September 21, 2007
Bargain Hunters Don’t Hurt Grocery Profits
By Tom Ryan
Extreme-price grocery shoppers, or those who contribute negative gross margins to a retailer, account for a very small share of the market and don’t have significant adverse effects on retail profits, concludes a study by researchers at the Yale School of Management and SUNY Buffalo.
Widely speculated to be a considerable drain on retailer profits, this segment
makes up only about 1 percent of a grocery store’s shoppers and reduces the
retailer’s profit by less than 0.2 percent, according to the study.
In their assessment, the authors of the study integrated the two ways that
consumers look for the lowest prices: across stores (spatial) and across
time within the same store (temporal). They believe past research analyzed
the two dimensions separately, thereby underestimating both shopper response
to price promotions and the impact of promotions on retail profit.
Within the two dimensions of search, consumers fall into four price search
profiles:
Incidentals – don’t search for price promotions at all;
Temporals – loyal to one store and time their purchases to coincide with the price promotions at that store;
Spatials – travel to different stores on any given shopping trip to find the lowest prices;
Spatio-temporals – make regular weekly trips to more than one store to get the lowest prices over time and across stores for an item.
According to the study, geography and opportunity costs are key predictors of the price search strategy a household will use. When competing stores are close together, a household performs a more spatial search; when a household lives close to a store, it performs a more temporal search. Higher opportunity costs of time reduce either type of search.
Not surprisingly, the spatio-temporal shoppers who search the most for low prices are the most effective in getting good deals, obtaining 76 percent of the potential savings available in the marketplace. But incidentals who search the least were able to intercept 54 percent of the potential savings by simply being at the right place at the right time.
Despite all the savings, the study found that all four price search segments were profitable to retailers on average. Incidentals contributed the highest profit margin; spatio-temporals, contributed the lowest. But the store-loyal temporal segment contributed the greatest average profits, even more than the incidental price searchers who have greater profit margins. This suggests that, though periodic price promotions are often thought of as a means of acquiring price sensitive shoppers, they play an important role in retaining profitable store-loyal customers.
“Retailers should be reassured by our results on their use of promotions. Price promotions serve an important role in retaining profitable store-loyal customers, while the negative impact through extreme cherry picking is minimal,” said Prof. Sudhir.
Discussion Question: What do you draw from the study’s conclusion that bargain hunters have a small net impact on grocery store profit? What about its overall positive take on promotions, especially in the key role they play in retaining profitable store-loyal customers?
BrainTrust
Recent Discussions
Discussion Questions
Poll
I agree that extreme bargain hunters should be of little concern. Really, do most grocers even offer extreme bargains to begin with? What is considered an extreme bargain at most conventional stores is the every day low price at Wal-Mart. Look at Aldi, which just loves to be located as close to Wal-Mart as possible. No retailer yet has come close to Aldi pricing, not even Wal-Mart. I believe that the extreme bargain hunters are less than one percent. Except for Aldi which does 100% of their business with extreme bargain hunters. This is 2007. No one goes to the plain vanilla grocery store today for bargains. Shoppers today go for convenience, quality, and service.
I think this is some pretty impressive work that is most worthy of our attention and discussion here today. Like any academic research, it confines its scope to the phenomena studied. So it does not incorporate the side effects caused by out-of-stocks (really an implementation breakdown), nor does it build in the confounding factor of promotional allowances, which we all understand distorts retailer decision-making.
This study focuses on profitable and unprofitable consumer behavior, not trade practices. It does not attempt to investigate why a retailer chooses to accept a given promotion. It does not investigate whether any individual promotion is profitable.
Perhaps we should own up to the reality that price is a motivation for nearly all shoppers at least some of the time. As this research confirms, for a few “devil” shoppers, the deal is a primary focus nearly all the time. For a few others, it is rarely a concern. The rest may be arranged along a classic bell curve.
This study tells me that we should not distort our pricing and promotion strategies to prevent unwanted behavior by a few outliers. And contrary to widespread belief, the detail on the “devils” may not be so dire after all.
I really think that bargain shoppers are a boon to a retailer. If the retailer is marketing correctly, he/she never loses anything on “loss leaders.” Bargain hunters shop the stores and the ads and they spread the word. Haven’t we all heard that word of mouth is the best advertisement?
With regard to OOS created by cherry picking, that’s a cop out for a retailer being unprepared for an advertisement. Every manufacturer knows promotional lift numbers for every week of the year–we do live in the 21st Century! This is not difficult to calculate. OOS is a direct result of a lazy buyer/merchandiser over 95% of the time. As for me, I say let’s get more traffic. If they aren’t coming in, I sure can’t sell them anything!
Have we returned to that point in retailing where we question, once again, whether bargain hunters impact on store profits and whether promotions retail profitable customers? Without the additional knowledge that Mark, Ron and Ryan correctly say is necessary for certainty, the answer is simply “yes” they might. In turn, that suggests more research is needed in order to be certain, which seemingly, is always a void today.
Research, of course, is a vital to deep understanding. But we tend to do endless research because in this ever changing world, uncertainty has arisen to a high level. We never seem certain of much. If we were certain, operators (such as the late Sam Walton) could reach conclusions, at least some, based on their acquired knowledge base, close observations and conditioned instincts. Then, perhaps, operators could make others take their organic research as seriously as the adornments given to most valuable research projects created for them.
The response to this research shows how deep we have fallen into the Wal-Mart trance that EDLP is the only way to market and customers don’t want to have to worry about deal pricing and sales.
What most customers like is getting a great price. For some, that means Wal-Mart, where they know the shelf price will be lower than at other stores. For other customers, their great prices come from their local supermarket where there are always great deals to choose from. Sure, they recognize that the shelf price might be higher than at Wal-Mart, but THIS WEEK, they can get it at a price that’s EVEN LOWER than Wal-Mart. EDLP doesn’t seem like such a great deal anymore.
I agree that the sample size could be larger, but I also think that it would be foolish to ignore the conclusions of the research. One of the real strengths of analyzing customer-specific loyalty data is the ability to see the true dynamics of what is driving sales in the store.
Despite the conventional wisdom that EDLP is the best/only way to maximize sales and profits, analysis of customer data shows that weekly ad features are effective at drawing profitable customers in the door.
The problem of the price shopper on the retailer’s profits is not the direct loss of margin from those shoppers, but the irrational pursuit of those shoppers, and the ill-conceived effort to “buy” sales by paying for them with cut prices. It’s the mind of the retailer that is getting messed with.
It is true that 40% of all sales, on average, across all categories, occur from end-caps, lobby displays and other promotional locations–based on our examination of millions of shopping trips on a second by second basis. The question is, why are all those locations being price promoted, when the vast majority of shoppers buying from them neither no about nor care about the money they are being “paid” to buy there?
Glen Terbeek noted this phenomena in his “Agentry Agenda,” also. What makes the practice rational for the retailer is that the margin on any of those items pales in significance to the money THEY are being paid by the manufacturer for the promotional space.
Why do these discussions always occur as if it is all about margins? Are the economics of the business that secret and arcane?
I think the study is absolutely correct.
Retailers have been selling “loss leaders” from time immemorial. They know full well (based on average gross margin per store and other reporting methods) which stores see the most cherry pickers and they order and stock accordingly.
The worst possible scenario would be one where retailers “fire” their cherry-picking customers. Those customers likely have the loudest voices, and would post nasty-grams on every blog on the internet.
Overreaction would be unwise. Very few people have the time to run from store to store looking for the best bargain…and those that do are not going to make or break a retailer’s earnings per share.
I agree with Mark and Ron. There is a need for broader, more comprehensive research before we can draw any firm conclusions.
Maybe I missed something, but the study doesn’t seem to pay any attention to the impact of the out-of-stocks created by cherry-pickers. What happens when the loyal and profitable customer goes to the store and can’t find the promoted item because a non-loyal, unprofitable customer bought the last 10? Will the store lose that profitable customer?
This study shows that loss leaders and front page flyer items are effective at bringing in traffic. The key opportunity is to turn cherry pickers into full fledged shoppers and get their carts full. By providing a healthy combination of customer service and merchandising flair, the merchant should be able to increase the basket. This study suggests that chains can get a little more aggressive in promo pricing. In this competitive environment, retailers need to utilize any advantage they can. Service and pricing are always the best way to get customers in the door!
Nielsen estimates that 41.5% of all supermarket sales are based on promotions. Each cherry-picker tends to buy an extra share of loss-leaders, which is why so many supermarkets have item limits. The Yale/SUNY Buffalo survey is based on 255 shoppers who made 700 shopping trips to 4 stores in a duopoly market. The conclusions are so contrary to expectations that it might be well worthwhile to make repeated studies with larger databases in more competitive markets.
It is common knowledge that promotions and bargains attract consumers; all types of consumers. However, everyone in retail knows that once in the store, the consumer tends to continue to purchase other items the longer they are in the store. Keeping the consumer longer, and exposing them to more items is the key to successful retail. This is why stores have long main traffic patterns, why they have numerous promotional exposures along each shelf category, and why impulse shopping drives margins (and sales)for all retailers. Exposing the consumer, and retaining them in the store is the key to retail. How you get them to the store (or continue to keep them there) is incidental to their total purchasing basket (or behavior). The key is to do it, and keep doing it for as long as possible.
Half of the question is left unanswered. Considering labor value, auto expenses, etc, is temporal and spatial shopping worth it for customers? I doubt it.
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
I agree that extreme bargain hunters should be of little concern. Really, do most grocers even offer extreme bargains to begin with? What is considered an extreme bargain at most conventional stores is the every day low price at Wal-Mart. Look at Aldi, which just loves to be located as close to Wal-Mart as possible. No retailer yet has come close to Aldi pricing, not even Wal-Mart. I believe that the extreme bargain hunters are less than one percent. Except for Aldi which does 100% of their business with extreme bargain hunters. This is 2007. No one goes to the plain vanilla grocery store today for bargains. Shoppers today go for convenience, quality, and service.
I think this is some pretty impressive work that is most worthy of our attention and discussion here today. Like any academic research, it confines its scope to the phenomena studied. So it does not incorporate the side effects caused by out-of-stocks (really an implementation breakdown), nor does it build in the confounding factor of promotional allowances, which we all understand distorts retailer decision-making.
This study focuses on profitable and unprofitable consumer behavior, not trade practices. It does not attempt to investigate why a retailer chooses to accept a given promotion. It does not investigate whether any individual promotion is profitable.
Perhaps we should own up to the reality that price is a motivation for nearly all shoppers at least some of the time. As this research confirms, for a few “devil” shoppers, the deal is a primary focus nearly all the time. For a few others, it is rarely a concern. The rest may be arranged along a classic bell curve.
This study tells me that we should not distort our pricing and promotion strategies to prevent unwanted behavior by a few outliers. And contrary to widespread belief, the detail on the “devils” may not be so dire after all.
I really think that bargain shoppers are a boon to a retailer. If the retailer is marketing correctly, he/she never loses anything on “loss leaders.” Bargain hunters shop the stores and the ads and they spread the word. Haven’t we all heard that word of mouth is the best advertisement?
With regard to OOS created by cherry picking, that’s a cop out for a retailer being unprepared for an advertisement. Every manufacturer knows promotional lift numbers for every week of the year–we do live in the 21st Century! This is not difficult to calculate. OOS is a direct result of a lazy buyer/merchandiser over 95% of the time. As for me, I say let’s get more traffic. If they aren’t coming in, I sure can’t sell them anything!
Have we returned to that point in retailing where we question, once again, whether bargain hunters impact on store profits and whether promotions retail profitable customers? Without the additional knowledge that Mark, Ron and Ryan correctly say is necessary for certainty, the answer is simply “yes” they might. In turn, that suggests more research is needed in order to be certain, which seemingly, is always a void today.
Research, of course, is a vital to deep understanding. But we tend to do endless research because in this ever changing world, uncertainty has arisen to a high level. We never seem certain of much. If we were certain, operators (such as the late Sam Walton) could reach conclusions, at least some, based on their acquired knowledge base, close observations and conditioned instincts. Then, perhaps, operators could make others take their organic research as seriously as the adornments given to most valuable research projects created for them.
The response to this research shows how deep we have fallen into the Wal-Mart trance that EDLP is the only way to market and customers don’t want to have to worry about deal pricing and sales.
What most customers like is getting a great price. For some, that means Wal-Mart, where they know the shelf price will be lower than at other stores. For other customers, their great prices come from their local supermarket where there are always great deals to choose from. Sure, they recognize that the shelf price might be higher than at Wal-Mart, but THIS WEEK, they can get it at a price that’s EVEN LOWER than Wal-Mart. EDLP doesn’t seem like such a great deal anymore.
I agree that the sample size could be larger, but I also think that it would be foolish to ignore the conclusions of the research. One of the real strengths of analyzing customer-specific loyalty data is the ability to see the true dynamics of what is driving sales in the store.
Despite the conventional wisdom that EDLP is the best/only way to maximize sales and profits, analysis of customer data shows that weekly ad features are effective at drawing profitable customers in the door.
The problem of the price shopper on the retailer’s profits is not the direct loss of margin from those shoppers, but the irrational pursuit of those shoppers, and the ill-conceived effort to “buy” sales by paying for them with cut prices. It’s the mind of the retailer that is getting messed with.
It is true that 40% of all sales, on average, across all categories, occur from end-caps, lobby displays and other promotional locations–based on our examination of millions of shopping trips on a second by second basis. The question is, why are all those locations being price promoted, when the vast majority of shoppers buying from them neither no about nor care about the money they are being “paid” to buy there?
Glen Terbeek noted this phenomena in his “Agentry Agenda,” also. What makes the practice rational for the retailer is that the margin on any of those items pales in significance to the money THEY are being paid by the manufacturer for the promotional space.
Why do these discussions always occur as if it is all about margins? Are the economics of the business that secret and arcane?
I think the study is absolutely correct.
Retailers have been selling “loss leaders” from time immemorial. They know full well (based on average gross margin per store and other reporting methods) which stores see the most cherry pickers and they order and stock accordingly.
The worst possible scenario would be one where retailers “fire” their cherry-picking customers. Those customers likely have the loudest voices, and would post nasty-grams on every blog on the internet.
Overreaction would be unwise. Very few people have the time to run from store to store looking for the best bargain…and those that do are not going to make or break a retailer’s earnings per share.
I agree with Mark and Ron. There is a need for broader, more comprehensive research before we can draw any firm conclusions.
Maybe I missed something, but the study doesn’t seem to pay any attention to the impact of the out-of-stocks created by cherry-pickers. What happens when the loyal and profitable customer goes to the store and can’t find the promoted item because a non-loyal, unprofitable customer bought the last 10? Will the store lose that profitable customer?
This study shows that loss leaders and front page flyer items are effective at bringing in traffic. The key opportunity is to turn cherry pickers into full fledged shoppers and get their carts full. By providing a healthy combination of customer service and merchandising flair, the merchant should be able to increase the basket. This study suggests that chains can get a little more aggressive in promo pricing. In this competitive environment, retailers need to utilize any advantage they can. Service and pricing are always the best way to get customers in the door!
Nielsen estimates that 41.5% of all supermarket sales are based on promotions. Each cherry-picker tends to buy an extra share of loss-leaders, which is why so many supermarkets have item limits. The Yale/SUNY Buffalo survey is based on 255 shoppers who made 700 shopping trips to 4 stores in a duopoly market. The conclusions are so contrary to expectations that it might be well worthwhile to make repeated studies with larger databases in more competitive markets.
It is common knowledge that promotions and bargains attract consumers; all types of consumers. However, everyone in retail knows that once in the store, the consumer tends to continue to purchase other items the longer they are in the store. Keeping the consumer longer, and exposing them to more items is the key to successful retail. This is why stores have long main traffic patterns, why they have numerous promotional exposures along each shelf category, and why impulse shopping drives margins (and sales)for all retailers. Exposing the consumer, and retaining them in the store is the key to retail. How you get them to the store (or continue to keep them there) is incidental to their total purchasing basket (or behavior). The key is to do it, and keep doing it for as long as possible.
Half of the question is left unanswered. Considering labor value, auto expenses, etc, is temporal and spatial shopping worth it for customers? I doubt it.