sizes (see Figure 10). The forecasting model using two customer segments de-
scribed above can then be applied in a very similar way with two minor
modifications. First, we have to solicit consumer reactions to price promotions, e.g.,
determine their switching behavior across package sizes. (Moreover, it is assumed
that customers in segment two do stockpile). Second, the aggregate forecast has to
be broken down into forecasts at the individual SKU level.
Figure 11 shows the accuracy of fit of the unit demand forecasting model
(based on a two-customer segment model applied to the aggregate demand for a
particular diaper type, e.g., Jumbo diapers) relative to actual store sales over one
year. It is important to note that the goal of the model is only to determine the
fraction of customers who switch during promotions. Figure 11 provides a calibra-
tion of the model and simultaneously determines the fraction of customers switch-
ing to the larger (most economical) package size.
Accuracy of Forecasts for Single SKUs
Disaggregating the forecasts for the individual SKUs is straightforward. The aggre-
gate demand is multiplied with the fraction of (price-sensitive) customers reacting to
promotions. We call this number the “a”-factor where the level of “a” maybe very
different across retail environments or micro-markets (and certainly across Euro-
Land). From the WHU-INSEAD shopper research study, we see that the German,
French and Dutch population is far more price-sensitive than the Italian or Spanish.
In our data analysis, we observed the following: demand for the large (and pro-
moted) package size(s) can be predicted very accurately. Across all stores, the fore-
cast error for the large package item is around 24 % with 87 % of all cases exhibit-
ing a forecast error of less than 2 % (Huchzermeier, Iyer and Freiheit 2002)! Forecast
error for the small package items is around 35 %. This is of little concern, since the
fraction of sales during times of promotions is negligible. In both cases, improve-
ments over the current level of forecasting error can be observed which typically
varies from 30-140 % with a target of around 50 % which is rarely being achieved.
Information Sharing
How does all this help CPFR and promotions? It is our experience that including
the consumer response to promotions through stockpiling and package size
switching, the forecast error can be reduced significantly. Thus for CPFR to be
successful in reducing forecast error and days of supply, a careful consideration of
Supply Chain Management in a Promotional Environment 341
0
5000
10000
15000
20000
25000
30000
35000
40000
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
Week
Units
Sales forecast
Actual sales
Fig. 11. Forecasts of Demand for the Large Package Item
consumer response to promotions is an imperative. As outlined above, we suggest
the following approach:
a. Aggregate the sales data to see unexplainable issues at the SKU level
b. Model the customer reaction to promotions, i.e., switching across package
sizes and stockpiling
c. Synchronize shipments with demand pull information to make promotions
work for both the manufacturer and the retailer
In addition, as suggested by executives from Metro and Procter & Gamble at the
2
nd
ECR Research Symposium at the WHU, the order fulfillment process – which
is not part of the standard CPFR framework – must be carefully managed during
times of promotion.
Management Summary
Promotion Forecasts and CPFR
Retailer Perspective on CPFR The retailer has better knowledge on consumer
choice to promotions. In addition to market research data, he has access to POS data
and information obtained through loyalty programs. The retailer also controls the
assortment and merchandising available to the consumer in each store. His input to
the collaboration is the understanding how promotions affect consumer choice.
342 Arnd Huchzermeier and Ananth V. Iyer
Manufacturer Perspective on CPFR. The manufacturer has a sense of overall
market potential. He also controls the product attributes, trade promotions and
overall logistics capability. His input to the collaboration is the more accurate read
of the market potential over time.
Supply Chain Collaboration. The joint retailer-manufacturer considerations repre-
sent the most accurate picture of SKU-level demand in the supply chain. Clearly
this suggests the value of collaboration between the manufacturer and the retailer
to better understand the consumer response. In other words, a crucial component
of CPFR is understanding the “C” as in consumer or even better, Consumer
Choice, to succeed in CPFR implementation.
Other Issues in Supply Chain Coordination
Private Labels and their Effect A report in 1993 suggested that $ 725 was the
premium that a brand loyal family had to pay for a year’s worth of supply of prod-
ucts from Procter & Gamble versus private label brands. This caused a significant
number of supply chain initiatives to be launched by Procter & Gamble including
a focus on smoothing trade promotions. Supply chain management and informa-
tion sharing offered both Procter & Gamble and retailers opportunities to generate
Pareto improving solutions that focused on improving the channel performance for
the consumer. Many of the ECR initiatives focus on such efforts.
The Role of Online Exchanges In the case of Metro and Procter & Gamble, the two
companies have recently agreed to adopt a co-managed inventory strategy where
promotions are being managed jointly. Otherwise, the manufacturer is responsible
for the continuous replenishment of products to the retailer’s central warehouse(s) or
stores. In addition, only the first four steps of the CPFR framework are being prac-
ticed, i.e., those related to sharing of demand forecasts. The main reason is that the
CPFR process is too complex and too difficult to implement in both organizations.
In general, the METRO Group relies on single SKU-based forecasts generated by
the SAF software (for further information, see www.saf-ag.com). In case of devia-
tions, e.g., of promotion items, it then utilizes the e-platform GNX to intensify data
exchange with its suppliers to synchronize forecasts with replenishments. As pointed
out earlier, the forecast error is a function of the stockpiling effect of non-loyal cus-
tomers and the consumer choice by loyal customers. Consequently, the research
related to the S.M.A.R.T.S model as presented above will influence the way the
METRO Group will determine promotion forecasts in the future.
RFID Tagging Today, the capability of tracing and tracking of products is mandated
by law in Europe and the U.S. The introduction of RFID tags at the pallet, the case
or the item level will increase on-shelf availability and reduce total cost of owner-
ship. The new technology also suggests more integrated manufacturer-retailer com-
munications and promotions in the future (see also chapters by Gedenk, Neslin,
Supply Chain Management in a Promotional Environment 343
Ailawadi and Raman, Naik in this book). For example, in Metro’s Future Store in
Rheinberg in Germany, Procter & Gamble presents commercials when consumers
take certain products from shelves, providing, e.g., information on conditioners for
shampoos.
Outlook into the Future
Collaborative Planning and Forecasting In Europe, retail promotions have be-
come a fact of life. While many manufacturers have adopted an every-day-low-
costing strategy, few retailers can afford not to promote. In some instances, even
EDLP retail chains have been convinced to adopt family packs or resort to price-
based promotions. A number of firms have focused on generating supply chain
benefits by coordinating replenishments to retailers even in a promotion-intensive
environment. In this context, enhancing the retailer’s forecasting capability and
sharing information about demand and promotion tactics has improved overall
supply chain performance. The use of technology for communication and thus
information sharing and product tracking will potentially further increase supply
chain efficiencies while benefiting the consumer by lowering out-of-stocks.
Risk Management In markets, where efficient utilization of capital intensive ca-
pacity is a key driver of overall supply chain performance, spot markets are com-
plemented by contract markets where options on inventory (or capacity) can be
purchased in advance for the exchange of a reservation fee. In case demand ex-
ceeds available stocking levels, such options are utilized and the exercise price
paid. It can be shown that such arrangements are Pareto-improving for the buyer
and the supplier, i.e., more sales are achieved at higher profits for both parties
involved (Spinler and Huchzermeier 2003). In the context of promotions, hedging
the forecast error through procurement options would almost completely eliminate
the need for physical stocks to cover the forecast error, and effectively share the
risk between the two supply chain partners. This would lead to the most profitable
supply chain design exhibiting the maximum level of performance. This is due to
the fact that the overage risk is being shared and thus, the retailer is willing to
stock more rather than less units. While improving forecast accuracy, i.e., below
25 % for individual SKUs (according to industry experts), is rather difficult and
collaborative planning is becoming standard business practice, introducing con-
tract markets may be the most effective tool for supply chain coordination in a
promotional environment in years to come.
References
Cachon, Gérard P. and Terwiesch, C. (2006): Matching Supply with Demand: An Introduc-
tion to Operations Management. McGraw Hill
Efficient Consumer Response: Enhancing Consumer Value in the Grocery Industry. Food
Marketing Institute, 1993
344 Arnd Huchzermeier and Ananth V. Iyer
Huchzermeier, Arnd, Burkhardt, Daniela, and van Wickeren (2005): METRO Group: Ad-
vancing ECR. Case Study, WHU, Otto-Beisheim Graduate School of Management,
Vallendar, Germany
Huchzermeier, Arnd and Iyer, Ananth. V./Freiheit, Julia (2002): The Supply Chain Impact
of Smart Customers in a Promotional Environment. Manufacturing & Service Opera-
tions Management, Summer, pp. 228-240
Huchzermeier, Arnd and Van der Heyden, Ludo (2002): WHU-INSEAD Shopper Research
Study. Proceedings of the 2nd ECR Research Symposium. Published by: WHU, Otto-
Beisheim Graduate School of Management, Vallendar, Germany, www.whu.edu/
prod/ecr
Iyer, Ananth. V. and Ye, Jianming (2000): Assessing the Value of Information Sharing in a
Promotional Retail Environment. Manufacturing & Service Operations Management,
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ply Chains. Sloan Management Review, Spring, pp. 93-102
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Spinler, Stefan and Huchzermeier, Arnd (2003): Risk Hedging via Options Contracts for
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Help? Management Science, April, pp. 458-464
Sales Promotion
Karen Gedenk1, Scott A. Neslin2, and Kusum L. Ailawadi3
1 University of Cologne, Germany
2 Tuck School of Business at Dartmouth, Hanover, USA
3 Tuck School of Business at Dartmouth, Hanover, USA
Introduction
Sales promotions are a marketing tool for manufacturers as well as for retailers.
Manufacturers use them to increase sales to retailers (trade promotions) and
consumers (consumer promotions). Our focus will be on retailer promotions,
which are used by retailers to increase sales to consumers. Typical examples of
retailer promotions are temporary price reductions (TPRs), features, and dis-
plays.
Sales promotions play an important role in the marketing programs of retailers.
A large percentage of retailer sales is made on promotion, as illustrated by the
numbers in Figure 1. Also, retailer promotions address consumers at the point of
sale. Thus, while advertising in classic media is becoming less effective, commu-
nication through promotions reaches the consumer at the place and time where
most purchase decisions are made. The Point of Purchase Advertising Institute
(POPAI) finds in a study from 1999 that the in-store decision rate of consumers in
Germany, for example, is 55%, meaning that more than half of all purchase deci-
sions are made in the store, as opposed to before the shopping trip.
At the same time, the management of retailer promotions is not trivial, for sev-
eral reasons. First, retailers can use many different forms of price promotions,
such as temporary price reductions, coupons, and multi-item promotions, and
combine them with non-price promotions like features, displays, and other POS
material. Second, retailer promotions can have many different effects. For exam-
ple, increases in sales can result from brand switching, store switching, category
switching, stockpiling, or increased consumption. In order to evaluate the profit-
ability of a promotion, it is important to disentangle these effects. Third, manufac-
turers and retailers pursue different goals, and retailers have to take into account
the manufacturer’s trade promotion policy and its impact on their own margins
346 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
12.1
15.0
21.3
22.8
25.0
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Germany
France
Italy
Spain
Great Britain
Percentage of Sales (in €) made on Promotion, January – June 2004
Fig. 1. Percentage of Sales Made on Promotion in Europe (A.C.Nielsen)
when planning their retailer promotions. Initiatives like efficient consumer response
(ECR) and collaborative planning, forecasting, and replenishment (CPFR) have tried
to promote more cooperation between manufacturers and retailers, one area of coop-
eration being sales promotions (see, e.g., chapter by Huchzermeier and Iyer in this
book).
Over the last 25 years a large research effort has been spent on studying the ef-
fects of promotions. Methods for measuring the success of promotions have been
developed and refined. And many substantive results have been accumulated,
allowing us to make some empirical generalizations.
At the beginning of the 21st century, promotions are facing new opportunities
and challenges as technology plays an increasing part in retailing. Technologies
such as loyalty cards, electronic media at the point of sale, and electronic shopping
assistants are likely to have an impact on how retailers use promotions, e.g. to
better target consumers.
The purpose of this chapter is twofold. First, we want to review what we know
about promotions as retailers have used them in the past. Second, we want to dis-
cuss the opportunities and challenges for promotions presented by new technolo-
gies in retailing.
The chapter proceeds as follows. In the second section, we categorize and de-
scribe promotion instruments that retailers may use. In the third, we give an over-
view of the effects of retailer promotions on sales and present empirical results as to
the strength of these effects. We describe new technologies used in retailing and
discuss the resulting opportunities and challenges for promotions in the fourth
section.
Sales Promotion 347
Promotions
Price promotions
- Promotion communication
• Features
• POS advertising
•
A
dvertising in other media
- Displays
- POS materials
- Promotion packaging
- Others
- Sampling
- Premiums
- Sweepstakes/ contests
- Events
- Others
-TPR
- Promotion packs
- Loyalty discounts
- Coupons
- Rebates
- Others
“‘True” non-price
promotions
“Supportive” non-
price promotions
Non-price promotions
Fig. 2. Instruments for Retailer Promotions
Promotion Instruments
Figure 2 shows different promotion instruments that retailers may use (Gedenk
2002, Neslin 2002).
A first distinction can be made between price and non-price promotions. The
price promotion instrument used most often is a temporary price reduction (TPR).
However, other forms of price promotions are possible. Retailers can use promotion
packs, i.e., packages with extra content (e.g., “25 % extra”), or multi-item promo-
tions (e.g., “buy three for x” or “buy two get one free”). Loyalty discounts also
require the purchase of several units, but the consumer can do this over several pur-
chase occasions. Retailers can also use coupons or rebates. With coupons, con-
sumers have to bring the coupon to the store in order to get a discount. With rebates,
consumers pay the full price, but they can then send in their receipt to get a discount.
“Supportive” non-price promotions are communication instruments used to
alert the consumer to the product or to other promotion instruments. Very often
they are used to draw attention to price promotions. For example, products on
TPR are featured or displayed. Thus, the focus is not so much on the brand as on
price. Note that they can also be used without a price promotion. For example, a
feature can advertise an everyday low price policy or a new product. Interestingly,
there is evidence that consumers may interpret supportive non-price promotions as
a signal for a price cut even if they are not coupled with actual price discounts,
since the two are closely linked in many consumers’ minds.
Finally, retailers can use “true” non-price promotions, where the focus of the
promotion is clearly on a brand or store, and not on a price cut. However, instru-
ments such as sampling and premiums are mostly used by manufacturers, and not
by retailers. Therefore, our focus in the following will be on price and supportive
non-price promotions.
348 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
Effects of Promotions
Overview of Effects
To assess the profitability of retailer promotions, retailers have to take into ac-
count their costs, the trade promotion allowances given to them, and the effect of
promotions on sales to consumers (for more discussion on this point, see chapter
by Bolton, Shankar and Montoya in this book). The biggest challenge for control-
lers lies in assessing the sales effects. Thus, we will discuss these in this section.
Figure 3 shows the effects of a retailer promotion on the sales of the promoted
product (Gedenk 2002, Neslin 2002).
In Figure 3, we distinguish between short-term effects, which occur during the
promotion, and long-term effects, which involve behavior that takes place after the
promotion. Sales for the promoted brand can increase during the promotion by
attracting customers from other stores (store switching), inducing customers to
switch brands (brand switching), inducing customers to buy from the promoted
category rather than another category (category switching), inducing customers
who normally do not use the product category to purchase it (new users), or induc-
ing customers to move their purchases forward in time (purchase acceleration).
Purchase acceleration can occur because consumers purchase earlier or because
they purchase more than they would have done without the promotion. Consumers
can either stockpile the extra quantity for future use or consume it at a faster rate.
Total category consumption can also increase owing to category switching or if
the promotion attracts new users.
While the short-term sales bump will be highest if all these mechanisms are at
work, the particular decomposition of the bump into these mechanisms is important
for the profitability of the promotion. Therefore, a controller must not stop at
Store
switching
Brand
switching
New
users
Consump-
tion rate
Stock-
piling
Brand
loyalty
Store
loyalty
Purchase
acceleration
Sales of the
promoted product
Short-term
effects
Long-term
effects
Product
switching
Category
switching
Category
loyalty
Product
loyalty
Fig. 3. Effects of Retailer Promotions
Sales Promotion 349
measuring the size of the short-term sales bump. Rather, it is important to de-
compose this bump. An increase in category consumption resulting from new
users, category switching, or a higher consumption rate is beneficial for both re-
tailers and manufacturers. If the bump is caused by consumer store switching, this
is beneficial only to the retailer. Note there are two types of store switching – di-
rect and indirect. A direct store switch occurs if the consumer visits store A rather
than store B. An indirect store switch is if the consumer shops at both stores, but
the promotion in store A pre-empts a purchase that would otherwise have occurred
at store B. Either form of store switching is beneficial to the retailer.
In contrast, the part of the promotion bump that results from brand switching
within the store is good for the manufacturer, but not necessarily for the retailer.
The effect on the retailer’s profit depends on which product has the higher margin
– the product switched to or the product switched from. Accelerated purchases
that are stockpiled for future use may or may not be beneficial to the retailer. If
retailer profit margin during the promotion period is larger than that during the
non-promotion period, it is to the advantage of the retailer to encourage stock-
piling. This may be why retailers sometimes use promotion signage such as “stock
up and save.” If, however, the retailer’s promotional margin is smaller than the
regular margin stockpiling is unprofitable for the retailer.
In short, measuring the size of the short-term bump in sales actually says very
little about whether the promotion is successful from the retailer’s point of view.
The bump must be decomposed as much as possible into the effects shown in
Figure 3, and the retailer’s regular and promotional margins must be taken into
account.
In addition to increases in short-term sales, promotions can have an effect on
long-term sales. Consumer stockpiling increases sales during the promotion, but
decreases them afterwards. Also, consumer loyalty may change. Manufacturers
hope for increased brand loyalty, while retailers would like to increase store loy-
alty. However, promotions may also have a negative effect on loyalty. Price pro-
motions can decrease consumers’ reference prices, thus making the brand / store
appear expensive on the next shopping trip. Attribution theory and behavioral
learning theory explain how consumers can learn from buying on promotion, but
these theories cannot predict whether consumers learn to buy a certain brand / in a
certain store, or whether they learn to purchase on promotion.
Finally, a retailer is not only interested in sales of the promoted product, but
also in sales of other products in the store. Promotions are very favorable for a
retailer if they draw consumers into the store, who then also purchase non-
promoted products. This can only occur if store switching is direct and the store-
switching consumers are not just cherry picking. If store switching is indirect,
consumers shop at both store A and store B, and this is not changed by the promo-
tion in store A. If store switching is direct but the store switchers are cherry pick-
ers, then they only come to the store to buy the promoted product, so that sales of
other products do not increase.
350 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
What We Know About the Strength of Promotion Effects
Many researchers have developed methods to measure the effects of promotions
on sales and applied them to generate substantive results over the last 25 years.
Most of these studies are based on scanner data and study fast-moving consumer
goods sold in grocery stores. Some studies use store-level scanner data, which
have the advantage of being readily available for managers. However, single-
source scanner panel data, which combine household and store data, allow a more
detailed analysis of promotion effects. With single-source data, researchers can go
beyond sales or market share response functions and investigate consumer behav-
ior, such as store choice, category purchase incidence, brand choice, and purchase
quantity in more detail. Therefore, many empirical studies are based on this type
of data. All these studies, together with laboratory and field experiments, have
generated a wealth of results (for reviews see Gedenk 2002, Neslin 2002).
Short-Term Effects
Retailer promotions typically cause a large bump in short-term sales of the pro-
moted brand. Increases in sales by several hundred percent are not unusual. Pro-
motional price elasticities differ across categories and depending on the promotion
instruments used. For example, Narasimhan, Neslin, and Sen (1996) find that
promotional elasticities are higher for categories with a relatively small number of
brands, shorter interpurchase times, and higher consumer propensity to stockpile.
Supportive non-price promotions can be used to enhance the effects of price
promotions by drawing attention to them. For example, Narasimhan, Neslin, and
Sen (1996) report on the basis of an Information Resources, Inc., study that a 15%
“unsupported” price cut yields an average sales increase of 34 % across 108 cate-
gories, whereas a 15 % price cut supported by a feature generates a 161 % increase,
and a 15% price cut supported by a display generates a 293 % increase. Supportive
non-price promotions can also serve the purpose of framing the deal. After all, a
price promotion is like a picture – it looks different depending on which frame you
put around it. Possible frames are external reference prices (e.g., “normally 3.99 € –
today only 2.99 €”) or price cuts expressed in percent (“25 % off”) rather than in
absolute terms (“1 € off”). Sometimes these frames can have strong effects, simply
from putting up a sign. For example, Wansink, Kent, and Hoch (1998) show in a
field experiment that imposing a quantity limit for canned soup (“limit of 4 [12]
per person”) increases the average quantity bought per person. Given that con-
sumers who would have bought a very large quantity without the promotion are
not allowed to do so, a decrease in average quantity would have been expected.
The authors explain their surprising results with an anchoring and adjustment
effect. Consumers use the number in the quantity limit as an anchor to adjust their
purchase quantity upwards. Another explanation could be that consumers interpret
the quantity limit as a signal for a particularly attractive promotion. Finally, sup-
portive non-price promotions can be used by themselves without a price reduction.
Sales Promotion 351
Often consumers interpret promotional signs and displays in the stores as a signal
for a promotion, resulting in an increase in sales at full margin. In summary, then,
not only do price reductions matter, but POS signage, displays, and features can
have a large impact on sales and profit contribution.
Many researchers have decomposed the short-term sales bump into brand
switching and purchase acceleration components. Until recently, empirical
analyses seemed to indicate that about three quarters of the sales bump results
from brand switching. However, van Heerde, Gupta, and Wittink (2003) have
pointed out that these studies, which are based on an elasticity decomposition,
have been interpreted in an inadequate way. When van Heerde, Gupta, and Wit-
tink perform a unit sales decomposition and look at how much the promoted
brand gains and how much competitors lose in sales, they find that two thirds of
the sales bump result from purchase acceleration and only one third from brand
switching. Other authors have shown that purchase acceleration can translate
into additional category consumption through a faster use-up rate. For example,
Ailawadi and Neslin (1998) find that 13 % of the short-term sales bump for yo-
gurt is due to increased consumption, whereas in the case of ketchup increased
consumption accounts for only 5 %. In summary, then, we know that promotions
cause substantial purchase acceleration, which, at least in some categories, can
result in increased consumption.
The most important promotion effect for a retailer, store switching, has not
been studied as much, and the empirical evidence that exists is somewhat mixed.
A few studies find no effect of promotions on store traffic and store sales, but
these studies use store-level data from supermarkets that run promotions every
week, so that they can only study differences between the promotion bundles ad-
vertised each week. Other studies do find that promotions increase store traffic
(e.g., Lam et al. 2001) and that a substantial part of the category expansion within
the store comes from store switching (e.g., van Heerde, Leeflang, and Wittink
2004). The latter study finds that, on average across different types of promotions,
store switching accounts for 25 % of the sales bump for tissues and 34 % for peanut
butter. The effect is about as strong for unfeatured as for featured promotions,
indicating that a lot of the store switching must be indirect. More support for indi-
rect store switching is provided by Bucklin and Lattin (1992), who study single-
source scanner panel data for detergent. They find no evidence for direct store
switching from features, but an increase in market share of the store in the pro-
moted category, resulting from indirect store switching.
Even less is known about the extent of category switching due to promotions.
One cross-category effect that has been studied extensively is category comple-
mentarity, that is, whether promotions in category A can increase sales in category
B if the products are used or purchased together by the consumer. For example,
Mulhern and Leone (1991) find sales increases for related products in some gro-
cery categories, but not in others. They also find that if cross-category relation-
ships exist, they are asymmetric. For example, cake mix prices significantly affect
frosting sales, but the reverse is not true. Mulhern and Padgett (1995) matched
352 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
actual purchases of consumers with survey data to study the effect of promotions
on non-promoted products. In this study, only 23.2 % of consumers who indicate
that they have come to the store because of a promotion buy only the promoted
item. This means that cherry picking exists, but not to a very large extent. At the
same time, 51.8 % of the consumers who have come to the store because of the
promotion buy only non-promoted items. Mulhern and Padgett find that this is not
because the promoted product is out of stock, but because many consumers
change their plans once they come to the store, or are disappointed by the pro-
moted item when they inspect it. Note that Mulhern and Padgett find this effect in
a home improvement store. In grocery retailing, where products are well known, it
seems less likely that many consumers will visit the store because of a promotion
but then not buy the promoted product. In summary, then, there is some evidence
for positive effects of promotions on non-promoted products, but it is not very
strong. This issue certainly warrants further investigation.
Long-Term Effects
Many researchers have studied the effect of promotions on brand loyalty. They
find that temporary price cuts decrease reference prices, increase price sensitivity,
and decrease share of category requirements and repurchase probabilities. These
findings suggest a negative relationship between promotion and brand loyalty.
However, the net effect on brand sales may be positive, at least for some custom-
ers. The reason is that consumers show some inertia in their purchase patterns:
they tend to repurchase what they purchased last time. A promotion makes it more
likely for this inertial effect to occur, because it induces that first purchase. Pro-
motion weakens the inertial effect relative to a non-promotion purchase, but the
inertial effect is still positive. As a result, promotions do not necessarily decrease
long-term market share (Gedenk and Neslin 1999). In fact, the net impact on share
can be positive. Ailawadi, Lehmann, and Neslin (2001) find that, in the long run,
decreasing promotion and, as a result, increasing net price has a detrimental effect
on customer share of requirements and contributes to a decrease in market share.
In addition, Gedenk and Neslin (1999) find that non-price promotions such as
features and sampling have a weaker short-term effect, but are more favorable for
brand loyalty than are price promotions, resulting in a stronger positive net effect
on brand choice probabilities after the promotion.
Unfortunately, the effect of promotions on store loyalty has not been studied as
much. An important measurement issue with regard to store loyalty is whether
inherently non-loyal shoppers self-select to shop at promotion-oriented stores, or
whether promotions in fact erode the loyalty of shoppers over time. Bell and Lat-
tin (1998) provide some evidence of a self-selection effect. They show that con-
sumers who purchase large total market baskets per visit tend to favor stores that
feature everyday low pricing (EDLP), whereas shoppers who purchase small mar-
ket baskets prefer stores that run good promotions. Sirohi, McLaughlin, and Wit-
tink (1998) find that perceptions of a store’s promotions correlate positively with
Sales Promotion 353
perceived value and store loyalty. Finally, Taylor, and Neslin (2005) provide evi-
dence for a positive effect of a special type of promotion on store loyalty. They
study a loyalty promotion in which consumers can obtain a free turkey product
based upon purchases during an 8-week promotion period. They find that this
reward program increases sales during the 8 weeks of the promotion (“points pres-
sure effect”). In addition, consumers participating in the promotion purchased
more in the store after the promotion. This “rewarded behavior effect” occurs
because the goodwill and positive affect created by the reward result in the cus-
tomer having a more favorable view of the retailer and hence purchasing more. In
summary, there is some evidence that promotions can have a positive effect on
store loyalty, but the issue warrants further investigation.
Future Developments
New Technologies
Retailing is currently facing opportunities from a variety of new technologies. In
Germany, Metro is currently testing many of these technologies in its “Future
Store,” a grocery store belonging to the “Extra” chain in Rheinberg. In this paper
we will not discuss all of these technologies, but briefly present those that we
expect to have the largest impact on promotions:
x Loyalty cards
x Personal shopping assistants (PSA)
x Electronic shelf labels and advertising displays
x RFID
Loyalty Cards
Loyalty cards have been used by retailers for quite a few years. Nonetheless, they
are included here, since they can be combined with some of the other technologies
and they constitute a major basis for targeting promotions. Metro in Germany par-
ticipates in the “Payback” loyalty program administered by the company Loyalty
Partners. Consumers can collect Payback points in many Metro stores, such as Real
(grocery), Kaufhof (department store), and OBI (DIY), but also in chains of other
retailers, such as Apollo Optik (optician) and Goertz (shoes). Once consumers have
collected a certain number of points they can exchange them for a cash payment or a
premium. In September 2004, Payback had issued as many as 28.3 million cards to
consumers in Germany (the chapter by Reinartz in this book provides more informa-
tion on the design of loyalty programs).
For Metro, Payback provides valuable data for promotion analysis and planning.
As in a single-source panel, the retailer has data on consumer purchase behavior at
354 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
the household level, as well as in-store data on the promotion environment at the
time when purchases are made. One disadvantage relative to single-source data is
that loyalty card data only capture purchases within the participating chains of
stores. Thus, purchases made in a competitor’s store cannot be registered. Note
also that Payback only provides detailed data for consumers who have acquired
their card through a certain chain of stores. Owing to privacy regulations, the rest
of the raw Payback data is only available to Loyalty Partners. It can nonetheless
be used for targeting consumers, since direct mail promotions, for example, can be
sent through Loyalty Partners.
Personal Shopping Assistants
Personal shopping assistants (PSAs) can be attached to the shopping cart when a
customer enters a store. At the Metro Future Store, the PSA reads the Payback
card of a shopper, so that it can access the purchase history of the customer’s
household. The PSA display shows an electronic shopping list. It initially pro-
poses a shopping list based on the favorites from previous purchases. The con-
sumer can than modify that list. If the consumer scans the products s/he puts into
the shopping cart, the PSA calculates total price and indicates savings from prod-
ucts bought at a reduced price (see also chapter by Litfin and Wolfram in this
book). In addition, the PSA displays information on promotions in the store. PSAs
therefore offer the potential to induce category complementarity and encourage
new use, indirect store switching, and purchase acceleration effects.
Electronic Shelf Labels and Advertising Displays
Electronic shelf labels and advertising displays are controlled centrally by WLAN.
In the Metro Future Store, electronic shelf labels are directly connected to the
price administration system and the checkout system. Thus, prices on the shelves
are always identical to prices at the checkout. On LCD displays the labels show
the prices of products on the shelf. In addition, special offers may be highlighted
by a flashing signal.
Electronic advertising displays are attached to the ceiling in several locations in
Metro’s Future Store. They can display advertising messages or show videos.
Messages can be changed within seconds. This type of signage might be very
effective at inducing profitable brand switching and indirect store switching as
well as new use and purchase acceleration effects (see, e.g., chapter by Kalyanam,
Lal, and Wolfram in this book for more detail on technologies being used in
Metro’s Future Store).
Radio Frequency Identification
Finally, an important new technology in retailing is radio frequency identifica-
tion (RFID). This auto-identification technology uses radio waves to identify
individual physical objects. In the US, WalMart is the first to have asked its
Sales Promotion 355
suppliers to attach RFID tags to pallets and cases of products. In Germany,
Metro is a pioneer in the usage of RFID. In its Future Store, it is even running
tests with tags attached to individual products. So far, this is an expensive exer-
cise, since each tag costs about 30 cents. Also, RFID is still beset with technical
problems, such as the receivers’ inability to read through liquid and metal. Fi-
nally, consumers have strong concerns about privacy. This has induced the Fu-
ture Store to test deactivating devices, which make sure that RFID tags can no
longer be read once the consumer leaves the store. In spite of these current diffi-
culties, many experts expect RFID to develop further and replace identification
through UPC / EAN in the future.
So far, tests of RFID have focused on optimizing the supply chain, and reduc-
ing costs in logistics. But RFID also offers potential for servicing the customer
better, particularly when tags are attached to individual products, and for better
analyses of the impact of retailers’ in-store merchandising activity.
Opportunities for Sales Promotions
The technologies described above can be expected to affect retailer promotions in
several ways, the most important ones of which are related to:
x Better control
x Targeting consumers outside the store
x Targeting consumers in the store
x Cross-selling
We will discuss these aspects in turn.
Better Control
A first effect of the new technologies is increased flexibility with respect to price
changes. In particular, electronic shelf labels and electronic displays allow the
retailer to adjust prices very quickly. Thus, it becomes possible to run promotions
for very short time spans. For example, a retailer could offer a price promotion
during the day, when most housewives go shopping, and return to the regular price
at night, when many singles shop after their working day is finished. This means
that promotions will have an increased potential for price discrimination.
Also, promotions in a traditional retail environment often run into problems
with out-of-stocks. Since it is hard to forecast sales bumps caused by a promotion,
retailers may not have enough of the promoted product in the shelf or display, and
thus not be able to satisfy consumers’ demand. RFID technology may help dis-
cover out-of-stocks very quickly, so that extra products can be moved to the point-
of-sale (see chapter by Verhoef and Sloot in this book for more information on
evolving approaches to out-of-stocks reduction).
356 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
Targeting Consumers Outside the Store
Price promotions are an important tool in price discrimination. Typically, the price
discrimination works through self-selection of the consumers. The promotion is
offered to all customers, who then decide whether to use it or not. However, pro-
motions can be an even stronger mechanism for price discrimination if retailers do
not offer them to all customers, but target certain consumers. This type of target-
ing can be an effective way of encouraging profitable store switching, purchase
acceleration, category switching, and brand switching.
Targeted promotions can be easily used on the Internet, where customer-
specific information is available. Loyalty programs such as Payback can also pro-
vide an important database for targeting promotions. Customers can be selected on
the basis of demographics and past purchase behavior and addressed individually
through direct mail. Tesco, a leading UK retailer, reportedly creates upward of
100,000 separate promotional flyers on a quarterly basis to effectively target its
customers with the coupons these customers want. This is also true of CVS, the
leading drugstore chain in the US. Metro uses Payback data mostly for targeted
direct mail coupons. For example, Real frequently sends coupons to households
with large shopping baskets.
Targeting can also occur at the category level. For example, loyalty card data
can be used to find out which product categories a household does not yet buy in a
given retail chain, but might buy there if offered a promotion. Real, for example,
has been successful with sending coupons for toys to consumers who have several
children but have not yet purchased toys at Real.
A key question, obviously, is which consumers to target. One possible answer
would be to address coupon-prone consumers, i.e., those consumers who redeem a
relatively large number of coupons. However, coupon proneness in itself does not
make a consumer attractive for targeted promotions. It is possible that coupon-
prone consumers only use coupons for products that they would have purchased
anyway in the respective store. Thus, it is important to identify consumers who
can be induced by coupons to make incremental purchases.
The academic discussion has focused a lot on whether promotions should be of-
fered to loyal consumers or to switchers. At first glance, it seems like a good idea
to target switchers. Loyal consumers would buy a given brand in a given store
anyway, without creating incremental sales. In contrast, switchers can be pre-
vented from buying a competitor’s brand or shopping in a competitor’s store. At
second glance, however, this strategy can have severe drawbacks. First, as Shaffer
and Zhang (1995) point out, targeting switchers may not be profitable in a com-
petitive setting because it results in a prisoners’ dilemma. If all competitors target
the switchers, the overall price level decreases while market shares remain the
same, and profits become smaller for all firms. Second, Feinberg, Krishna, and
Zhang (2002) point out that targeting switchers may cause two negative behav-
ioral effects, which they call betrayal and jealousy effects. A betrayal effect means
that consumers’ preference for their favored firm will decrease if the firm offers a
special price to switchers, i.e., to another firm’s loyal customers. A jealousy effect
Sales Promotion 357
means that consumers’ preference for their favored firm will decrease if another
firm offers a special price to its own loyal customers. In a laboratory experiment,
the authors find empirical support for these effects. They show that when firms
ignore these behavioral effects, they put too much emphasis on targeting switchers.
When these effects are taken into account, it may become more profitable to target
loyal customers. Overall, then, the question of whether to target switchers or loyal
customers is not a trivial one, and it warrants further investigation.
Finally, retailers may consider using customer lifetime value for targeting cer-
tain customers with promotions. As in the case of coupon proneness, it is impor-
tant to note that retailers should not necessarily target the consumers with the
highest customer lifetime value. Rather, they should try to identify those consum-
ers for whom promotions will lead to an increase in customer lifetime value.
In summary, targeting consumers outside the store offers potential for more ef-
fective price discrimination. However, more research is needed on which consum-
ers to target. Whether retailers’ use of targeted promotions will increase in the
future will depend on whether attractive target groups can be identified and on
whether targeting will lead to a prisoners’ dilemma and annoy consumers who are
not part of the target group.
Targeting Consumers in the Store
Thus far, targeted promotions have mostly been used on the Internet and via direct
mailing, but new technologies also offer the opportunity to target consumers at the
point of sale in bricks-and-mortar stores. Customized information on promotion
can be presented to the consumer by beaming it on the floor or by displaying it on
the PSA or on electronic advertising displays. For example, the information on the
PSA may change according to where a consumer is located in the store. The pro-
motion information displayed can be adapted to the individual consumer on the
basis of the information read from the loyalty card inserted into the PSA. If prod-
ucts have RFID tags, electronic advertising display can show information about a
certain product once the consumer takes it off the shelf.
Cross-Selling
The same technologies offer retailers new opportunities for cross-selling and for
exploiting category complementarity. For example, analysis of market basket data
together with loyalty card data may suggest that breakfast products and fruits are
typically bought together and a particular shopper might currently buy breakfast
products in the store but not much fruit. The retailer could therefore create a pro-
motion that offers a price discount on fruit if the customer buys breakfast prod-
ucts. A major question in this type of cross-selling is which should be the pro-
moted brand – the breakfast product or the fruit. Dhar and Raju (1998) show that
this depends on the market shares of the two brands and whether they are com-
plements or substitutes. For example, they find that when brands are complements,
the promoted brand should be the high share brand.
358 Karen Gedenk, Scott A. Neslin, and Kusum L. Ailawadi
In addition, cross-selling may be induced by promotions directly at the point of
sale. If individual products have RFID tags, in-store promotions may be based on
the products a consumer has already put into his/her shopping cart.
The above discussion has shown that new technologies in retailing offer many
opportunities for sales promotions. Promotions are becoming more flexible, can be
targeted better at specific consumers, and can be used for cross-selling. Many of
the new opportunities occur at the point of sale in bricks-and-mortar stores, where
sales promotions can be featured in more prominent and targeted ways. Thus, a
general trend expected is that larger parts of the promotion budgets of retailers and
manufacturers will be spent on in-store promotions.
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Understanding Customer Loyalty Programs
Werner J. Reinartz
INSEAD, Fontainebleau, France
Introduction
In retailing, loyalty programs (LPs) have been the subject of exploding levels of
attention since the late 1990s. Building mainly on the premise that it is less expen-
sive to market to existing customers than to acquire new ones, firms across a mul-
titude of industries have raced to implement one loyalty scheme or another. For
example, Internet service provider AOL and American Airlines recently created
the world’s biggest loyalty program with, respectively, 1.5 million and 38 million
members and more than 2000 partners. In Europe, an estimated 350 million loy-
alty cards were distributed in 1999 for the retailing sector alone.
An LP can be defined as a marketing process that generates rewards for cus-
tomers on the basis of their repeat purchases. The term “loyalty program” is used
here to encompass the many different forms of frequency reward programs. There
is not one single definition of an LP because of its considerable overlap with pro-
motional tools. The key characteristics of the term, as it is used herein, are the
notions that it pertains to longer-term activity and focuses on supporting or gener-
ating repeated customer interactions with a product, store, or brand. Consumers
who enter an LP are expected to transact more with the focal company, and in that
sense, they voluntarily give up the free choice they would possess otherwise. In
exchange for concentrating their purchases with the focal firm, they accumulate
assets (e.g., points) that they can exchange for products and services, typically but
not necessarily those associated with the focal firm. Therefore, LPs have become
an important customer relationship management (CRM) tool used by marketers to
identify, reward, and retain their customers.
The degree of growth in LPs has been staggering in the past decade; virtually
every retail category now engages into the activity. The most well-known examples
of LPs are frequent flyer programs in the airline industry, starting with American
Airlines, which established its AAdvantage frequent flyer program in 1981. Dur-
ing the 1990s, many supermarket chains and general merchandise retailers also
362 Werner J. Reinartz
11%
9%
19%
12%
100
80
120
140
60
40
20
0
1998 1998 2000E 2001E
Millions of
Customers
Number of Members in Loyalty Programs
Membership/
Population
Average Growth
Per Year
2.2
1.6
1.3
0.6
UK
France
Italy
Germany
29
55
91
68
10
76
58
33 37
62
83
116
125
96
76
49
Fig. 1. European Loyalty Program Penetration
(Source: Mark Kadar and Bernhard Kotanko, (2001) Designing Loyalty Programs to En-
hance Value Growth, Mercer Management Consulting. Vol 8 (Spring/Summer))
established loyalty programs, such as the “Carte Iris” program by the French retail
chain Champion, the Metro Cash&Carry Card, or the ClubCard of the British
retailer Tesco.
According to Forrester Research, 62% of consumers in the United States be-
longed to a grocery store LP in 2002. For warehouse clubs, pharmacies, and de-
partment stores, this figure was 33%, 25%, and 22%, respectively (Forrester
2003). Similarly, Mercer Management Consulting notes double-digit growth in
LPs in Europe in the years just prior to 2001 (Figure 1).
Finally, in a cross-category study of German and Austrian companies, Roland
Berger Consultants (2003) found that 61% of the firms have a LP in place and
64% plan to accelerate their customer retention activities.
Thus, the prevalence and ubiquity of LPs has remained unchallenged. In many
cases, this marketing tool has become a critical component of firms’ overall CRM
efforts. However, most organizations face LP challenges; though they are concep-
tually appealing and mostly easy to understand, their implementation is anything
but straightforward. In particular, what has become clear to many firms – some-
times painfully – is that loyalty programs do not create loyalty, at least in the vast
majority of cases. For example, Roland Berger’s (2003) study notes that many
firms simply do not feel any strategic impact of LPs. In particular, the participat-
ing firms in that study did not achieve their key objectives, such as improvements
in customer retention or increased share of customer wallets. Stated differently,
for most firms, the factors that make LPs effective and successful remain nebu-
lous. The response to this gap – between desired objectives and current reality –
constitutes the basis for this chapter. More specifically, this chapter addresses
three critical areas that managers of LPs must think about and answer clearly be-
fore their LP can succeed:
Understanding Customer Loyalty Programs 363
x What are some of the key design characteristics of our LPs?
x What are the various conceptual objectives for our LPs?
x What empirical evidence do we have that our LPs achieve their desired ob-
jectives?
Although there are, of course, other potentially important aspects of managing
LPs, due to space constraints, this chapter concentrates on the answers to these
three questions.
A Framework for Organizing the Different Types
of Programs
The multitude of LP types that exist attests to the large number of discrete choices
within LP design, both within and across different industries. The purpose of this
section is to describe and structure the key dimensions of LP design to assist man-
agers who make their LP decision. Generally speaking, there is great discretion
with respect to the dimensions to include in LP design and with respect to the
level of the offer to choose within each dimension.
Design Characteristics
Loyalty programs can be described along the following dimensions:
A. Reward structure
Hard vs. soft rewards
Product proposition support (choice of rewards)
Hedonic value of rewards
Rate of rewards
Tiering of rewards
Timing of reward redemption
B. Type of sponsorship
Single vs. multifirm
Within sector vs. across sector
Ownership (focal firm vs. other firm)
Reward Structure
The principal motivation for consumers to enroll in LPs is their ability to accrue
benefits from the rewards that ensue from their purchase transactions over time.
Thus, from a consumer’s perspective, the rewards are the key design benefit.
364 Werner J. Reinartz
Hard vs. Soft Rewards. One can distinguish financial or tangible rewards (hard
rewards) from those that are based on psychological or emotional benefits (soft
rewards). Hard rewards comprise the gamut of price reductions, promotions, free
products, early check-ins, late check-outs, and so forth. For example, a Flying
Blue member of KLM Airlines may receive a free ticket for travel within Europe
on KLM after collecting 20,000 miles – a hard reward. In contrast, soft rewards
typically are linked to special recognitions of the buyer. They provide the psycho-
logical benefit of being treated specially or receiving special status. For example,
many frequent travelers who have achieved “Silver” or “Gold” status consider the
simple fact that they belong to this category as beneficial (often called the “badge
effect”). Naturally, the psychological benefits involved in recognition often comes
in a package with tangible benefits such as preferred customer service (e.g., a
special service telephone number). When the buyer finds the product or product
category important, soft rewards often become more important than hard rewards.
For example, members of customer clubs do not receive many hard rewards but
enjoy the sense of being a member of a community (e.g., Harley Davidson’s
owner group HOG).
Product Proposition Support. The rewards entailed in an LP may be directly linked
to the company’s product offering or be entirely unrelated. For example, the U.S.
coffee franchise Starbucks offers an LP that allows participants to redeem their ac-
cumulated bonus points for the firm’s own products: specialty coffee drinks. This
reward clearly and directly supports the firm’s product proposition. However, other
LPs may allow the member to redeem points for products that are completely unre-
lated to the focal firm’s offering. For example, British Petroleum’s LP members may
redeem points earned through their fuel-related purchases for merchandise such as
first-aid kits, photographic film, coffee mugs, and Barbie dolls.
Ideally, firms would prefer that their LP supports their product proposition, as-
suming that customers can build up a reasonable amount of assets (i.e., points)
through regular purchases. Even better, when they redeem their assets for the
company’s own products, LP customers may do additional business with the firm
(e.g., pay for a companion ticket when redeeming miles for an airline ticket, order
room service during a free hotel stay). Roehm, Bolman-Pullins, and Roehm (2002)
even find that incentives for packaged goods brands that overlap with the brand
(company) associations – and support the product proposition – prompt the acces-
sibility of the brand for customers and thereby help boost loyalty.
Hedonic Value of Reward. Hedonic products are those products whose consump-
tion is associated with pleasure and fun. An interesting result from consumer psy-
chology research shows that consumers prefer hedonic goods to utilitarian goods
when it takes them considerable effort to earn it (Kivetz and Simonson 2002).
That is, consumers feel better indulging in luxury items when the effort they had
to expend to earn that luxury is relatively high, as in the case of an LP reward. For
example, a free flight to an exotic destination might be much more attractive to a
buyer than vouchers for the local supermarket, even if both had the same face
value. Companies therefore have been trying to differentiate their LPs on the basis
Understanding Customer Loyalty Programs 365
of the hedonic value of their rewards. For example, the LP connected to PRO7, a
German television channel, is the PRO7 Club. One of its most popular rewards is
VIP service, which offers rewards from preferred access to becoming a talk show
visitor to meeting actors backstage. In the same vein, Mercedes Benz’s LP makes
it possible for customers to transform their points into a flight in a MiG 29 combat
aircraft. Neiman Marcus, the U.S. luxury retail chain, offers an annual list of
“wow and cool” rewards, including such items as the services of a world-famous
photographer who will come to the customer’s home to take a personal portrait.
Rate of Rewards. The rate of rewards refers to the ratio of the reward value to the
transaction volume (both in monetary terms). In essence, it answers how much a
consumer receives in return for concentrating his or her purchases with the retailer.
Needless to say, consumers generally prefer LPs that give them higher reward rates.
Likewise, reward redemptions are a key cost factor that firms must consider in the
design of their LPs. For example, a McKinsey (2000) study found that the super-
market industry functions with a 1% average reward rate (i.e., one cent for every
euro or dollar spent), which is a comparatively small loyalty incentive.
Tiering of Rewards. The rate of rewards given to customers may depend on their
cumulative spending with the focal firm. The so-called asset accumulation re-
sponse function (Figure 2) describes how assets (points) are accumulated as a
function of consumers’ cumulative spending behavior.
Two principally different response functions exist. In the first case, the buyer
receives the same number of assets (per € spent), regardless of his or her cumula-
tive spending. In the second case, the buyer receives a greater amount of assets as
his or her cumulative spending level increases. Therefore, the second program
clearly is relatively more attractive for buyers who spend more. Many airline pro-
grams follow the pattern depicted in the second case, which also helps them man-
age the size of their LP. If rewards can be accumulated meaningfully only when
customers spend large amounts, there will be a corresponding self-selection bias
toward high spenders. This trend is of particular interest to those firms that want to
concentrate their retention efforts on a small group of high-value customers rather
than work with their entire customer base.
Cumulative
€
spendings
Asset accumulation
per € spent
Cumulative
€
spendings
Asset accumulation
per € spent
Fig. 2. Asset Accumulation Response Function
366 Werner J. Reinartz
Timing of Reward Redemption. The timing of reward redemption represents another
important design feature of an LP. Firms prefer to create redemption rules that favor
long accumulation periods, which in turn influences customer retention. This effect
is also called a “lock-in,” because customers build up assets that eventually function
as switching costs, locking them in to doing business with the firm. In contrast, cus-
tomers favor the opposite scenario, with immediate rewards or short accumulation
periods. Managers must ask themselves how long it takes to accumulate assets for a
representative reward, given a certain buying pattern. The timing of rewards should
be determined by minimum redemption rules, the type of reward provided, and the
reward rate. If the time to reward redemption becomes too long, customers either
lose interest in the program or, even worse, refuse to even join.
Figure 3 shows the time that consumers need to generate a reward worth 50
euro through the LPs of several types of retailers. If the reward rate is too low
from a consumers’ perspective, LP program adoption will stall, as the Görtz shoe
store chain example clearly shows with its unattractive redemption characteristic.
78
12,5
11
6,5
0 102030405060708090
Gört z Shoes
Aral (Gasoline)
Payback
Lufthansa Miles & More
Fig. 3. Waiting Time for Accumulating a € 50 Reward (in months)
Calculations in Figure 3 are based on the following purchase behavior:
Lufthansa: Business Traveller, 80% of flights with Miles&More partners
Payback: 70% of category purchases (grocery, general merchandise, insurance) with Pay-
back partners
Aral: 15.000 km yearly, 80% with Aral
Görtz: € 300 per year on shoe purchases spent at Görtz
(Source: Roland Berger, 2003)
Type of Sponsorship
The second key design dimensions by which LPs can be described is sponsorship,
which refers to the features of the LP’s owner and operator.
Single vs. Multifirm. Organizations may establish LPs that reflect only transactions
with its own customers, such as that of BP France that includes only the transactions
members have made at BP stations in France. Alternatively, organizations might
Understanding Customer Loyalty Programs 367
allow LP members to accumulate assets at firms that are associated with the focal
firm’s LP. For example, members of Tesco’s ClubCard can accumulate points
through the British utility TXU Energi. The introduction of partners represents one
of the major axes of current growth in LP design because it attracts additional LP
members through its greater opportunities for asset accumulation. The potential
disadvantage of such partnerships is that the LP of the focal company can lose
meaning and customer connections if it brings in too many partners. However, a
multifirm LP is absolutely necessary when an individual category does not yield
enough opportunities for asset accumulation. For example, the German car insurer
HDI belongs to the German PayBack LP scheme. Because consumers only buy car
insurance once per year, a multifirm scheme overcomes HDI’s structural problem of
possessing an LP in a low frequency purchase situation.
Within Sector/Across Sector. Another supply-side dimension of multifirm LP de-
sign is the degree of across-sector partnering. In other words, to what degree do
customers accumulate assets within the same sector or across different sectors?
The STAR Alliance – SAS, Lufthansa, United Airlines, Varig, and various others
airlines – provides a prime example of an LP structure that remains within the
same sector. However, the LP by AOL and American Airlines, with its 2000 or so
partners, crosses many different industries.
Ownership. In case of multifirm LPs, the ownership dimension indicates who
owns the LP within the network of firms. Is it the focal firm, another firm, or a
firm whose sole purpose is to manage the LP? An example of the latter case is
the German firm Loyalty Partners, which runs the PayBack scheme and draws
together a network of partners across different categories. Its sole purpose is LP
management. Whereas joining a network program makes it much easier to estab-
lish the firm’s critical size, such membership also means that the firm has lim-
ited influence on its LP strategy, such as positioning, branding, or member firm
selection.
Implications
Today’s LP environment shows clearly that the ubiquity and variety of LPs has
never been greater. Over time, firms have become more and more experienced
with running LPs and more and more creative in deploying various LP design
features. What is particularly interesting to notice is that similar loyalty pro-
grams across different firms vary tremendously in their effectiveness (Ziliani
and Bellini 2004). Likewise, firms in similar industries deploy very differently
designed LPs.
The implication that can be derived from this proliferation of LP design in gen-
eral is straightforward: There is no one default design for LPs. Rather, the design
of a specific program must be aligned appropriately on the following issues:
368 Werner J. Reinartz
x Is the suggested program design attractive to consumers? Does it sway
them to join, stay, and use it?
x Is the program economically viable (for the firm)?
x Does the program achieve its desired strategic objectives (e.g., higher cus-
tomer retention, better learning about customer behavior)?
A key condition for a successful LP scheme is sufficient consumer adoption and
persistent use of the program tools (e.g., loyalty card, member number). Many
cases of unsuccessful card schemes were due to a lack of card adoption or lack of
commitment to using the card among the target customers (Mauri 2003). These
failures could be due to misaligned designs, a lack of appropriate incentives and
rewards, or a lack of communication about the LP scheme.
Probably the most common question asked is simply whether loyalty programs
work (Dowling and Uncles 1997). Obviously, the answer to this question depends
on the design of the LP, because that design directly affects the program’s efficiency
and effectiveness. For example, features that are highly attractive to consumers, such
as high reward rates, are unlikely to be economically viable for the firm.
Therefore, the more important question to ask is whether a specific LP design
works for the specific strategic objective. Thus, the answer to the question “Do
LPs work?” really depends on the objective that the firm pursues, which may vary
tremendously across firms. Commonly cited LP goals include increased customer
retention, greater share of wallet, higher sales, more customer information, more
positive attitudes toward the company/brand, cross-selling, competitive responses,
and so on. Given the variety in these potential objectives and given that companies
must make choices with respect to their objective functions, the design of LPs
must involve a contingency approach.
Conceptual Objectives of LPs
The moment when they must define the specific objective of a LP provides a key
challenge for marketers. The secret is not that the organization needs to generate
value at the end of the day; rather, it is how such value comes about – in this case,
through the LP instrument. A sobering number of research surveys teach that most
LPs fail to achieve their originally stated goals (e.g., Sharp and Sharp 1995;
Dowling and Uncles 1997; McKinsey 2000; Leenheer et al. 2002). As evidence,
consider that most consumers tend to belong to multiple LPs, even in the same
category. For example, in 2002, more than half of the primary grocer shoppers in
the United States belonged to two or more grocery loyalty programs, which natu-
rally diminished their specific loyalty to any one grocer (Forrester 2003). Thus, to
assess LP program success in the broadest sense, one must be clear about what the
dimension of success means. The previous section introduced the notion of an LP
objective function; the goal of this section is to outline the following map of the
potential objectives that managers might pursue when they implement an LP.
Understanding Customer Loyalty Programs 369
1. Building True Loyalty. True loyalty, which combines attitudinal and behav-
ioral customer loyalty, leads to greater commitment to the product or or-
ganization. Building such loyalty is not easy to achieve, because consumers
are fickle in their purchases in most categories, and economic benefits will
always be very important to them.
2. Efficiency Profits. Objectives such as higher sales, larger share of wallet, or
greater buying frequency compared with the situation without an LP
constitute the immediate profit consequences, net the cost of the LP.
3. Effectiveness Profits. These profit consequences are realized in the longer
term through a better understanding of customer behavior and preferences.
Such information enables managers to create sustainable value for custom-
ers through, for example, customized products or relevant communications.
4. Value Alignment. By aligning the cost to serve a particular customer with
the value that customer brings to the firm, the firm can serve its most valu-
able customers best.
5. Competitive Parity. The firm engages in an LP to match competitors who
have already done so.
These goals may be pursued individually or collectively. Depending on the LP
design, companies focus on one or more of them.
True Loyalty
True loyalty always encompasses both attitudinal and behavioral loyalty, de-
fined as follows: Attitudinal loyalty comprises the favorable, potentially covert
beliefs and attitudes a customer holds about the brand or company, whereas
behavioral loyalty refers to overt repeat buying behavior. According to this
logic, customers may exhibit behavioral loyalty (i.e., purchase a product repeat-
edly) but do so for various reasons, such as convenience or price. Although be-
havioral loyalty may be a result of attitudinal loyalty, it can be driven by other
factors as well.
Many LPs have been established to “make customers more loyal,” a difficult
goal to reach simply through programs. Enforcing loyalty by enticing customers
with rewards and bonuses is highly unlikely to work in the long run. True loyalty
is a function of the true value provided to customers and often involves other
factors like the customer’s degree of involvement in the product category, the
visibility of the product, or the product’s value-expressive nature. From the firm
perspective, these aspects are hard to control. However, when consumers experi-
ence true loyalty, they are more resistant to outside persuasion, less motivated to
search for alternatives, and willing to provide greater positive word-of-mouth
reports (see, e.g., Uncles discussion of the importance of word-of-mouth influence
among retail customers elsewhere in this book).
370 Werner J. Reinartz
Building or reinforcing the attitudinal loyalty component is particularly chal-
lenging for virtually all low-involvement product categories, such as the grocery
industry, a prototypical example. Inducing real loyalty in this category is a tough
proposition because purchases are driven principally by tangible considerations,
such as value for money.
In contrast, if product involvement is high or the product provides an emotional
element, the benefits that LPs offer are better suited to support overall attitudinal
loyalty. In the most ideal case, true loyalty finds its expression in community
building among customers, which is why the nurturing of attitudinal loyalty is the
goal of many customer clubs. Using the brand as a reason to share experiences as
a community represents a very powerful expression of loyalty. Therefore, it is not
surprising that many companies attempt to build consumer communities around
their brands, though such community building works best if the emotional compo-
nent of the product is high, such as for leisure products (e.g., American Girl dolls,
LEGO), or when others’ consumption of the brand adds utility to one’s own con-
sumption (e.g., Harley-Davidson motorcycles). In many cases, brand communities
are linked to special benefits that are unavailable to those outside the community,
which creates a distinct in-group/out-group split. For example, Steiff, the vener-
able maker of teddy bears, has a customer club that offers a limited-edition teddy
bear exclusively to its members once a year.
From a managerial perspective, member acquisition typically occurs through
self-selection because the customer’s degree of involvement and identification
with the brand/company is self-driven and therefore outside management’s con-
trol. Creating customer clubs through which members can identify with and
strongly relate to the brand works best for those brands or companies that target
relatively small, homogenous markets.
Efficiency Profits
Efficiency profits are the short-term profits that result from a change in customers’
buying behavior due to the loyalty program. This change in buying behavior can
be measured as, for example,
x Basket size
x Purchase frequency acceleration
x Price sensitivity
x Share-of-category requirements
x Share of wallet
x Retention
x Lifetime duration
Understanding Customer Loyalty Programs 371
Efficiency profits must be calculated net of LP cost, and the most widely used
measure of behavioral loyalty is the share of category requirement or share of
wallet (e.g., Leenheer et al. 2002). The key idea behind an LP that aims to im-
prove efficiency profits is that customers will build up their switching costs by
accumulating assets in the LP. In accumulating these assets, customers forego
their free choice because the expected reward seems to make this reduction in free
choice worthwhile. Therefore, for a customer to engage in an LP, the overall util-
ity of being in that LP should be higher than any utility the consumer can achieve
without the program. As a result, the cost for the firm to entice the customer to
change his or her behavior accordingly may be higher than it would be without an
LP. For just such reasons, including the high maintenance cost, Safeway, a U.K.
grocer, scrapped its ABC loyalty card scheme in 2000, which saved the company
£50 million that year (BBC News May 4, 2000), which the firm passed on to con-
sumers by cutting prices. Likewise Leenheer et al. (2002) discovered in their study
of seven Dutch supermarket loyalty schemes that four of these LPs gave greater
value to members than they earned back in terms of additional revenues.
Another issue inherent in the goal of efficiency profits is the expectation that
those customers most likely to join the LP are truly loyal customers who have the
most to gain. The problem is that their business would have been guaranteed in the
first place, even without an LP. Therefore, the question that arises is whether LPs
actually change the buying behavior of previously not-so-loyal customers and
whether this incremental business offsets the losses incurred through giving bene-
fits to loyal customers who would have bought anyway (Lal and Bell 2003). Ap-
parently, LPs do not change behavior as much as they reinforce already existing
behavior – but at a much higher cost of operation. Several research studies have
found that the increase in customer spending due to LPs is surprisingly low. In a
study of the Dutch supermarket industry, Leenheer and Bijmolt (2003)) find that
LPs yield, on average, € 113 additional revenue per customer per year. McKinsey
(2000) also finds that average sales increase 1–3% among grocery industry LP
providers but that these increases tend to erode over time. In the context of general
retailing in Australia, Sharp and Sharp (1997) find that LPs have a positive effect
on repeat purchase behavior (behavioral loyalty) but that this effect is minimal.
Research by Reinartz and Kumar (2003) in the direct response marketing industry
shows that LP membership is associated with a longer customer-firm relationship,
in line with Bolton, Kannan, and Bramlett’s (2000) finding of greater retention
among credit card LP members. Finally, Lewis (2004) finds that LPs increase
repeat purchase rates in the context of Internet retailing.
In summary, there seems to be a positive, albeit small, effect of LPs on pur-
chase behavior. However, the very quest for short-term profits might be a fallible
basis for an LP because (a) profit consequences are questionable due to the high
costs of operating the program and (b) this focus does not provide for any com-
petitive differentiation. Despite these concerns, most LPs are built with the short-
term goal of selling more to existing and new customers (efficiency profits) in
mind.
372 Werner J. Reinartz
Effectiveness Profits
Effectiveness profits refer to the medium- to long-term profit consequences
realized through better understanding customer preferences and needs. Such an
LP is designed to gather cumulative information about individuals, their behav-
ior, and their preferences and then to derive knowledge from this information.
This process of learning allows the firm to improve its knowledge about cus-
tomer preferences continuously and thereby offer an increasingly better value
proposition to its various customers through more effective product and com-
munication offerings. Effectiveness profits, more than any other type of LP out-
come, are likely to generate sustainable competitive advantage for the firm be-
cause the knowledge it gains is hard to copy and the outcomes of well-executed
learning are valuable to customers.
Case Study
Achieving effectiveness profits means implementing an information-based strat-
egy that gathers and analyzes information about every transaction. For example, in
grocery retailing, data mining generates personalized promotions and recommen-
dations for each customer, so that a vegetarian would not receive a promotion for
steak. The store’s knowledge that the customer is a vegetarian is derived from
either surveys or the customer’s buying behavior. If the store’s customer intelli-
gence system recognizes that a customer does not buy meat over time, it assumes
that customer is a vegetarian, not that he or she simply buys meat elsewhere. Al-
though this assumption could be wrong, a store would rather not bother a customer
with costly promotions for categories from which that customer has never bought
anything in the first place.
The strategy of using an LP to learn about customer preferences and deploy-
ing that learning in the market may result in impressive gains for both customers
and organizations. Customers get more of what they truly want, and firms be-
come more efficient because they do not need to engage in costly mass market-
ing campaigns.
However, the possible downside of a learning strategy is the relative process
sophistication required for its implementation. Whereas the collection of massive
amounts of data is an all-too-easy step, the analysis of, learning about, and imple-
mentation based on these data are far more difficult. Few companies have mas-
tered this strategic capability.
Nevertheless, the strategic sustainability of this approach is uncontested. An
example of one of the few companies that seems to have mastered this process is
Tesco, the U.K. supermarket chain. Tesco’s market share has been rising 52%
since the launch of its ClubCard in 1995, while floorspace is up by only 15%.
Understanding Customer Loyalty Programs 373
Value Alignment
Value alignment refers to the goal of aligning the cost to serve a particular cus-
tomer with the value that customer brings to the firm. Underlying this goal is the
understanding that, in any industry, customers have differential economic values
to the firm and typically are differentially expensive to serve. For example, if a
provider of wireless services were to arrange its customers from highest to lowest
value to the firm, it likely would find that business users rack up higher phone
bills than do occasional private users. Likewise, if the company arranged the same
customers from highest to lowest cost to serve, it would find considerable vari-
ance. Some customers are easy to satisfy, whereas others cost the firm significant
amounts through their constant use of the customer service function.
If a firm pursues value alignment, it simply attempts to align the profits it re-
ceives from a given customer with the cost that the firm incurs to serve that same
customer. This goal therefore means that not every customer is treated equally, a
notion that some managers find discomforting. However, it permits firms to en-
sure their best customers are getting the best service. When is this function impor-
tant? The goal of value alignment is particularly critical when there is great het-
erogeneity in the customers’ value and cost to serve, such as in the airline
business, hospitality industry, and financial services industry.
The chart in Figure 4 gives an example of a financial services firm with a
highly heterogeneous customer base and the profitability of three very different
customer profiles. Tier A represents 31% of the customer base, Tier B comprises
42%, and Tier C represents the remaining 27%. In this fictional example, Tier C
customers – more than one-quarter of the firm’s total customers – are unprofitable
and must be subsidized by the highly profitable ones. This condition is not un-
common to find in banks.
860
161 159
435
17
-67
-200
0
200
400
600
800
1000
Tier A Tier B Tier C
(in €'s)
Revenue
per year
Annual
profit
Fig. 4. Value Heterogeneity of Customer Segments
374 Werner J. Reinartz
While information about transaction frequencies, dates, amounts, and so forth
is collected routinely by banks, other industries typically do not regularly en-
gage in such collections. In general merchandise retailing, for example, it is the
LPs that assume this function. Thus, the primary goal of introducing a LP may
be to systematically collect customer behavior information, which then can be
translated into customer-level profit and loss statements. This information en-
ables the organization to distinguish customer segments according to their eco-
nomic value to the company and then allocate its resources differentially.
Leenheer and Bijmolt (2003) provide empirical evidence that the degree to
which customers are heterogeneous in their value to the company is a key
driver of LP initiation.
Competitive Parity
In a significant number of cases, pure competitive pressure leads companies to de-
ploy an LP. Dowling and Uncles (1997) find that in practice, despite claims to the
contrary, firms often launch LPs to differentiate their brand, preempt the entry of a
brand, or preempt a competitor that plans to launch a similar program. Unlike the
reasons discussed in the sections above, this objective is driven purely by external
forces. In a multi-industry study, Leenheer and Bijmolt (2003) find that the introduc-
tion of LPs is driven strongly by the general competitiveness of the environment, as
well as by existing competitor programs. For example, markets like grocery or gaso-
line retail suffer from the condition in which most or all major competitors have an
LP, which means they all operate on a higher cost level but market shares eventually
return to preprogram levels. This aspect has been investigated in a study by Singh
and Jain (2004), who find that firms enter a “prisoner’s dilemma” when all of them
offer loyalty programs, which in turn results in lower profits for all firms. Therefore,
LPs based on competitive pressures are unlikely to lead to sustainable advantage for
firms, though it might be hard not to introduce one if LPs become part of the ex-
pected offer in that industry.
Implications
On the basis of the various objective functions that firms may pursue through their
LPs, normative suggestions about their optimality for various situations become
clear. Toward this end, Table 1 outlines the key characteristics of LPs according to
the program’s objective. In particular, the table summarizes the kind of business
situation that is most suitable for the respective objectives, how the cost of LPs
might be mitigated, the key challenges for each objective, and the likely degree of
competitive advantage that can be generated. The last objective – competitive
parity – is not included because it is the only goal conceptualized as a defensive,
“me-too” tactic.
Understanding Customer Loyalty Programs 375
Table 1. Comparison of LP Objectives
Goal of LP True Loyalty Efficiency Profits Effectiveness
Profits
Value Alignment
Most suited for All branded prod-
ucts (however, the
larger the buyer
base, the more
difficult it becomes
to differentiate the
brand and manage
customer interact-
tions consistently)
Many industries Firms with access
to large amounts of
information about
customers and
firms that commu-
nicate directly with
end customers
All industries with
a highly skewed
customer value
distribution (e.g.,
airlines, hotels,
rental cars)
Cost of LP
may be
mitigated by
For retail LPs,
contributions from
manufacturers
(promotions)
For retail LPs,
contributions from
manufacturers
(promotions)
Key challenges Providing
meaningful
value that cre-
ates differentia-
tion in consum-
ers’ minds
Brand building
Providing
acceptable
incentives to
customers while
controlling cost
Program
differentiation
Capability to
handle, analyze,
learn from, and
deploy knowl-
edge from large
databases
Implementing
the customer
differentiation
scheme
(deployment
automation)
Having fair and
equitable rela-
tionships in
general and still
ensuring that
best customers
are treated best
Degree of
competitive
advantage
created
High (a truly loyal
customer base is
hard and costly to
replicate because
it can only be built
over time)
Low (it is easy to
replicate hard
benefits and pro-
gram costs create
major challenges)
High (capability of
learning from cus-
tomer behavior and
using it is very
difficult to copy
and unique to a
company’s context)
Low-medium (LPs
have become
standard industry
practice)
Economic Viability
Regardless of the different LP objectives, the eventual goal of any program is
that it contributes to higher operating profits for the firm. Therefore, assess-
ments of the economic impact of the program must be made continuously. The
more strategic the use of the LP (e.g., effectiveness profits), the more difficult it
becomes to make these assessments correctly because (a) the impact arguably
can be measured only in the longer term and (b) many intangible benefits, such
376 Werner J. Reinartz
as improved customer goodwill, are hard to quantify. An exemplary assessment
of the economics of a grocery LP appears in Table 2, which outlines the key
parameters of such an economic calculation and comments on the derivation of
the figures.
The key lesson, based on the assumptions made in this calculation, is that a su-
permarket could barely make a profit on the program. Rather, the program costs
(€ 73m) and benefits (€ 75m) seem approximately equal. However, given such a
calculation, the manager can begin to question certain assumptions or seek to im-
prove certain response or decision parameters. For example, in this case, if the
retailer could collect contributions from the manufacturers of the products it sells,
the economic viability would look different. Needless to say, this exemplary cal-
culation must be customized for any given business context.
There is an interesting historic side note to economics calculations: The spe-
cific reason LPs are so widespread and began so early in the airline and hotel
industries can be traced back to the underlying program economics. Because
these industries operate with perishable products under capacity constraints,
they can give away rewards to customers for very low marginal costs. For ex-
ample, if an airline LP member upgrades to business class and pays with miles
that have been accrued over time, the airline incurs a very low actual cost for the
reward – the seat would have gone empty otherwise. This structural aspect of
such industries caused them to deploy LPs very successfully from a very early
point. Of course, these economics differ in industries (say, retailing) that must
bear the full cost of the rewards they provide. This short history corroborates the
finding that LP economics are much more challenging in retailing than in the
hospitality industry.
Summary and Outlook
Many organizations currently are transitioning from a transactional to a relational
perspective on exchange. This new view requires that firms attempt to maintain
ongoing relationships with most of their customers, and one way to do so is through
an LP. These programs enable organizations to identify individual customers,
observe their transactions over time, and differentiate among them in terms of the
resources allocated to them.
The purpose of this chapter has been to (a) summarize evidence about the
prevalence of LPs, (b) describe some of the key design characteristics of LPs, (c)
explain the various conceptual objectives for LPs, and (d) provide empirical evi-
dence about whether LPs achieve their desired objectives.
The key findings that emerge from existing research on LPs highlight the
following central points:
Understanding Customer Loyalty Programs 377
Table 2. Exemplary LP Economics for a Grocery Retailer
Program Revenues
1 Total # of customers 5,000,000
2 Yearly spending per nonmember (€) 2,000
3 % sales increase due to membership 5
4 Yearly spending per member (€) 2,100
5 % customers in program 50
6 =5 × 1 # of customers in program 2,500,000
7 =6 × 4 Total revenue from members (€) 5,250,000,000
8 =(4 – 2) × 6 Additional revenue from members (€) 250,000,000
Program Cost
9 Program reward rate 2.0%
10 =7 × 9 Potential outstanding rewards (€) 105,000,000
11 % breakage 40 % of assets that
never get redeemed
12 =10 × (1 – breakage) Breakage-adjusted redemption (€) 63,000,000
13 Yearly program administration cost (€) 10,000,000
14 =12 + 13 Total yearly program cost (€) 73,000,000
15 =14/12 Yearly program cost per member (€) 29
Program Profits
16 Additional revenue from members (€) 250,000,000
17 Variable cost 70% available contribu-
tion margin = 30%
18 =16 × (1 – variable cost) Additional contribution margin (€) 75,000,000
19 =14 Total yearly program cost 73,000,000
fully or partially under managerial control
378 Werner J. Reinartz
x Those LPs introduced to gain short-term profits are mostly built on shaky
grounds. Firms that pursue this strategy should seriously rethink their ap-
proach. Although LPs influence customer behavior, their impact on the
bottom line is much less obvious because of the operational costs of new
schemes.
x Those LPs that are introduced to learn about customers and thereby provide
better value (though greater utility, more customization, less inappropriate
offers) seem to be going in the right direction. However, the economics of
this approach are much less quantifiable, and the process capabilities the
firm needs are substantial in terms of analytical skills, interpretive skills,
and rollout capabilities.
In terms of future research opportunities, consider the following nonexhaustive list:
From an organizational perspective,
x The huge variety of LPs begs for a more thorough and grounded typology
of different programs.
x When and how do companies achieve better success through their specific
LP strategy?
x What relative influence do the various design characteristics have on LP
success?
x How does the performance of LPs interact with industry, company, and
product characteristics?
x Are there systematic traits of organizations that are able to garner effective
profits from their programs?
From a consumer’s perspective,
x Currently, virtually no insight exists into the redemption behavior of con-
sumers. Once consumers have accumulated assets, how do they dispose of
them?
x How exactly do customer preferences for LP design features differ across
product categories?
In terms of the future outlook, businesses will persist in using LPs. The proportion
of businesses that use LPs in a strategic sense currently is small, but this propor-
tion likely will grow slowly. However, many firms will realize over time that they
have not gotten the benefits they expected out of their LPs because of their tactical
approach. These firms will face the painful decision to either abandon the program
and existing investments in it or invest even more to build strategic LP manage-
ment capability. Overall, the good news is that strategic LPs can provide signifi-
cant benefits to organizations.
Understanding Customer Loyalty Programs 379
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Integrated Marketing Communications
in Retailing
Kalyan Raman 1 and Prasad A. Naik 2
1 Loughborough University,Leicestershire, UK
2 University of California Davis, Davis, USA
Introduction
A computer scientist, Mark Weiser, envisioned over a decade ago that future
environments would be saturated with computing and communication capabil-
ity, but yet gracefully integrated with human users (Weiser 1991). His vision
manifests itself in smart environments, where useful technologies disappear and
“weave themselves into the fabric of everyday life until they are indistinguish-
able from it.” Retailing environments are poised to become such smart environ-
ments with modern technologies such as RFID (Radio Frequency Identification),
wireless sensors, the ubiquitous Internet, and mobile computing. Communica-
tion is the central part of this smart retailing environment that proactively an-
ticipates the consumer’s needs and makes recommendations to assist consumers’
decision-making process. The key challenge for retailers is to build strong
brands by orchestrating in-store communications (e.g., Personal Shopping Assis-
tant) with the usual out-of-store branding communications (e.g., print adver-
tisement). To achieve this orchestration, retailers will find the concept of Inte-
grated Marketing Communications (IMC) relevant for designing profitable
marketing strategies.
We organize this chapter as follows. We first present the genesis and defini-
tion of IMC and review the standard multimedia model of communications. We
next contrast this standard model with the IMC framework, highlighting how
retailers should act differently to determine the amount and allocation of budgets
in the presence of synergies that emerge within the IMC context. In addition, we
discuss the effects of uncertainty on the profitability of IMC programs. Finally,
we extend the IMC framework to futuristic retailing and identify new research
avenues.
382 Kalyan Raman and Prasad A. Naik
Genesis and Definition of IMC
The IMC concept originated at Northwestern University, where Professor Don
Schultz introduced and developed it further over the last decade. Many companies
embraced this concept in practice not only because of the mergers and acquisitions
that led to consolidation of the advertising industry (which resulted in one-stop
shopping of communications needs such as media and creative, consumer promo-
tions and direct marketing, PR and product placement), but also because of syner-
gies that emerged when various communications activities were integrated within
the IMC framework. Consequently, several academic journals devoted space to
investigate the deeper implications of IMC for budgeting and allocation; for ex-
ample, see the special issues of Journal of Advertising Research,Journal of Mar-
keting Communications,Journal of Business Research, and numerous textbooks
(e.g., Schultz, Tannenbaum and Lauterborn 1993). The actual application and use
of IMC has now spread from North America to Asia to Europe to the Pacific Rim
and South America. A commonly used definition of IMC is as follows: IMC is a
concept of marketing communication planning that recognizes the added value of
the comprehensive plan that evaluates the strategic roles of a variety of communi-
cation disciplines – for example, general advertising, direct response, sales promo-
tion, and public relations – and combines these disciplines to provide clarity, con-
sistency, and public communication impact (Schultz et al. 1993, p. 6). For brevity,
we propose a new succinct definition:1
An IMC program plans and executes various marketing activities with consistency
so that its total impact exceeds the sum of each activity’s impact.
Standard Model of Multimedia Communications
Here we review the standard model of communications so that we contrast not
only its quintessential difference from the IMC framework, but also the resulting
differences in managers’ decisions and firm’s profitability. In standard advertising
models, the various modes of communications, for example, television, radio and
newspapers, exert independent effects on consumers. Figure 1 depicts this com-
munication process.
Given the lack of consideration of joint effects and cross-media complementari-
ties, inconsistencies could arise between the messages carried by disparate com-
munications media from the same organization. This potential for inconsistencies
raised questions about how media advertising works. In addition, cognitive psy-
chology shed new light on consumer information processing, suggesting that con-
sumers absorb information about goods and services from a number of sources,
not all of which are formal promotional messages. So, no longer can marketers
1 We thank Prof. Scott Neslin for suggesting a variant of this definition.
Integrated Marketing Communications in Retailing 383
Internet
Internet
TV
TV
Customers
Customers
Magazines
Magazines
Rebates
Rebates Newspapers
Newspapers
Fig. 1. Standard Multimedia Communications Model
assume that they control the way consumers think about brands via image-
building media advertising. Despite these concerns, standard advertising theory
offered deep insights by deducing fundamental principles of budgeting and alloca-
tion, which we explain in the next two propositions.
Multimedia Budgeting and Allocation
For the sake of clarity, suppose managers expend u1 and u2 dollars on two com-
munications activities with effectiveness E1 and E2, respectively; then the total
budget is (u1 + u2), and the budget allocation is u1/u2. Based on Naik and Raman
(2003), we state the normative result in the following proposition:
PROPOSITION 1: In multimedia advertising, as the effectiveness of an activity in-
creases, managers should increase the spending on that activity, thus increasing
the total media budget. Furthermore, the total budget should be allocated to mul-
tiple activities in proportion to their relative effectiveness.
This proposition informs managers that if an ad agency improves the creative
copy, thereby increasing the effectiveness of television advertising (say E1), then
they should increase the expenditures on TV advertising (i.e., increase u1). The
force of this proposition lies in cautioning managers against the tempting – but
384 Kalyan Raman and Prasad A. Naik
incorrect – intuition: “now that we have a better advertising campaign, we should
be able to achieve greater impact with less (or the same) budget.”
Another insight from this proposition is revealed by the question2: Why should
managers spend any dollars at all on the less effective medium? Because they
should not continue to invest in the most effective activity after diminishing re-
turns set in. Rather, they should shift the allocation to the less effective medium so
as to locate the firm on the steep region of the response curve for the less effective
medium rather than stay on its flatter portion for the more effective medium. Con-
sequently, as in proposition 1, the eventual budget allocation results in the optimal
proportion E1/E2 (and not 100% to the most effective activity and zero to the less
effective ones).
The standard advertising theory also investigated the role of carryover effects,
which capture the long-term effects of advertising. Naik and Raman (2003)
showed that not only do managers need a larger total budget when carryover ef-
fects are large, but that they should increase spending on each of the communica-
tions activity proportionately so that the relative allocation remains invariant to
the magnitude of the carryover effect. We summarize these findings as follows:
PROPOSITION 2: In multimedia advertising, as the carryover effect increases, the
total media budget increases; however, budget allocation does not depend on the
carryover effect.
To develop the intuition for this proposition, we observe that the carryover effect
enhances the long-term effectiveness of communications activities. Specifically, if
O denotes the carryover effect, then the long-term effectiveness of each activity is
given by Ei/(1O), which exceeds the short-term effectiveness Ei (because O is a
positive fraction). Furthermore, the long-term effectiveness of each activity in-
creases proportionately by the same factor, (1O)-1. Hence the relative proportion
E1/E2 must necessarily remain unchanged, keeping the budget allocation invariant
to changes in the carryover effect.
Integrated Marketing Communications Framework
Managers should recognize that consumers combine the information they receive
from various media whether or not the firm itself integrates those messages across
media. To prevent consumers from integrating them inconsistently, they should
take charge of this process, and this proactive view of IMC represents the new
approach to media planning (see Schultz and Pilotta 2004 for further details). The
overriding purpose of IMC is to manage all marketing activities that impact sales,
profits, and brand equity.
2 We thank Prof. Kusum Ailawadi for leading us to this inquiry.
Integrated Marketing Communications in Retailing 385
Internet
Internet
TV
TV
Customers
Customers
Magazines
Magazines
Rebates
Rebates Newspapers
Newspapers
Fig. 2. Integrated Marketing Communications Model
Figure 2 presents the IMC model that emphasizes the role of joint effects or syn-
ergies (shown by the curved arrows) generated due to the orchestration of multiple
activities. In comparison to Figure 1, the concept of IMC is much more than sim-
ply using multiple media concurrently as in the standard multimedia model, where
the effectiveness of each activity does not depend upon any other activity. In con-
trast, the major difference in the IMC model is that the effectiveness of each activ-
ity depends upon all other communications activities used by the firm.
Another difference between the IMC model and standard models is as follows.
Traditional marketing employs a “push” strategy, where communications between
a firm and its consumers are designed to promote goods that the firm created and
desired to sell. IMC employs both the push and pull approaches. Retailers like
Macy’s or Nordstrom are examples of companies that attempt to apply the IMC
approach by incorporating feedback so that their products and communications
can be adjusted to meet consumers’ needs. Given this IMC framework, a number
of fundamental questions arise:
x Do synergies between media (e.g., television and print advertising) exist in
the marketplace?
x How should synergies be estimated using readily available market data?
x How should synergy affect managers’ decision about the size of media
budget?
386 Kalyan Raman and Prasad A. Naik
x If synergy increases or decreases, how should managers alter the budget al-
location?
x How does synergy moderate the effects of advertising carryover on the
budget and its allocation?
x Are there catalytic effects of synergy?
x How can managers create synergies and reduce wearout?
x Is there an alternative perspective to investigate the IMC phenomenon?
We address all these issues in turn.
Measurement of Synergy
One of the earliest studies measuring media synergy was conducted by a consor-
tium of radio network companies, who sampled 500 adults, ages 20-44, across 10
locations in the United Kingdom. The main findings indicated that 73% of the
participants remembered prime visual elements of TV ads upon hearing radio
commercials. In addition, 57% re-lived the TV ads while listening to the radio
advertisement. Thus, radio ads reinforced the imagery created by TV commer-
cials, resulting in synergy between television and radio advertising (for further
details, see Radio Advertising Bureau at www.rab.co.uk).
Although the estimation of cross-media synergy remained elusive, stan-
dard advertising models attempted it by specifying brand sales as a response
function of managers’ current actions and past outcomes; for example,
ttttt SuuS
H
O
E
E
E
122110 . Gatignon and Hanssens (1987) pioneered the
distinction between a response function and process functions, which explain how
effectiveness parameters themselves depend on managers’ actions. In other words,
managerial actions affect not only market outcomes (e.g., sales, share), but also
the effectiveness of marketing activities. For example, suppose that radio and TV
advertising enhance each other’s effectiveness. Such effects are captured in the
process function (say), 211 u
N
E
E
c
, which suggests that the spending u2 in-
creases the effectiveness E1 in the presence of positive synergy (N > 0). When we
substitute this process function into the above response function, we obtain the
overall model, ttttttt SuuuuS
H
O
N
E
E
E
u
c
12122110 , thus introducing an
interaction term that captures synergy.
We note that this notion of process function is deterministic and static (i.e.,
without the error terms or lagged Es). Even so, many challenges arise in applying
the ordinary least squares (OLS) or related statistical approaches to estimate the
parameter for synergy, N. These challenges arise because OLS and related statisti-
cal approaches ignore inter-temporal dependence and non-stationarity in the ob-
served sales process, thereby resulting in biased parameter estimates and incorrect
budget determination.
Integrated Marketing Communications in Retailing 387
Advanced estimation techniques overcame these challenges and facilitated
the joint estimation of both response and process functions. Specifically, apply-
ing Wiener-Kalman filtering theory, Naik and Raman (2003) developed an ap-
propriate method and demonstrated its application by analyzing the sales and
advertising data for Dockers® brand of Khaki trousers in the fashion apparels
market. They furnished strong evidence for the presence of synergy between
television and print advertising. Furthermore, they generalized this approach to
estimate a general nonlinear, non-stationary, dynamic and stochastic process
functions (for details, see Naik and Raman 2003, p. 384). Thus, managers can
now implement this Kalman filter-based approach to estimate and infer the exis-
tence of synergy by using data on retail sales and multimedia advertising (see
Schultz 2004).
Multimedia Budgeting in the Presence of Synergy
After managers establish the existence of synergy in their markets, how should
they determine the multimedia budget? Applying optimal control theory, Naik and
Raman (2003) showed that, in dynamic equilibrium, the total budget should be
increased to capitalize media synergies. We present this normative result as,
PROPOSITION 3: As synergy increases, managers should increase the total media
budget.
This proposition addresses the age-old issue of whether or not managers over-
spend, i.e., actual expenditure exceeds the optimal budget. Specifically, they show
that the literature seems to be over-stating this assertion within the context of
IMC. Because previous response models have ignored synergy, the optimal budget
is actually understated. Hence, what appears to be overspending would represent
an appropriate spending level once we account for synergy among multiple media.
Thus, overspending is likely to be smaller when the total budget reflects the objec-
tives of orchestrating the communications mix.
It is important to recognize that managers should not simply spend additional
money to “do more of the same thing.” Rather, the increased budget should be
utilized to create synergies between activities (see page 389 for a suggestion). The
resulting synergies then enhance both short- and long-term effectiveness of mar-
keting activities.
Multimedia Allocation in the Presence of Synergy
Next we note the important finding that budget allocation is qualitatively different
in the presence of synergy, requiring managers to act differently when implement-
ing IMC. Based on Naik and Raman (2003), we state how synergy alters the
budget allocation:
388 Kalyan Raman and Prasad A. Naik
PROPOSITION 4: As synergy increases, managers should decrease (increase) the
proportion of media budget allocated to the more (less) effective communica-
tions activity. If the various activities are equally effective, managers should
allocate the media budget equally among them regardless of the magnitude of
synergy.
The counter-intuitive nature of this result is its striking feature. To understand the
gist of this result, suppose that two activities have unequal effectiveness (say, E1 >
E2). Then, in the absence of synergy (N = 0), the optimal spending on an activity
depends only on its own effectiveness; hence, a larger amount is allocated to the
more effective activity (see proposition 1). However, in the presence of synergy (N
z 0), optimal spending depends not only on its own effectiveness, but also on the
spending level for the other activity. Consequently, as synergy increases, marginal
spending on an activity increases at a rate proportional to the spending level for
the other activity. Hence, optimal spending on the more effective activity in-
creases slowly, relative to the increase in the optimal spending on the less effec-
tive activity. Thus, the proportion of budget allocated to the more effective activity
decreases as synergy increases.
If the two activities are equally effective, then the optimal spending levels on both
of them are equal. Furthermore, as synergy increases, marginal spending on each of
them increases at the same rate. Hence, the optimal allocation ratio remains constant
at fifty percent, regardless of the increase or decrease in synergy.
Advertising Carryover Effect in the Presence of Synergy
We describe how synergy moderates the carryover effect in the next two proposi-
tions:
PROPOSITION 5 (BUDGET): As the carryover effect increases, managers should
increase the media budget; the rate of increase in media budget increases as syn-
ergy increases.
PROPOSITION 6 (ALLOCATION): In contrast to proposition 2, budget allocation
depends on the carryover effect in the presence of synergy. Furthermore, as
carryover increases (decreases), managers should decrease (increase) the propor-
tion of budget allocated to the more (less) effective activity.
Based on propositions 2 and 6, managers should act differently: absent synergy,
they should allocate the budget to a variety of activities in simple proportion to the
relative effectiveness and regardless of the carryover effect; when synergy is pre-
sent, the allocation should incorporate the information on the magnitude of the
carryover effect.
Integrated Marketing Communications in Retailing 389
Catalytic Effects of Synergy
Does synergy introduce any fundamentally new advertising effect? Yes, since all
media are not alike, managers can capitalize on the “catalytic effects” of ancillary
activities. For example, BMW used product placement in James Bond movies,
which may not have increased sales of BMW, but made its TV and print advertis-
ing more effective. Or Mini Cooper used the real movie, The Italian Job, to build
its brand image. In other words, managers should use activities such as event
sponsorship, free-samples and collaterals, in-transit advertising or merchandising
because these ancillary activities enhance the effectiveness of primary activities
through synergistic interactions.
This new effect – the catalytic effect of ancillary activities – can be defined as
follows: a marketing activity is a catalyst if it has negligible direct effect on sales,
but exhibits substantial synergies with other activities. For catalytic activities,
Raman and Naik (2004) prove the
PROPOSITION 7: Managers should allocate a non-zero budget to the catalytic ac-
tivity even if it is completely ineffective.
We note that, based on proposition 1, managers should allocate the total budget
to various media in proportion to their relative effectiveness, and so the com-
pletely ineffective activity should not even be considered in the communications
mix. In contrast to this traditional way of thinking, managers who seek to or-
chestrate an IMC program benefit from not only the direct effects, but also the
indirect effects of various activities. Therefore, they should not eliminate spend-
ing on an ineffective activity when it enhances the effectiveness of other activi-
ties due to its catalytic properties. Thus, managers should consider the catalytic
role of various activities to fully benefit from the synergies generated within
IMC contexts.
How Can Managers Create Synergies?
Keller (2003, p. 325) suggests “mixing and matching” communications such that
weaknesses in one medium can be compensated by the strengths of another me-
dium. This idea is reinforced by Edell and Keller (1999), who show that a coordi-
nated television and print media strategy led to greater processing and improved
memory performance than either television or print media alone. The limited
amount of information in TV ads is complemented by the elaboration in a print
advertisement, while the limited attention-getting nature of the print medium is
complemented via the interest aroused by the television. Thus, by mixing and
matching modalities, managers can create synergies among various activities in
the communications mix. We encourage further research to discover other mecha-
nisms for building synergies.
390 Kalyan Raman and Prasad A. Naik
Synergy Versus Wearout
The phenomenon of wearout refers to the decline in ad effectiveness (i.e., drop in
Es). The marketing literature identifies two types of ad wearout: copy wearout and
repetition wearout (see Naik, Mantrala and Sawyer 1998). The former captures the
decline in ad effectiveness over time, while the latter describes its decline due to
repetitive exposure. Repeated exposure in the same medium produces wearout; to
forestall it, an appropriate pulsing strategy needs to be discovered (for details, see
Naik, Mantrala and Sawyer 1998). In contrast, varied exposures across different
media can create synergies. A behavioral explanation, based on encoding variabil-
ity hypothesis, suggests that consumers retrieve brand information more effec-
tively when they encode such information via multiple cues from different media
rather than the same cues from a single medium (see Unnava and Burnkrant 1991
for details). We encourage further research to find appropriate “media pulsation”
strategies for generating synergies.
Hierarchical IMC?
Another perspective of IMC is that various communication activities move cus-
tomers through distinct stages of decision process.3 More specifically, let the deci-
sion process be as follows: need recognition brand awareness brand attitude
purchase intent purchase post-purchase evaluation. Then, consumers may
be impacted such that activity A enhances need recognition; activity B builds
awareness; activity C generates positive attitudes; and so on. The kernel of the
idea is to determine whether and which activities facilitate consumers’ movement
across these hierarchical stages. Note that a “hierarchy” emerges because the later
stages require consumers to transit through the earlier stages. To capture consum-
ers’ transition across these unobservable (i.e., hidden) stages, we need to apply
hidden Markov modeling to formulate, solve, and estimate the resulting hierarchi-
cal IMC model. We can incorporate the central essence of this hierarchical notion
in a dynamic IMC model by specifying an upper triangular transition probability
matrix, which ensures the unidirectional flow across stages (e.g., a consumer can-
not become “unaware” after having formed brand attitudes). To calibrate such
hierarchical IMC models, Smith, Naik and Tsai (2005) have developed a new
method that enables the joint estimation of the specific stages to be retained and
the specific communications activities that would influence a consumer’s transi-
tion. We encourage researchers to investigate this perspective of hierarchical IMC
empirically.
While the above propositions and discussions advanced our understanding of
synergy, we maintained a tacit assumption that the impact of marketing effort on
sales is deterministic. When this assumption is untenable, for instance, in turbu-
3 We thank Prof. Scott Neslin for this novel perspective.
Integrated Marketing Communications in Retailing 391
lent, volatile markets where uncontrollable factors also may affect sales, we need
to incorporate the role of uncertainty in the analyses. To this end, Raman and Naik
(2004) generalized the deterministic IMC model by using the Wiener process to
represent uncertainty in their continuous-time dynamic model.
Extending IMC to Uncertain Environments
Applying stochastic optimal control theory, Raman and Naik (2004) derived the
optimal IMC program for uncertain markets. Below we present their main propo-
sitions and discuss the substantive implications.
PROPOSITION 8: In uncertain markets, the total media budget increases as synergy
increases. Furthermore, the proportion of budget allocated to the more (less)
effective medium decreases (increases) as synergy increases.
It is intriguing to find that propositions 3 and 4 in the absence of uncertainty are
identical to the above one, seemingly implying that uncertainty plays no role! But
jumping to such a conclusion is inaccurate because uncertainty directly affects
sales evolution, thereby making the level and growth of sales less predictable in
the future. In addition, uncertainty affects the variability in long-term profit,
thereby increasing the downside risks of losses and bankruptcies. Thus, uncer-
tainty has serious consequences on both sales and profit.
The proper interpretation of proposition 8, therefore, is that managers should
not alter their decisions by increasing or decreasing budget in response to the
effects of uncertainty on sales and profit. This finding clarifies the conflicting
views prevalent in the existing practice. Specifically, advertising agencies advo-
cate that managers should increase the media spending in response to demand
shocks such as recessions. Whereas an empirical analysis of the national media
spending data indicates that managers are likely to decrease their media budget
during recessions. Resolving these conflicting views, Proposition 8 recommends
neither increasing nor decreasing the media spending,but sticking to the course
of action in uncertain times.
In sum, this proposition highlights the fact that “no action” on budget
changes does not imply managerial “inaction,” the former requiring knowledge
of optimal decision-making under uncertainty, the discipline not to tinker with
marketing budgets in the short term, and the commitment to building brands
over the long term.
We next describe the effects of uncertainty on the profitability of IMC programs:
PROPOSITION 9: In uncertain markets, the expected value of long-term profitability
of the optimal IMC program increases as synergy increases.
PROPOSITION 10: In uncertain markets, the variability of long-term profitability of
the optimal IMC program is unaffected by the magnitude of synergy.
392 Kalyan Raman and Prasad A. Naik
According to these propositions, managers should adopt an IMC perspective to
increase the brand’s profitability. That is, they should think of marketing commu-
nications activities not as a set of independent variables, but rather as a set of in-
terconnected activities with potential synergies. By generating synergies, they not
only increase the expected profitability in the long run, but they also keep profit
variability unaltered. In other words, synergy imposes no tradeoff between profit-
ability and variability. Thus, an IMC perspective raises profit but leaves its vari-
ability unaffected, and so it is prudent to build synergies by orchestrating the
communications mix.
IMC and Smart Retailing
Multiplicity of media is a fact of life for modern consumers. They tend to multi-
task, to browse the Internet while watching the television, or to read a magazine
while listening to the radio. Hence a firm’s messages from print, radio, television
or the Internet should not conflict mutually. Consistency across multiple media
requires managing everything involved in the process of communication, from
strategic analysis through database management. However, in the realm of retail-
ing, the role of IMC has received little attention. We believe a better understand-
ing of IMC in the retailing context would benefit both retailers and researchers. To
this end, we suggest research avenues to investigate the role of multiple channels
of communications to be found in futuristic retailing context.
In existing retailing environments, a consumer visits the retail store to buy a bas-
ket of goods and, once inside the selected store, she encounters several competing
brands in a product category to choose from. Inside the store, each brand in a prod-
uct category has limited avenues to provide additional information to consumers to
influence their purchase intention or willingness to pay (for more on consumer
shopping behaviors see Uncles chapter in this book.). Consequently, branded goods
advertise outside the store in mass media via television, print, radio, billboards or in-
transit advertising. In such environments, the manufacturer follows the pull strategy
(i.e., via mass advertising to build brand image) and the retailer follows the push
strategy (e.g., point-of-sale support, coupons, promotions).
In future retailing environments, however, retailers have access to fascinating
possibilities for communicating with consumers. For example, consider a personal
shopping assistant (PSA), which is a touch-screen Tablet PC mounted on shopping
carts. Think of it as “smart carts.” It provides information to a consumer while she
shops in the store. This information includes not just price, promotion, coupon
availability, or in-store location of the item, but also inventory at home and prefer-
ences for any brands bought on previous shopping occasions. Indeed, the next
generation PSA would include an intelligent guidance system for generating rec-
ommendation that’s personalized for (and by) an individual shopper. If so, what
customer-specific messages should the retailer offer to influence a consumer’s inten-
tion to buy or willingness to pay? Do the retailer’s messaging decisions amplify
Integrated Marketing Communications in Retailing 393
Internet
Internet
TV
TV
Customers
Customers
Magazines
Magazines
Rebates
Rebates Newspapers
Newspapers
Rebates
Rebates
Rebates
Rebates
Rebates
Rebates
Rebates
Rebates
Rebates
Rebates
Fig. 3. IMC in Smart Retailing Environments
Legend: TV = Television advertising
PSA = Personal shopping assistant
EAD = Electronic advertising displays
IT = Information terminals
ESL = Electronic shelf labels
RR = RFID-equipped refrigerators
Mags = Magazine advertising
News = Newspaper advertising
or attenuate the effectiveness of in-store individualized promotions (see, e.g.,
chapter by Gedenk, Neslin and Ailawadi in this book)? (Are there synergies with
the out-of-store traffic or brand-building advertising? Does the retailer’s ability to
provide timely information to consumers inside the store increase brand-
switching, thereby increasing the power of retailers relative to manufacturers (who
employ out-of-store brand-building strategies)?
To address such issues and related implications for resource allocations, Fig-
ure 3 sketches a conceptual model that reveals potential synergies a retailer can
build between various in-store communications channels – personal shopping
assistant (PSA), electronic advertising displays (EAD), information terminals (IT),
electronic shelf labels (ESL), RFID-equipped refrigerators (RR) – for sending
messages to its customer franchise (see also Kalyanam, Lal and Wolfram in this
book). The activities North-West of the 45q diagonal represent existing communi-
394 Kalyan Raman and Prasad A. Naik
cation channels, which essentially build store traffic and mitigate competitive
pressure from other retailers in town. In contrast, the activities on the South-East
of the 45q diagonal represent new communication channels, which potentially
identifies an individual customer and targets personalized communication packets.
Thus, synergies can exist at two levels: those between in-store and out-of-store
activities, and those within various in-store activities and within various out-of-
store activities. We encourage further research to investigate these novel issues.
In conclusion, we predict that retailers of the 21st century will not only embrace
emerging technologies like PSA, EAD, IT, ESL and RR, but also employ innova-
tions based on more advanced technologies (e.g., nanotechnology) in the next
decade. Such technologies cost substantial investment; the change of technology
from the old to the new invokes the well-known biases of sunk costs; the psycho-
logical desire to hold on familiar technologies retards the adoption rate; and the
painful tradeoffs implicit in replacing part of the workforce with automation is the
hardest of all. Yet, every retailer will inevitably adopt new technologies, albeit
some sooner than the others. For example, in the United States, the retailing giant
Wal-Mart expects every carton and palette it receives to carry a radio identifica-
tion tag (Feder 2003). Its top hundred suppliers are expected to adopt this technol-
ogy soon, and the rest of its suppliers to do so by 2005. Indeed, the U.S. Depart-
ment of Defense now requires its major suppliers to use RFID tags. As large
buyers stipulate such requirements, manufacturers will comply, driving the real
costs of technology down due to augmented scale and experience effects, thereby
inviting additional retailers to embrace such technologies.
This adoption of computing and communications technology marks the dawn
of smart retailing environments, thus realizing Weiser’s (1991) vision of ubiqui-
tous computing in marketing. A futuristic retailer, such as Metro’s Future Store,
would therefore possess an expanded repertoire of communications modalities for
better understanding its consumers. More advanced sensing and recognition de-
vices would fuel an explosive growth of interactive and highly distributed com-
munications. Consequently, retailers’ real challenges will be to orchestrate the
resulting marketing communications across multiple modalities without over-
whelming consumers’ limited attention spans. We hope this literature review and
the proposed IMC framework provide an impetus for both retailers and research-
ers to implement managerially relevant experiments and establish the existence of
synergies in retail markets.
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About the Editors
Professor Dr. Manfred Krafft
University of Muenster, Germany
Manfred Krafft holds the Chair of Marketing at the University
of Muenster, Germany. He is also director of the Center for
Interactive Marketing and Media Management (CIM). Before
his call to the University of Muenster, he had held the Otto
Beisheim Endowed Chair of Marketing at WHU, Otto Beis-
heim Graduate School of Management, in Vallendar near Kob-
lenz, Germany for four years. Manfred received his PhD from
the University of Kiel. His primary research interests include
customer relationship management, direct marketing, and sales
management. His paper on the optimization of direct marketing
won the inaugural INFORMS Society for Marketing Science’s Practice Prize in
2003, and he was a finalist in the Franz Edelman Award competition in 2002. He
also received the 2004 Best Article Award from the European Marketing Academy.
Manfred’s recent papers have appeared in such journals as Interfaces,International
Journal of Research in Marketing,Journal of Marketing,Journal of Marketing Re-
search, and Marketing Science. Manfred has also published books on sales manage-
ment and customer retention and serves on several editorial boards. In his spare time,
he enjoys cycling, literature, and classical music, and is very proud of his family.
Professor Murali K. Mantrala, PhD
University of Missouri, USA
Murali K. Mantrala is Sam. M. Walton Professor of Marketing
at the University of Missouri, Columbia and an honorary visit-
ing professor at Loughborough University, UK. Previously, he
was associate professor of marketing and research director at
the Center of Retailing Education and Research at the Univer-
sity of Florida, Gainesville. He has also served as adjunct pro-
fessor of marketing at the University of Chicago, Duke, Wash-
ington-St. Louis and Vanderbilt Universities. Murali holds a
PhD in Marketing from Northwestern University. His current
research focuses on retail pricing optimization, category man-
agement, pharmaceuticals marketing, and sales force incentives design. He has pub-
lished articles in Marketing Science,Journal of Marketing Research,Journal of
Marketing,Marketing Letters,Interfaces, and the European Journal of Operations
Research. He serves on the editorial board of Marketing Science and is an area edi-
tor for the Journal of Personal Selling and Sales Management. Between 1999 and
2003, Murali was a marketing consultant at ZS Associates, Evanston, Ill., serving
pharmaceutical, insurance, and broadcast industry clients. His wife Surya and he are
founders of Markdown Management Inc., a consulting firm specializing in fashion
retail pricing management.
About the Authors
Professor Dr. Dieter Ahlert
University of Muenster, Germany
Dieter Ahlert was born in 1944 and has been a full professor
of business administration since 1975. His primary researcher
interests are in the areas of distribution, retailing, and net-
work marketing. Dieter Ahlert is Managing Director of the
Department of Retailing and Network Marketing, the Fashion
Institute of Marketing (FATM), and the International Center
for Franchising and Cooperation (F&C). He is project manager
and researcher in the fields of retail management, distribution
systems and multi-level, value-adding networks. He is a found-
ing member of the Brandsboard Association, a consortium of
researchers and analysts from different disciplines. Within this consortium, Dieter
Ahlert has focused on interdisciplinary brand research.
Professor Kusum L. Ailawadi, PhD
Tuck School of Business, Dartmouth College, USA
Kusum Ailawadi is Professor of Marketing at the Tuck
School of Business at Dartmouth. Her research on (I) marketing
spending decisions and their impact on firm, category, and
brand performance and (II) the strategic interaction between
manufacturers and retailers and their relative performance has
been published in several of the top marketing journals. Kusum
and her co-authors have won the Journal of Retailing William
Davidson Award; the Journal of Marketing Harold Maynard
Award; and the Marketing Science Institute/Journal of Market-
ing Research competition for Academic-Practitioner collabora-
tive research. She serves on the editorial review boards of Journal of Marketing,
Journal of Retailing,Marketing Science and Review of Marketing Science.
Markus Blut, Dipl.-Kfm.
University of Muenster, Germany
Markus Blut is an Assistant Researcher in the Marketing
Center of Muenster’s Faculty of Retailing and Distribution,
where he studied Business Administration. His primary re-
search interests include retail management, internationaliza-
tion, knowledge management and behavioral pricing.
400 About the Authors
Professor Ruth N. Bolton, PhD
Arizona State University, USA
Ruth N. Bolton holds the W. P. Carey Chair in Marketing at
Arizona State University. Dr. Bolton is studying how organiza-
tions can increase the value of their customer base over time.
She holds a PhD from Carnegie-Mellon University. She has
held positions at Vanderbilt University, the University of
Oklahoma, Harvard University, the University of Maryland,
and the University of Alberta. She also worked for eight years
at Verizon, a large telecommunications and information ser-
vices company. She is currently a Trustee of both the Market-
ing Science Institute and the American Marketing Association.
She was editor of the Journal of Marketing from 2003 to 2005.
Professor Susan M. Broniarczyk, PhD
University of Texas at Austin, USA
Susan M. Broniarczyk is Professor of Marketing at the
McCombs School of Business, University of Texas at Austin.
Susan received her PhD from the University of Florida. Her
research interests involve consumer behavior for branding
and retail assortment. She has received the Society for Con-
sumer Psychology’s Early Career Contribution Award and
the American Marketing Association’s Howard Dissertation
Award and O’Dell Award for research on branding and as-
sortment. She serves on the editorial boards of Journal of
Consumer Research and Journal of Marketing Research and
has served on the board of the Association for Consumer Research.
Professor Raymond R. Burke, PhD
Kelley School of Business, Indiana University, USA
Raymond R. Burke is the E.W. Kelley Professor of Business
Administration at Indiana University's Kelley School of
Business and a founding director of the School's Customer
Interface Laboratory, a state-of-the-art facility for investigat-
ing how customers interact with new retailing technologies.
His research focuses on understanding the influence of the
store environment on consumer shopping behavior. Dr.
Burke has also served on the faculties of the Harvard Busi-
ness School and the University of Pennsylvania's Wharton
School. His articles have appeared in several major journals,
including the Harvard Business Review,Journal of Consumer Research,Journal
of Marketing, and Marketing Science.
About the Authors 401
Philip W. Daus
SIMON
KUCHER & PARTNERS Strategy & Marketing Consultants, Germany
Philip W. Daus is a consultant with SIMON KUCHER &
PARTNERS Strategy & Marketing Consultants. He studied
business administration at WHU Vallendar (Germany), the
Universidad Pontificia Comillas de Madrid ICADE (Spain),
and the Fundação Getulio Vargas (Brazil). During his studies
he also took part in the MBA Program of the Indian Institute
of Management at Bangalore. Philip W. Daus has gained
international practical experience in various branches, rang-
ing from the media industry in Portugal to industrial vehicles
in Spain. At SIMON KUCHER & PARTNERS he focuses
on the development of marketing strategies and optimization of pricing processes.
Professor John Dawson, PhD
University of Edinburgh, UK, ESADE, Barcelona, Spain, and UMDS Kobe, Japan
John Dawson is Professor of Marketing at the University of
Edinburgh and also holds professorships at ESADE, Barce-
lona, and the University of Marketing and Distribution Sci-
ences Kobe. He has a PhD from the University of Notting-
ham. His activities in research, management development,
and teaching focus on retail strategy, marketing, and relation-
ships with suppliers. John publishes and consults widely in
Europe and Japan. He is a Board Member of National Mu-
seum Enterprises, which operates the commercial activities,
including retailing, in the National Museums in Scotland.
Recent research on the internationalization of retailing has been conducted in col-
laboration with scholars in Japan, UK, and France.
Dr. Heiner Evanschitzky
University of Muenster, Germany
Heiner Evanschitzky is Assistant Professor at the Marketing
Center Muenster (MCM), University of Muenster, Germany.
Before coming to Muenster he studied economics, marketing,
political science, and philosophy at the University of Saar-
bruecken, the Université de Lausanne, and the University of
Texas in Austin. He gained his Master’s degree at the Uni-
versity of Saarbruecken, majoring in Consumer Behavior and
Retailing. He has published in numerous journals, including
Journal of Retailing,Industrial Marketing Management, and
Journal of Product and Brand Management. He has been a
reviewer for several journals and program co-chair for the 2005 World Marketing
Congress.
402 About the Authors
Professor Edward J. Fox, PhD
Southern Methodist University, Dallas, USA
Edward Fox is the W.R. and Judy Howell Director of the
JCPenney Center for Retail Excellence and Assistant Pro-
fessor of Marketing at Southern Methodist University’s
Cox School of Business. Before coming to SMU, he was
Research Director of the Center for Retail Management and
Adjunct Assistant Professor of Marketing at Northwestern
University’s Kellogg School of Management. Ed earned
PhD and MA degrees from the Wharton School at the Uni-
versity of Pennsylvania, MBA and MS degrees from
Northwestern University and a BS degree from the United
States Military Academy at West Point. His research focuses on retail market-
ing, consumer shopping behavior, category management, and customer relation-
ship management.
Professor Dr. Karen Gedenk
University of Cologne, Germany
Karen Gedenk is Professor of Marketing at the University of
Cologne, Germany. Karen received her PhD and her “habili-
tation” at the University of Kiel, Germany. From 2000 to
2004 she was Professor of Marketing at the University of
Frankfurt, Germany. Karen’s main area of research is sales
promotion. She is particularly interested in measuring promo-
tion effectiveness. Her research is based on scanner data,
surveys, and experiments and yields insights into the effects
of price and nonprice promotions on several aspects of con-
sumer behavior, such as brand switching and brand loyalty.
Karen is also researching into pricing and marketing research methods.
Professor Dhruv Grewal, PhD
Babson College, USA
Dhruv Grewal (PhD Virginia Tech) is the Toyota Professor
of Commerce and Electronic Business at Babson College. He
is currently co-editor of Journal of Retailing. He is a Distin-
guished Fellow of the Academy of Marketing Science. He
has published over 65 articles in journals such as JM, JCR,
JMR, JR,and JAMS. He has also co-authored Marketing
Research and articles on writing for Marketing). He has
taught executive seminars/courses and/or worked on research
projects with numerous firms, such as Ericsson, Met-Life,
AT&T, Motorola, Nextel, FP&L, Lucent, Sabre, Goodyear
Tire & Rubber Company, Sherwin-Williams, and Esso International.
About the Authors 403
Professor Wayne D. Hoyer, PhD
University of Texas at Austin, USA
Wayne D. Hoyer holds the James L. Bayless/William S.
Farish Fund Chair for Free Enterprise and is Chairman of the
Department of Marketing. He is also the Director of the Cen-
ter for Customer Insight. Dr. Hoyer's research interests in-
clude consumer decision making, customer insight and cus-
tomer relationship management, and advertising information
processing (including miscomprehension and humor). Dr.
Hoyer has published over 60 articles in top marketing jour-
nals and other marketing forums. He is co-author with Deb-
orah MacInnis of a textbook on consumer behavior.
Professor Arnd Huchzermeier, PhD
WHU, Germany
Arnd Huchzermeier holds the Chair of Production Manage-
ment at WHU’s Otto-Beisheim Graduate School of Manage-
ment in Vallendar, Germany. Before this he held an appoint-
ment at the University of Chicago after receiving his PhD
from the Wharton School. His research focuses on supply
chain management. In 2003, he won both the ISMS prize of
the Marketing Science Institute and the MSSIP Award from
the European Association of Operations Research Societies.
In 2002, he received INFORMS’ Franz Edelman Finalist
Award. He has published in various journals, including Man-
agement Science,Manufacturing & Service Operations Management, Marketing
Science, and Operations Research.
Ananth V. Iyer, PhD
Purdue University, USA
Ananth Iyer holds the Susan Bulkeley Butler Chair in Op-
erations Management and is Director of the Global Supply
Chain Management Initiative at the Krannert School of
Management, Purdue University. He was on the faculty at
the University of Chicago from 1987 to 1996. He received a
PhD in Industrial and Systems Engineering from Georgia
Tech. His research interests in supply chain management
include contracts, customer promotion impact in the grocery
industry, quick response in the apparel industry, and spare
parts management and procurement issues in the global auto
industry. He was the President of the INFORMS MSOM Society from 2002 to
2003.
404 About the Authors
Professor Paul Jackson, MBA
University of Coventry, UK
Paul Jackson is the Principal Lecturer in Strategy at the Uni-
versity of Coventry, United Kingdom. He is also the manager
of the MBA programs for part-time students. Prior to his
appointment to the University of Coventry, he worked for
Marks and Spencer plc, where he was a senior manager in IT
& Logistics. Before this he was a store director for many
years and also managed a large distribution center. His pri-
mary research interests include failure of organizations, and
overseas retail operations. He works as a consultant to a
number of differing organizations, mainly in the area of
change and logistics management.
Professor Kirthi Kalyanam, PhD
Retail Management Institute, Santa Clara University, USA
Dr. Kalyanam is the J.C. Penney Research Professor, Direc-
tor of Internet Retailing in the Retail Management Institute at
Santa Clara University. He was a visiting Professor at the
Graduate School of Business at Stanford University. He also
served as Senior Vice President and Chief Marketing Officer
of SpinCircuit Inc. Kirthi’s PhD is from Purdue University.
His areas of expertise include Internet Marketing, eCom-
merce, and Retailing & Channel Marketing. His most recent
article, entitled: “When Is the New What,” was featured in
the HBR list of Breakthrough Ideas for 2005. Kirthi is the
co-author of Internet Marketing and eCommerce, forthcoming from ITP South-
western.
Professor Ram Krishnan, PhD
University of Miami, USA
Professor R. Krishnan (PhD Virginia Tech) is Research Pro-
fessor of Marketing at the University of Miami. He was pre-
viously Director of Graduate Programs and Professor of
Marketing at Cal Poly, San Luis Obispo. Professor Krish-
nan’s research has appeared in a number of professional and
scholarly journals, including the Journal of Marketing, Sloan
Management Review, California Management Review and
Journal of Retailing. He has received many distinguished
teaching awards, including the UM-EMBA Excellence in
Teaching Award, the '63 Teacher Award, the College of
Business Teacher Award, and the Alumni Award for Best Teaching. Dr. Krishnan
is the author of Marketing Research, a college textbook being revised for 2006
release.
About the Authors 405
Professor Rajiv Lal, PhD
Harvard Business School, USA
Rajiv Lal is the Stanley Roth, Sr. Professor of Retailing at
Harvard Business School. He is responsible for the retailing
curriculum and co-chairs the Senior Executive Seminar for
Retailers and Suppliers. Lal has worked on research and/or
consulting projects with a range of companies, such as Sta-
ples, Citizens Bank, Nordstrom, Microsoft, Kellogg, Sara
Lee D/E, Novartis Pharmaceuticals, Stride Rite Corpora-
tion, Oliver Wyman and Company, Fleming Companies,
Callaway Golf Company, and Omnitel Italia, on strategy
and implementation. Lal’s current research highlights build-
ing and sustaining customer-centric organizations.
Professor Roy Larke, PhD
ESADE School of Business, Barcelona, Spain, and UMDS Kobe, Japan
Professor Roy Larke is a leading expert on Japanese market-
ing and consumer behavior. He is the author of numerous
articles about Japanese retailing and the distribution system
and consumer behavior in Japan, and he is currently editor-
in-chief of Japan Consuming Magazine. He is the author of
Japanese Retailing, published by Routledge in 1994, and has
written two books about training methodology in Japanese, as
well as the Japan Distribution Statistics Handbook. In addi-
tion to academic work, he consults for a wide range of com-
panies, particularly those looking to enter the Japanese market.
He currently holds posts at the University of Marketing & Distribution Sciences in
Kobe and at ESADE in Barcelona.
Professor Michael Levy, PhD
Babson College, Massachusetts, USA
Michael Levy is the Charles Clarke Reynolds Professor of
Marketing at Babson College and a co-editor of Journal of
Retailing. His stream of research includes retailing,
business logistics, financial retailing strategy, pricing, and
sales management. He has published in such journals as
Journal of Retailing, Journal of Marketing, and Journal of
Marketing Research and serves on several editorial boards.
He is also co-author of 5th edn (McGraw-Hill/Irwin, 2005).
Dr. Levy has previously taught at Southern Methodist Uni-
versity and served as Professor and Chair of the Marketing
Department at the University of Miami.
406 About the Authors
Professor Dr. Thorsten Litfin
University of Applied Sciences Osnabrueck, Germany
Thorsten Litfin is Professor of Marketing, Service, and
Innovation Management at the University of Applied Sci-
ences of Osnabrueck, Germany. Prior to being appointed to
his post at the University of Applied Sciences he worked
for three years as a Senior Consultant for Simon Kucher &
Partners Strategy & Marketing Consultants. In his projects
he has focused on the development of product and pricing
strategies for innovative products. Thorsten received his
PhD from the University of Kiel. His primary research in-
terests include acceptance of new products, options to en-
hance the launch of new products, customer loyalty programs, pricing/bundling
strategies, and adoption/diffusion models.
Julia Merkel
Head of Corporate Executive Development, METRO AG, Germany
Julia Merkel is Head of Corporate Executive Development at
METRO AG, Duesseldorf, Germany. She studied Business
Administration at the BA Heidenheim, Germany, and then
worked as an Assistant Buyer for Castorama, Lyon, France
and held various HR positions at OBI Headquarters, Wermels-
kirchen, Germany before becoming Managing Director, HR
& Administration, at OBI Headquarters. In 1992 and 1993
she was project coordinator for an international cooperation
at Mitsukoshi Ltd., Warehouses, Tokyo, Japan.
Zygmunt Mierdorf, MBA
Chief Information Officer METRO AG, Germany
Zygmunt Mierdorf is a member of the Management Board
and Chief Information Officer of the METRO Group. Mr.
Mierdorf is responsible for the company’s IT, e-business,
human resources, logistics, and real estate divisions. Mr.
Mierdorf is also an adviser for several different sales lines.
He joined the METRO Group in 1991 and held several dif-
ferent executive positions before becoming a member of the
Management Board in 1999. Prior to joining the METRO
Group, Mr. Mierdorf had been Administrative Managing
Director at Betrix Cosmetics, Group Chief Financial Officer
and Chairman of the LRE Inc. Group, and CFO for Black & Decker, Germany. He
holds an MBA.
About the Authors 407
Detra Y. Montoya, MBA
Arizona State University, USA
Detra Y. Montoya is a doctoral candidate at the W.P. Carey
School of Business, Arizona State University in Tempe, Ari-
zona. She spent over five years in Customer Business Devel-
opment and Multicultural Marketing with Procter & Gamble.
She received her BSBA from the University of Arizona and
her MBA from Arizona State University. She has presented
her research at the Association for Consumer Research con-
ference. Her primary research interests include consumer
preferences for product and brand systems, retailer pricing
strategies, and product shelf management initiatives.
Professor Jeanne Munger, PhD
University of Southern Maine, USA
Professor Jeanne Munger is an Associate Professor at Uni-
versity of Southern Maine, and has held teaching positions at
The Ohio State University and Clarkson University. She has
won numerous teaching awards and is listed in Who’s Who
Among America’s Teachers. Her primary research interests
include retailing strategy, customer satisfaction and loyalty in
e-tailing, and promotional pricing. She has also worked as a
consulting associate for Management Horizons and later as a
research associate and strategic planner for F&R Lazarus.
She has published articles in journals such as Psychology &
Marketing,Journal of Business-to-Business Marketing, and Journal of Product &
Brand Management. She has also developed executive training programs in mar-
keting, retailing, and effective marketing communications and service quality.
Professor Prasad A. Naik, PhD
University of California Davis, USA
Prasad A. Naik is Professor of Marketing and Chancellor’s
Fellow at the University of California Davis. He develops
novel models and methods to improve the practice of mar-
keting. He publishes in top journals such as Journal of Mar-
keting Research,Marketing Science,Journal of Economet-
rics,Biometrika,Journal of the Royal Statistical Society,
and JASA. He has received an AMS Doctoral Dissertation
Award and a Frank M. Bass Award. He was selected for
MSI’s Young Scholars Program, the AMA’s Doctoral
Consortium Faculty, and Marquis’ Who’s Who in America
America and Who’s Who in the World.
408 About the Authors
Professor Scott A. Neslin, PhD
Amos Tuck School, Dartmouth College, USA
Scott A. Neslin is the Albert Wesley Fry Professor of Market-
ing at the Amos Tuck School of Business Administration,
Dartmouth College. He has been at the Tuck School since
completing his PhD at the Sloan School of Management, MIT
in 1978. He has served as a Visiting Scholar at the School of
Management, Yale University (1989–1990) and at the Tera-
data/Duke CRM Center located at the Fuqua School of Man-
agement, Duke University (2002). His primary research inter-
ests include sales promotion, database marketing, and market
response models. He is on the editorial boards of the Journal
of Marketing Research, the Journal of Marketing, and Marketing Letters and is an
Area Editor for Marketing Science.
Cirk Sören Ott
TNS Infratest, Germany
Cirk Sören Ott is Sales Director at TNS Infratest, Munich.
Sören has been working with TNS Infratest for 10 years. He
was initially responsible for retail research, before moving to
the consumer sector. He is now Head of Business Develop-
ment at TNS Infratest, Germany. He has been concentrating
on key clients and key accounts (in the areas of food, bever-
age, nonfood and retail) and on consulting work over a wide
range of market research methods. He has wide experience of
working with retailers and on questions of channel and brand
management both locally and globally. Sören studied Econo-
mies in Bamberg and graduated in 1995.
Doreén Pick
University of Muenster, Germany
Doreén Pick is a doctoral student at the Institute of Marketing
at the University of Muenster, Germany. After her appren-
ticeship in banking she spent five years working in public
relations and marketing for a bank in Germany. She then
studied in Germany and Italy from 1996 to 2002 and subse-
quently spent more than 2 years working in different posi-
tions for Karstadt, a large department store retailer in Ger-
many. Her last position with Karstadt was as the company’s
assistant CEO. Since October 2004 she has been working at
the Institute of Marketing in Muenster. Her special research
interests are in the field of CRM, and especially customer recovery management.
About the Authors 409
Professor Kalyan Raman, PhD
Loughborough University, UK
Kalyan Raman is Professor of Marketing at Loughborough
Business School, Loughborough University, UK. He was
previously at the University of Michigan Flint, University of
Florida, AT&T Bell Labs, and Auburn University. He ob-
tained his PhD in Marketing from the University of Texas at
Dallas and majored in Statistics at Purdue University. He has
published articles in Marketing Science,Management Sci-
ence,Journal of Marketing Research,Journal of Consumer
Research, and other scholarly journals. He specializes in
optimizing marketing decision making and has expertise in
problems with long-term and uncertain consequences. He is currently working on
marketing communications and marketing mix problems.
Professor Dr. Werner J. Reinartz
INSEAD, France
Professor Werner Reinartz’ research focuses are on CRM,
retailing, and marketing strategy, and his work has been pub-
lished in top academic marketing journals such as Journal of
Marketing,Journal of Marketing Research, and Journal of
Consumer Research, as well as in the applied practitioner
literature exemplified by Harvard Business Review and Cali-
fornia Management Review. His research on customer life-
time value has received major academic awards, such as the
2001 Don Lehmann Award and the 2004 MSI/Paul Root
Award. He is a member of the editorial boards of Journal of
Marketing and Marketing Science.
Professor Raj Sethuraman, PhD
Southern Methodist University in Dallas, USA
Dr. Raj Sethuraman is an associate professor of marketing at
the Edwin L. Cox School of Business at Southern Methodist
University in Dallas, USA. He received his PhD in marketing
from Northwestern University. Dr. Sethuraman’s research
focuses on marketing mix, private labels, and channels of
distribution. He has won many research awards, including
the Davidson Award for the best paper in Journal of Retail-
ing (second place) and the Little Award for the best paper in
Management Science. He serves on multiple editorial boards
and consults in the area of marketing research, brand man-
agement, and competitive retailing strategy.
410 About the Authors
Professor Venkatesh Shankar, PhD
Texas A&M University, USA
Venkatesh (Venky) Shankar is Professor of Marketing and
holds the Coleman Chair in Marketing at Texas A&M Uni-
versity. Venky received his PhD in Marketing from North-
western University. His research focuses on retail pricing,
marketing strategy, digital business, and innovation. He won
the 2001 IBM Faculty Partnership Award, the 1999 Green
Award, and the 2000 Lehman Award, and was a Faculty
Fellow of the 1999, 2000, and 2003-5 AMA Doctoral Con-
sortia. He is the co-editor of Journal of Interactive Marketing
and associate editor of Management Science and is on the
editorial boards of such journals as Marketing Science and Journal of Retailing.
Professor Dr. Hermann Simon
SIMON
KUCHER & PARTNERS Strategy & Marketing Consultants, Germany
Hermann Simon is founder and chairman of SIMON KU-
CHER & PARTNERS Strategy & Marketing Consultants. He
is a leading strategy, marketing, and pricing expert and the
author of more than 30 books, including the world best-
sellers Hidden Champions,Power Pricing, and Think!. He
is a director of several corporations and serves on the
boards of trustees of several foundations. In his “first” life
Simon was Professor for Management Science and Market-
ing at the Universities of Mainz and Bielefeld and Visiting
Professor at numerous institutions, including Harvard Busi-
ness School, Stanford University, INSEAD, and MIT. He is a Past-President of
the European Marketing Academy and has been on the editorial boards of vari-
ous scientific journals.
Professor Drs Laurens Sloot
EFMI, Erasmus University Rotterdam, The Netherlands
Laurens Sloot (1967) is director of the Erasmus Food Man-
agement Institute. EFMI is a business school belonging to the
Erasmus University in Rotterdam. Before being appointed to
his post at EFMI he worked from 1992 to 1997 as an assis-
tant professor in the Marketing Management Department,
Faculty of Economics at Erasmus University Rotterdam. He
is currently (2005) finishing his dissertation research on the
topic “consumer reactions towards permanent and temporary
assortment unavailability.” His primary research interests are
retail strategies, assortment management, private labels,
pricing and promotional effectiveness, and shopping behavior. He has published
over fifty articles in academic and trade journals.
About the Authors 411
Peter Sonneck
TNS Infratest, Germany
Peter Sonneck is Research Consultant at TNS Infratest,
Bielefeld. As an expert on international studies he focuses on
both national and international surveys within the retail sec-
tor, and also advises on international key accounts. Before he
joined the company five years ago he gained experience in
other market research institutes. Peter studied Sociology in
Konstanz and Bielefeld and graduated in 1993. His primary
research interests are customer segmentation and shopper
research. In his spare time he practices aquatic sports and
enjoys being with his family.
Professor Mark D. Uncles, PhD
University of New South Wales, Australia
Mark Uncles, BSc, PhD, is Professor of Marketing, School of
Marketing, University of New South Wales (UNSW). His
research interests include: buyer behavior, store patronage,
loyalty-building initiatives, and cross-country comparisons.
Publications have appeared in international journals such as:
Sloan Management Review;Marketing Science;Journal of
Retailing;Journal of Advertising Research;International
Journal of Research in Marketing;Journal of Business
Research; and European Journal of Marketing. He is on the
editorial boards of seven journals, co-editor of the Australasian
Marketing Journal, and co-author of The New Penguin Dictionary of Business
(Penguin Books).
Professor Vadlamani Ravi, PhD
IDRBT, Hyderabad, India
Dr. Vadlamani Ravi is an Assistant Professor at the Institute
for Development and Research in Banking Technology,
Hyderabad. He obtained his PhD from Osmania University,
Hyderabad. Prior to joining IDRBT he taught knowledge
engineering and was engaged in research on fuzzy systems,
neural networks, soft computing, and machine learning at
the National University of Singapore. He has published in
various international and national journals and is a referee
for several international journals, including Applied Intelli-
gence,Computers and Operations Research,Asia-Pacific
Journal of Operational Research, and Indian Journal of Engineering and Mate-
rial Sciences.
412 About the Authors
Professor Dr. Peter C. Verhoef
University of Groningen, The Netherlands
Peter Verhoef is Professor of Customer-based Marketing in
the Department of Marketing, Faculty of Economics, Univer-
sity of Groningen, The Netherlands. He obtained his PhD at
the School of Economics, Erasmus University Rotterdam.
His research interests concern customer relationship man-
agement, customer loyalty, multi-channel issues, category
management, and buying behavior in the specific case of
organic products. His publications have appeared (or will
appear) in such journals as Journal of Marketing, Journal of
Marketing Research, Marketing Science, Marketing Letters,
Journal of Consumer Psychology, Journal of the Academy of Marketing Science,
and Journal of Retailing.
Dr. Andreas von der Gathen
SIMON
KUCHER & PARTNERS Strategy & Marketing Consultants, Germany
Dr. Andreas von der Gathen is a Partner with SIMON KU-
CHER & PARTNERS Strategy & Marketing Consultants in
Bonn. He is a specialist in the consumer goods industry and
retailing, having carried out projects dealing with price and
allowance optimization, the development of marketing and
brand strategies, and the valuation of brands, for example.
Andreas von der Gathen received his PhD from the Univer-
sity of Bochum. He works as a lecturer with IIR, Manage-
ment Circle, and Management Forum and holds a teaching
position in controlling at the University of applied science for
Economics and Management (FOM). He is the author of several books and articles.
Professor Barton A. Weitz, PhD
University of Florida, USA
Barton Weitz holds the JCPenney Eminent Scholar Chair and
is Executive Director of the Miller Center for Retailing Edu-
cation and Research at the University of Florida. Professor
Weitz was formerly Chair of the American Marketing Asso-
ciation, a member of the Board of the National Retail Federa-
tions, and editor of the Journal of Marketing Research. He
received the AMA/Irwin Distinguished Marketing Educator
Award for his lifetime contribution to the discipline of mar-
keting. Professor Weitz is the author of Retailing Manage-
ment, the most widely retailing textbook in this discipline.
His research has been honored with two Louis Stern awards and with the Paul
Root award for papers making the most significant research contributions.
About the Authors 413
Mary Brett Whitfield, MBA
Retail Forward, Inc., USA
Mary Brett Whitfield is the director of the Retail Forward
Intelligence System™. She oversees the development of more
than 50 research publications a year on a variety of topics in
the retail industry. Whitfield is a regular contributor to the
program, writing about consumer shopping behavior, soft
goods retailing and e-retailing. She has more than 12 years of
consulting experience with retailers and consumer products
companies and four years of experience with retail companies
in market research, strategic planning, and sales development
roles. Her consulting specialties include industry and company
analysis, competitive positioning, and primary consumer research.
Dr. Gerd Wolfram
MGI METRO Group Information Technology GmbH, Germany
Gerd Wolfram is Managing Director of the MGI METRO
Group Information Technology GmbH. He is responsible for
innovation and advanced technologies, and also for the cor-
porate IT strategy within the METRO Group. In addition, he
is Executive Project Manager of the METRO Group Future
Store initiative. The well-known test-lab of the Initiative is
the Future Store in Rheinberg. Gerd Wolfram received his
PhD from the University of Cologne. He has more than 15
years’ experience in IT; his primary interests are in SW de-
velopment, networks, and new technologies such as RFID. In
addition, he is co-chair of standardization working groups in EPCglobal, GCI, and
GS1 Germany.
