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STANFORD, Calif. -- Grocery circulars announcing the latest local grocery specials remain an effective means of connecting with consumers, according to new research released by the Stanford Graduate School of Business here.
Grocers spend some $8 billion on feature ads each year, which amounts to two percent of their sales -- almost the same amount as their net profit margin. For that reason, V. "Seenu" Srinivasan, the Adams distinguished professor of management at the Stanford Graduate School of Business, and his former doctoral student Anand Bodapati, assistant professor of marketing at UCLA's Anderson School of Management, claim to be the first academics to be able to assure grocers that feature advertising does work, and to determine in what product categories it tends to be most successful.
The researchers said they found that at least 10 percent of shoppers chose their store based on the week's ads, and that shoppers were most influenced when the ads promoted discounts on cereal, snack chips, pizza, cookies, and hot dogs.
According to the researchers, figuring out how to measure customer behavior in this regard was no easy task, as most consumers are vague on the issue. Available data on grocery sales, when studied as a whole, tell very little about what fraction of shoppers switched from one store to another for their shopping trips -- and if so, whether the switch was in response to the weekly ad. And this is the key question grocers want answered.
"Safeway managers want to know whether they've beckoned you away from Albertsons that week because they offered a good deal on Coke," said Srinivasan. "Attracting shoppers away from competitors is really the key factor in increasing sales volume."
Grocers also are interested in grabbing those customers who are out to do a major shopping trip, not just pick up a few items. "That's where the money is," the researcher said.
Bodapati and Srinivasan said they created a sophisticated mathematical model in order to discern the effects of feature advertising on store choice. They also were able to isolate predictors that would drive individual customer store choice, such as the prices of goods, preference for certain brands and product categories, preference for one store over another based on the consumer's distance to the store, and so forth.
The model also takes into account expectations a consumer has about prices of goods that are not advertised (if Coke is on sale, Pepsi is probably not on sale in that supermarket) and how those might influence store choice.
The researchers modeled customer purchasing data from five supermarkets located near one another in a geographical area, and combined it with information on how products were priced and featured at the same time.
Examining purchasing behavior and prices in 19 goods categories (such as yogurt, detergent, and peanut butter), they concluded that 10 percent of the customers chose stores for major shopping trips based on feature ads they saw in any given week, and that sales on items such as chips, cookies, and cereal were what grabbed them the most.
The study, Srinivasan admitted, has some limitations. "Perhaps the main thing is that the data did not include information on meat and produce, which are important sales categories," he said. "Were those to have been included, the percentage of people who made store choice based on weekly ads might have been even greater."
Better data will give store managers a more accurate picture of just how feature advertising works, Srinivasan said, noting that clearly, "feature ads do more than just occupy the time and efforts of garbage collectors and recycling establishments."