Retail Formats and the Myth of Shopper LoyaltyRetail Formats and the
Myth of Shopper Loyalty
SMU/CoxNovember 4, 2005
Professor Edward Fox
W.R. and Judy Howell DirectorJCPenney Center for Retail Excellence
2005, Edward J. Fox. All rights reserved.
Old Paradigm
Location, Location, Location!Location, Location, Location!
Virtually every study of consumer shopping behavior has concluded that:ConvenienceConvenience is the most important factor in
consumers’ store choicesPricePrice
EDLP, orPromotional pricing
Product assortmentProduct assortment
2005, Edward J. Fox. All rights reserved.
Shoppers Responded to the Old Paradigm by Being Pretty Loyal
In the US56% of shoppers reported that they were loyal to the same
specialty stores >5 years (American Express Retail Index 1999)About 50% of shoppers were found to be loyal to a single
supermarket (Bell and Lattin 1998) Outside the US
38% is Worchester, MA shopped at the closest supermarket (Thompson 1967)
50% in Christchurch,NZ bought groceries, meat and vegetables at the closest stores (Clark 1968, Clark and Rushton 1970)
25% in Manchester, UK bought bread at closest store (Fingleton 1975)
Reported loyalty levels approached or exceeded Reported loyalty levels approached or exceeded 50%, but … 50%, but …
2005, Edward J. Fox. All rights reserved.
On the Other Hand, Grocery Stores Are “Leaking” Shoppers
FMI (1989-1993)24% - 29% of customers reported switching grocery stores in a
year
Measured Marketing, (Woolf 1993)25% - 50% of grocery store customers leave a store each year
What is going on? What is going on?
The average household visits 2.2 grocery stores per weekOver 80% of households visit their favorite grocery store fewer
than once a week
2005, Edward J. Fox. All rights reserved.
What Is Shopper Loyalty?
“Share of Wallet”The proportion of a customer’s purchases in a retail
format (e.g., supermarket, mass, drug) that is made at a given retailer
Proportion of a customer’s purchases of a given category or type of products (e.g., packaged goods, apparel) that is made at a given retailer
Nearly all loyalty studies have focused on a single Nearly all loyalty studies have focused on a single retail format retail format
2005, Edward J. Fox. All rights reserved.
Shopper LoyaltyWITHIN SUPERMARKETS
We tested “share of requirements” loyalty within format for two supermarkets
"Share of Wallet" between Supermarkets
Number of Shoppers
% of All Shoppers
Annual Store Rev. / Shopper
Annual Store Rev. / Segment
Non-Shoppers 2091 45.8% $0 $00% - 25% 1149 25.1% $180 $206,48626% - 50% 582 12.7% $786 $472,83151% - 80% 480 10.5% $1,338 $643,12481% - 100% 267 5.8% $2,100 $533,153
TOTAL 4569 100.0% $406 $1,855,593
Source: ACNielsen multi-outlet panel data, 1993-4
We found that …We found that … Loyal customers account for most of a store’s revenuesLoyal customers account for most of a store’s revenues The majority of a retailer’s customers make most of their purchases The majority of a retailer’s customers make most of their purchases
outside of its storesoutside of its stores
2005, Edward J. Fox. All rights reserved.
We also examined shopper loyalty across formats and found that…
Shopper LoyaltyACROSS FORMATS
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
0%
20%
40%
Grocery Only Grocery + Mass Grocery + Drug Grocery + Club
So … households shop in multiple formatsSo … households shop in multiple formats
Shoppers are much more likely to shop at two or more retail formats during a week than to shop at supermarkets alone
2005, Edward J. Fox. All rights reserved.
Shopper LoyaltyACROSS FORMATS
Category by category, in which retail formats are packaged goods purchases made?
Sales Ranking
Description
% Spending in Grocery
% Spending in Mass
% Spending in Drug
% Spending in Club
1 REGULAR SOFT DRINKS 88.5% 7.7% 2.0% 1.8% 2 READY TO EAT CEREAL 91.3% 4.7% 0.3% 3.8% 3 LOW CALORIE SOFT DRINKS 88.9% 8.2% 2.1% 0.7% 4 REFRIGERATED SKIM/LOW-FAT MILK 90.3% 1.5% 3.9% 4.3% 5 SHELF STABLE BREAD 95.3% 3.5% 0.4% 0.8%
8 CIGARETTES CARTON 31.0% 36.2% 10.4% 22.4% 11 TOILET TISSUE 52.4% 35.5% 3.0% 9.1% 12 DISPOSABLE DIAPER/LINER 35.8% 55.8% 5.9% 2.5% 14 INTERNAL ANALGESICS TABLET 36.9% 29.1% 27.4% 6.6% 20 DRY CELL BATTERY 25.2% 47.9% 20.1% 6.8% 25 PAPER TOWELS 46.4% 40.1% 2.0% 11.4%
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
Packaged Goods Purchases in Retail Formats for Selected Categories
Many large packaged goods categories are now Many large packaged goods categories are now bought predominantly outside of grocery storesbought predominantly outside of grocery stores
2005, Edward J. Fox. All rights reserved.
Shopper LoyaltyACROSS FORMATS
How are shopping trips and packaged goods spending allocated across formats?
Supermarket Mass Drug Club
% of Shopping Trips 64% 20% 11% 5%
% of Spending 74% 14% 5% 8%
Spending/Trip $27.64 $15.86 $10.64 $37.24
% of HH Shopping 100% 96% 91% 54%
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
Shopping Trips and Packaged Goods Spending Across Retail Formats
The vast majority of households shop in grocery, The vast majority of households shop in grocery, mass, mass, andand drug stores drug stores
2005, Edward J. Fox. All rights reserved.
Shopper LoyaltyLOYALTY SEGMENTS
Segmentation based on store loyalty within and across formats
0.0
0.2
0.4
0.6
0.8
Pct
of
Tri
ps
Moderate Store / Format Loyal
Fav Other Fav Other Fav Other FavGROCERY MASS DRUG CLUB
Size: 26%
Other
0.0
0.2
0.4
0.6
0.8
Pct
of
Tri
ps
Size: 15%Store / Format Loyal
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
Shopper LoyaltyLOYALTY SEGMENTS
Segmentation based on store loyalty within and across formats
0.0
0.1
0.2
0.3
0.4
0.5
Pct
of
Tri
ps
Format and Store Switcher
Fav Other Fav Other Fav Other FavGROCERY MASS DRUG CLUB
Size: 10%
Other
0.0
0.1
0.2
0.3
0.4
0.5
Pct
of
Tri
ps
Size: 39%Format Loyal / Store Switcher
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
0.0
0.1
0.2
0.3
0.4
0.5
Pct
of T
rip
s
Size: 7%Primary Mass Merchandiser
With 22% of households now using supercenters for With 22% of households now using supercenters for their primary shopping trips, this segment has their primary shopping trips, this segment has
grown!grown!
Shopper LoyaltyLOYALTY SEGMENTS
Segmentation based on store loyalty within and across formats
Size: 3%
0.0
0.1
0.2
0.3
0.4
0.5
Pct
of T
rip
s
Fav Other Fav Other Fav Other FavGROCERY MASS DRUG CLUB
Size: 7%
Other0.0
0.1
0.2
0.3
0.4
0.5
Pct
of T
rip
s
Primary Mass Merchandiser
Primary Warehouse Club
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
Why Aren’t Shoppers Loyal?
2005, Edward J. Fox. All rights reserved.
Why Aren’t Shoppers Loyal?
Store SwitchingStore Switching – The consumer may choose a different store whenever s/he shops, depending onWhere s/he isWhat s/he needs
Multi-Store ShoppingMulti-Store Shopping – The consumer may use multiple stores to meet her/his needsConsumers shop strategically!!
2005, Edward J. Fox. All rights reserved.
Why Aren’t Shoppers Loyal?STORE SWITCHING
Product MixAssortment differences – Destination categories /
products (research with Rick Briesch)Variety differences – One-stop-shopping
“Stock Up” vs. “Fill In” TripsPurpose of the shopping trip depends on what and
how much the consumer needs (research with John Semple)
Routing Internet
1.8% of retail sales, and growing slowly
2005, Edward J. Fox. All rights reserved.
Store Switching“STOCK UP” VS “FILL IN” TRIPS
EXAMPLE – Suppose you need to buy 10 units of “stuff.” Which store should you choose?
Kroger (a neighborhood store): a “unit” costs $4.00. Shopping cost is low (say $1.00). Total acquisition cost is 1 + (10 4) = 41.
Sam’s Club (a low-price store): a “unit” costs $3.00. Shopping cost is high (say $8.00). Total acquisition cost is 8 + (10 3) = 38.
So…So… Shoppers are trading off convenience and priceShoppers are trading off convenience and price The more a shopper needs, the more important price The more a shopper needs, the more important price
becomesbecomes
2005, Edward J. Fox. All rights reserved.
Store Switching“STOCK UP” VS “FILL IN” TRIPS
Basket sizes, for store switchers, at the …
Neighborhood Store Low-Price Store
48.5%
27.2%
24.3%
Common Replenishment
Extra Replenishment
Stockpiling
We find that:We find that: Shoppers buy less than half as much on a trip to the Shoppers buy less than half as much on a trip to the
neighborhood store, compared to a low-price storeneighborhood store, compared to a low-price store Shoppers stockpile at low-price storesShoppers stockpile at low-price stores
2005, Edward J. Fox. All rights reserved.
Store Switching ROUTE
Where does the trip begin and end?From home to home?From work to home?
Changing routes are hard to observe, but are likely Changing routes are hard to observe, but are likely to be responsible for a lot of switching behavior to be responsible for a lot of switching behavior
2005, Edward J. Fox. All rights reserved.
“Trip chaining” – Make unrelated purchases on the same trip
Price search – Search until you find an attractive price
“Cherry picking” – Visit multiple stores for their bargain prices
Shopper LoyaltyMULTI-STORE SHOPPING
2005, Edward J. Fox. All rights reserved.
Multi-Store ShoppingPRICE SEARCH AND “TRIP CHAINING”
How does retail location affect multi-store shopping?(research with Steve Postrel)
RETAIL LOCATIONRETAIL LOCATION
Relative to customersRelative to customers Relative to other storesRelative to other stores
Retail Competition
Retail Competition
Destination Effect
Destination Effect
Specifically, how are retailer revenues affected by nearby supermarkets, drug stores, mass merchandisers and supercenters, dollar stores and warehouse clubs?
2005, Edward J. Fox. All rights reserved.
Multi-Store ShoppingPRICE SEARCH AND “TRIP CHAINING”
Preliminary findingsBy allowing for search between stores and “trip chaining,”
we can explain 166% more of shoppers’ spending behavior than travel distance alone.
Together, all retail location variables explain a substantial amount of shoppers’ spending (17.3%).
Retail location findingsSupermarkets lose revenues by locating near warehouse
clubs and drug stores, due to both search and trip chaining.
Supermarkets locating near other supermarkets neither lose nor gain revenues uniformly. It appears that some stores benefit and other stores suffer.
2005, Edward J. Fox. All rights reserved.
Multi-Store ShoppingCHERRY-PICKING
“Instead of going to the same outlet each week, every week, to complete their grocery shopping, price-price-conscious consumers often visit more than one conscious consumers often visit more than one store in search of special prices – a bargain-hunting store in search of special prices – a bargain-hunting practice known in the industry as ‘cherry-picking.’practice known in the industry as ‘cherry-picking.’” (Mogelonsky 1994)
Consumer Reports recommends that smart shoppers “scrutinize the food-day ads and ‘cherry pick’ the scrutinize the food-day ads and ‘cherry pick’ the specialsspecials,” noting that 20% of its readers show little loyalty among supermarkets (Consumer Reports 1988)
2005, Edward J. Fox. All rights reserved.
Multi-Store ShoppingCHERRY-PICKING
Size of the cherry-picking segment Only 20% of households don’t cherry-pick at all 7% of store visits are made when cherry-picking, so 14% of people
visiting a supermarket are cherry-picking.
Who cherry-picks? Cherry-picking households are either older (lower cost to cherry-pick)
or bigger (higher returns to cherry-picking) Homeownership, stay-at-home spouses and higher incomes all lead to
more cherry-picking
So what? When shoppers cherry-pick, we found that they buy 25% more items
that are on deal and over a third more feature advertised items
Source: Fox & Hoch 2005
We find that cherry-pickers:We find that cherry-pickers:Save an average of $14 on cherry-picking tripsSave an average of $14 on cherry-picking tripsAre more vigilant shoppers, even when they don’t cherry-pick Are more vigilant shoppers, even when they don’t cherry-pick
2005, Edward J. Fox. All rights reserved.
Multi-Store ShoppingCHERRY-PICKING
When cherry-picking, do consumers care about being a “smart shopper” and feeling good about themselves, or are they just interested in saving money? (research with Suzanne Shu and John Semple)
We find the first evidence of the “smart shopper” phenomenon outside of a laboratory
We also find that “smart shoppers” save less than those who care only about savings, but are just as happy