Though a decade has passed, the recession of 2008-09 offers perennial lessons to retailers. No one is immune to shopping for groceries and basic household items but today’s shoppers have a choice. SMU Cox Marketing Professor Chaoqun Chen analyzed how consumers shop various retail formats and how their behavior changed during and since the Great Recession. Her findings reveal how consumers from different income levels adjusted their weekly treks to the store.
Grocery stores have been the dominant retail format for food and related items for decades, Chen’s narrative begins. Households form their impressions about retail attributes of a retail format over a long period, and their impressions are unlikely to change quickly. Their impressions are slightly sticky. In general, retail formats are competing for expenditure shares, not for consumers - a distinguishing factor in her research.
From 2004 to 2007, discount stores such as Target and Walmart grew their market share substantially, the research notes. However, in 2008, the beginning of the Great Recession, discounters lost share to other competing formats like Costco warehouse clubs. Chen observes that in the midst of the Great Recession there was little adjustment to retailers’ pricing policies, despite the changes in market share.
On the other hand, households experienced unprecedentedly large shocks to their economic status. Large changes in overall spending did not occur though, despite very large income changes for some consumers. “At the start of the Great Recession in 2008, consumers changed the allocation of their budgets among retail formats,” she says.
Changing it up
Beginning in 2008, households’ share of spending at discount stores gradually shifted to warehouse clubs and dollar stores. “Lower-income consumers shifted allocations to stretch their income to more limited assortment venues, such as Dollar General and Family Dollar stores,” Chen observed.
Chen’s research analyzes a comprehensive data set that contains a wide selection of stores and product categories. The data includes daily shopping trips to more than 1,000 chains that consist of six retail formats: convenience, discount, dollar, drug, grocery stores and warehouse clubs. A typical shopper visits multiple retail formats in any period and makes 3 shopping trips in a typical week, or 12 shopping trips per month.
During the study period, households in 76 geographic markets from 2004 to 2010 were considered. The study looked at 23,000 households in which considerable variation exists in both the level of spending and how dollars are allocated among different retail formats. The average consumer spends $5,193 per year, but lower-income households tend to spend 15% less each year. Chen finds that higher-income households are much more likely to purchase from warehouse clubs. In contrast, low-income households spend disproportionately more at discount stores.
How to compete?
During the recession, retailers could have lowered prices but they did not. Research indicates that lowering price may increase demand but lowers margins. This increases market share at the expense of profitability.
More recently, trends show that discount stores are launching new sub-formats, smaller stores in urban areas, which have more limited assortments. Chen’s examines whether this new retail format is effective at staving off the loss of market share to other retail formats, had such format is widely available. “In terms of innovation, like focusing on convenience or alternative store formats, Target and Walmart rolled out these smaller format stores to experiment and indeed found markets,” says Chen.
Chen concludes that offering a small-size format is relatively more effective than price competition for discount stores. By introducing a small-size format with a more focused assortment, the retailer would gain an approximate 4% expenditure share, with less than 2% gained from cannibalization of existing discount stores and the remaining 2% gained from stealing business from grocery stores. A 4% gain is a large feat given the stiff competition in retail shopping for groceries and household essentials.
Price competition is a risky path at the level of retail formats. Discount stores can effectively compete by developing new retail formats that cater to household preferences. “One important thing for discount stores to consider is whether they are able to take advantage of economies of scale to keep costs low when they roll out more new-format stores,” Chen says. “If so, the small-size retail format is a good addition to discount stores’ portfolio.”
The research also shows that grocery stores and discount stores are leading the private label provision, compared with other retail formats. Chen offers, “Private labels require a lot of management and channel coordination with manufacturers, plus additional marketing costs.” While not an easy strategy, Chen says, grocery stores are leading the trend because they have the customer base to implement it.
Today one cannot neglect online shopping, Chen suggests. “Customers may value product assortment,” she notes. “Then again, during the research time period, smaller assortment was really valued. If one adds online shopping to the mix of formats, convenience and returns may be important.”
Retail store competition is not going away, concludes Chen. “There is no single format that dominates the other,” she says. While consumers may not need to shop at dollar stores as much as they did during the recession, the stores’ recent market expansions and innovative retail formats gave customers new shopping venues that remain appealing options today.
The paper “Competition Among Retail Formats” was written by Chaoqun Chen of Southern Methodist University’s Cox School of Business.
Summarized and written by Jennifer Warren.
