Executive Summary:
How Consumers Choose a Store: ‘Assortment Really Matters’
Shopping behavior is ‘much more complex and richer’ than it may appear on the surface. The factors that influence which brand a consumer selects from the store shelf are pretty well understood. But how consumers decide which store to visit is more complex. Most models of store choice have focused on pricing strategies: promotional (HiLo) or Every Day Low Price (EDLP). However, Ed Fox and Rick Briesch of SMU Cox, along with co-author Pradeep Chintagunta of the University of Chicago, offer a new model that expands the focus to include three key drivers of consumers’ store choice decisions— convenience, price, and product assortment.
The authors point out that the world’s largest retailer is counting on consumers trading off convenience and assortment, not just seeking low prices. Wal-Mart’s newly-introduced format—Neighborhood Markets—is poised to complement its supercenter format in grocery sales. Neighborhood Markets offer more convenient locations than supercenters, but offer a more limited product selection. Moreover, Wal-Mart’s policy is to offer the same item prices in both formats. Neighborhood Markets therefore serve as a real world motivation for the authors’ research, and the concept of segmenting consumers based on their preference for assortments.
Background
The benchmark store choice model of Bell, Ho and Tang (1998) suggests that consumers make a tradeoff between low prices and convenience, framing competition between stores of different pricing formats in terms of the size of consumers’ shopping lists. Consumers choose EDLP stores like Sak-N-Save or Wal-Mart if their shopping list is long; they choose HiLo stores, Tom Thumb, Albertsons or Kroger for example, when they plan to buy less. The shopping list in this benchmark model was comprised of individual SKUs (stock-keeping units) scanned by a retailer, rather than category needs, which is more consistent with how shopping lists are actually developed. For example, we are much more likely to list general categories such as shampoo or paper towels than to specify a 64oz. bottle of Pantene with full body or a Bounty 2-count jumbo size. Fox stated, “It’s that level of planning we capture in our model because people will substitute items on their list based on what is available, price, or other factors.”
In this study, assortment refers to the number of products offered in a category (e.g., 650 different carbonated beverage alternatives) rather than the number and diversity of product categories offered (e.g., soup vs. soap). The authors find much more variation in consumers’ response to assortment than to convenience or price. Some shoppers prefer larger assortments than they find in stores today, while others would prefer that stores reduce their assortments. These findings suggest that optimal retail assortment levels depend on the assortment preferences of a store’s customers. Briesch commented, “Previously, the marketing literature has focused on pricing strategies, which is how we have been framing retail competition, but it’s not sufficient because assortment does weigh into the equation.”
Analyzing the Data
The authors modeled purchases at the four largest grocery chains in the Chicago market, which together accounted for 91% of store visits and 92% of spending at known grocery outlets. The four retailers were segmented based on their advertised pricing strategy: EDLP1, EDLP2, HiLo1, and HiLo2. Most purchases were made at the HiLo (77% of trips; 76% of spending) versus the EDLP (14% of trips; 16% of spending) retailers. The dataset includes 169 households, whose 11,005 store visits during a 69-week period were studied.
Looking at the market positions and strategies of the four retailers, HiLo stores were chosen far more frequently, with HiLo 2 visited 55% of the time and HiLo 1, 28% of the time. Together, the two EDLP retailers accounted for fewer than 20% of store visits. This difference was consistent with the high penetration of the two HiLo retailers, whose stores were within 1.6 (HiLo 1) and 1.2 (HiLo 2) miles of panelists’ homes on average. There were far fewer EDLP stores in the market, which were 4.9 (EDLP 1) and 5.8 (EDLP 2) miles from panelists’ homes on average. Across ten categories that the authors studied in detail, the two HiLo retailers feature advertised more than the EDLP retailers but charged higher prices.
The authors created an assortment index to reflect the relative sizes of category assortments at each store, weighted by the probability that shoppers planned to purchase in those categories. Averaging assortment indices, prices and travel distances for each retailer, the authors found that assortment best explained the probabilities of shoppers switching between stores. The relationship between the assortment index and store switching suggests that assortment levels may play an important role in retail competition.
Relative assortment sizes were roughly the same for the two HiLo retailers, but differed by 16% between the two EDLP retailers. EDLP 1 had the highest assortment index in the market (1.07), EDLP 2 the lowest (0.91). Fox explained, “A 16% difference can be significant in terms of the size of the store and what the consumer perceives. It turns out that people are self-selecting. Those with a higher cost of shopping [in terms of distance or time] will go to EDLP 2 [smaller assortments] in part because of the low prices but also because the smaller assortments help them to get in and out quicker.”
Market Share and Segmentation Impacts
The authors also found a significant relationship between shoppers’ responses to assortment and travel distance. Shoppers prefer either larger assortments to convenient locations or vice versa, which represents a clear opportunity for retailers to segment consumers. “If you extrapolate from our grocery store analysis to Wal-Mart Neighborhood Markets and supercenters, this shows a way to compete,” Fox explained. “If price alone matters, then why would Wal-Mart have both types of stores? What Wal-Mart is doing is consistent with our analysis of EDLP 2. If you’re an astute retailer—knowing that Wal-Mart owns the low cost part of the world—how can you entice the less price sensitive, make inroads or defend your customers from Wal-Mart? Perhaps in key categories, a retailer can extend their assortments or focus on those customers within their geographic radius.”
Likely changes in market shares were calculated for hypothetical increases or decreases in category assortments. EDLP 2 would lose 2.1% of its market share if it were to increase assortments by three percent with all other retailers gaining share as a result. However, if EDLP 1 were to increase its assortments by the same amount it would realize a 2.0% gain in market share, despite the fact that it already offers the most extensive product assortments in the market. That gain would come at the expense of the HiLo retailers. HiLo 1 would benefit (+1.1%) more than twice as much as HiLo 2 (+0.5%) if either were to increase its own assortments. Interestingly, if either HiLo chain were to increase its assortments, EDLP 2 would gain market share as a result while EDLP 1 would lose share. This reflects the movement of assortment-seeking shoppers from EDLP 1 and assortment-averse shoppers to EDLP 2. Moreover, the advertised pricing strategy of EDLP or HiLo did not capture retail competition in product assortment. In summary, the authors found that the impact of changes in price and assortment were not uniform across retailers, and that they often reflected differences among retailers rather than format-specific (EDLP vs. HiLo) differences.
Tradeoffs and Implications
The authors provide evidence to support the growing contention that retailers that make major assortment reductions may be doing so at their own peril. However, their analysis found one store chain, EDLP 2, that could do so without substantial risk. Because larger assortments are not always preferable (unlike lower prices and shorter travel distances), optimal assortment levels could be substantially different for different retailers, depending upon their current assortment levels and their customers’ preferences. Matching competitors’ assortment levels without regard to customer preference for assortment is therefore not recommended.
For retailer positioning, the findings support either high convenience/low assortment or low convenience/high assortment positioning strategies. Recalling Wal-Mart’s new Neighborhood Market format, the stated intention for these small store footprint (fewer than 40,000 square feet) stores is to offer high convenience with smaller assortments. Based on the relationship the authors found between distance and assortment response, this positioning is likely to be an effective complement to Wal-Mart’s low convenience/high assortment supercenters.
The authors’ analysis of store switching implies that assortment can be a competitive weapon. For example, low assortment retailers might benefit if others were to increase assortments, driving consumers with high shopping costs to seek smaller assortments. Other retailers would lose share if others were to increase assortments. This pattern of asymmetric switching reinforces the importance of assortment in characterizing retail competition.
Finally, the authors’ findings about the effect of product assortment on store choice suggest that shoppers’ self-reports might not contain sufficient information to form the basis of retailers’ resource allocation decisions and to formulate effective strategies. Changes in assortment and price influence future, as well as current patronage decisions. Thus, such changes are likely to have a substantial impact on the lifetime value of retail customers, and consequently on optimal retailer assortment and price levels.
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