1. Retail Formats and the Myth of Shopper Loyalty SMU/Cox November 4, 2005 Professor Edward Fox W.R. and Judy Howell Director JCPenney Center for Retail Excellence

2.  2005, Edward J. Fox. All rights reserved. Old Paradigm Location, Location, Location! Virtually every study of consumer shopping behavior has concluded that:  Convenience  Convenience is the most important factor in consumers’ store choices  Price EDLP, or Promotional pricing  Product assortment

3.  2005, Edward J. Fox. All rights reserved. Shoppers Responded to the Old Paradigm by Being Pretty Loyal In the US  56% 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 50%, but …

4.  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?  The average household visits 2.2 grocery stores per week  Over 80% of households visit their favorite grocery store fewer than once a week

5.  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 retail format

6.  2005, Edward J. Fox. All rights reserved. Shopper Loyalty WITHIN SUPERMARKETS We tested “share of requirements” loyalty within format for two supermarkets Source: ACNielsen multi-outlet panel data, 1993-4 We found that … Loyal customers account for most of a store’s revenues Loyal customers account for most of a store’s revenues The majority of a retailer’s customers make most of their purchases outside of its stores The majority of a retailer’s customers make most of their purchases outside of its stores

7.  2005, Edward J. Fox. All rights reserved. We also examined shopper loyalty across formats and found that… Shopper Loyalty ACROSS FORMATS Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997 So … 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

8.  2005, Edward J. Fox. All rights reserved. Shopper Loyalty ACROSS FORMATS Category by category, in which retail formats are packaged goods purchases made? 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 bought predominantly outside of grocery stores

9.  2005, Edward J. Fox. All rights reserved. Shopper Loyalty ACROSS FORMATS How are shopping trips and packaged goods spending allocated across formats? 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, mass, and drug stores

10.  2005, Edward J. Fox. All rights reserved. Shopper Loyalty LOYALTY SEGMENTS Segmentation based on store loyalty within and across formats Moderate Store / Format Loyal Fav Other Fav Other FavOther Fav GROCERYMASSDRUGCLUB Size: 26% Other Size: 15% Store / Format Loyal Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997

11.  2005, Edward J. Fox. All rights reserved. Shopper Loyalty LOYALTY SEGMENTS Segmentation based on store loyalty within and across formats Format and Store Switcher Fav Other Fav Other FavOther Fav GROCERYMASSDRUGCLUB Size: 10% Other Size: 39% Format Loyal / Store Switcher Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997

12.  2005, Edward J. Fox. All rights reserved. Size: 7% Primary Mass Merchandiser With 22% of households now using supercenters for their primary shopping trips, this segment has grown! Shopper Loyalty LOYALTY SEGMENTS Segmentation based on store loyalty within and across formats Size: 3% Fav Other Fav Other FavOther Fav GROCERYMASSDRUGCLUB Size: 7% Other Primary Mass Merchandiser Primary Warehouse Club Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997

13.  2005, Edward J. Fox. All rights reserved. Why Aren’t Shoppers Loyal?

14.  2005, Edward J. Fox. All rights reserved. Why Aren’t Shoppers Loyal?  Store Switching  Store Switching – The consumer may choose a different store whenever s/he shops, depending on  Where s/he is  What s/he needs  Multi-Store Shopping  Multi-Store Shopping – The consumer may use multiple stores to meet her/his needs  Consumers shop strategically!!

15.  2005, Edward J. Fox. All rights reserved. Why Aren’t Shoppers Loyal? STORE SWITCHING Product Mix  Assortment differences – Destination categories / products (research with Rick Briesch)  Variety differences – One-stop-shopping “Stock Up” vs. “Fill In” Trips  Purpose 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

16.  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… Shoppers are trading off convenience and price Shoppers are trading off convenience and price The more a shopper needs, the more important price becomes The more a shopper needs, the more important price becomes

17.  2005, Edward J. Fox. All rights reserved. Store Switching “STOCK UP” VS “FILL IN” TRIPS Basket sizes, for store switchers, at the … Neighborhood StoreLow-Price Store We find that: Shoppers buy less than half as much on a trip to the neighborhood store, compared to a low-price store Shoppers buy less than half as much on a trip to the neighborhood store, compared to a low-price store Shoppers stockpile at low-price stores Shoppers stockpile at low-price stores

18.  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 to be responsible for a lot of switching behavior

19.  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 Loyalty MULTI-STORE SHOPPING

20.  2005, Edward J. Fox. All rights reserved. Multi-Store Shopping PRICE SEARCH AND “TRIP CHAINING” How does retail location affect multi-store shopping? (research with Steve Postrel) RETAIL LOCATION Relative to customers Relative to other stores Retail Competition Destination Effect Specifically, how are retailer revenues affected by nearby supermarkets, drug stores, mass merchandisers and supercenters, dollar stores and warehouse clubs?

21.  2005, Edward J. Fox. All rights reserved. Multi-Store Shopping PRICE SEARCH AND “TRIP CHAINING” Preliminary findings  By 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 findings  Supermarkets 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.

22.  2005, Edward J. Fox. All rights reserved. Multi-Store Shopping CHERRY-PICKING price- conscious consumers often visit more than one store in search of special prices – a bargain-hunting practice known in the industry as ‘cherry-picking.’ “Instead of going to the same outlet each week, every week, to complete their grocery shopping, price- conscious consumers often visit more than one store in search of special prices – a bargain-hunting practice known in the industry as ‘cherry-picking.’ ” (Mogelonsky 1994) scrutinize the food-day ads and ‘cherry pick’ the specials Consumer Reports recommends that smart shoppers “ scrutinize the food-day ads and ‘cherry pick’ the specials,” noting that 20% of its readers show little loyalty among supermarkets (Consumer Reports 1988)

23.  2005, Edward J. Fox. All rights reserved. Multi-Store Shopping CHERRY-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: Save an average of $14 on cherry-picking trips Save an average of $14 on cherry-picking trips Are more vigilant shoppers, even when they don’t cherry-pick Are more vigilant shoppers, even when they don’t cherry-pick

24.  2005, Edward J. Fox. All rights reserved. Multi-Store Shopping CHERRY-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