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PITTSBURGH -- Small grocers might not need new tools or tricks to effectively compete against big-box retailers like Wal-Mart--as long as they are savvy enough to use their existing customer data to greater effect, say researchers in a study released by the Tepper School of Business at Carnegie Mellon University here.
The study, "Impact of Wal-Mart Supercenter on a Traditional Supermarket," identifies some important characteristics of customers who are likely to switch to shopping at supercenters, suggesting that small food retailers target those particular shoppers to retain their business.
While some of the study's findings might seem intuitive to grocers, the researchers said their study is one of the first to quantify the effect of a big-box retailer on a traditional grocer. They analyzed customer behavior related to an East Coast small-town supermarket for 20 months, before and after a Wal-Mart supercenter opened two miles away from the location. When the supercenter debuted, sales volume at the local retailer plunged by more than 17 percent of sales volume, which translates to a $250,000 monthly decrease in revenue.
"We looked at customer data in the store's robust frequent shopper program," noted Vishal Singh, assistant professor of marketing at the Tepper School and lead author of the study, along with Karsten T. Hansen and Robert C. Blattberg of the Kellogg School of Management at Northwestern University, in a statement. "The information captured more than 85 percent of transactions and represented more than 10,000 households." The data encompassed products bought, date and time of sales, and the geographic location of customer residence in relation to the store.
"We found that roughly 70 percent of the lost revenue was attributed to only 20 percent of the store's customers," said Singh. "We then looked to find out why customers defected and why some remained loyal. With this information, retailers can make decisions about the types of products they carry and how to better price and promote them."
An analysis of customer purchase behavior yielded the information that typical defectors to supercenters were usually "large basket" consumers who often had infants and pets in their households. Additionally, those with a tendency to switch to big-box retailers generally shopped more on weekends and frequently bought lower-priced store brands instead of name brands. Singh observed that earlier research has found that store-brand buyers are likely to be more sensitive to price, further justifying why they would move to a megaretailer with economies of scale.
Those less likely to defect to supercenters, however, tended to spend a big proportion of their grocery budgets on fresh produce, seafood, and home meal replacement items such as salad bars or "ready-to-eat" food selections.
Further, the study discovered that geographic closeness to the local grocer had little effect on the likelihood of a customer's defection to a supercenter. The research also found that most losses at the local store were because of fewer store visits by the group of key customers, but that actual basket size (or amount of goods bought) stayed more or less the same the same if those customers could be won back to the store.
"The limited impact on overall basket size suggests retailers would benefit from focusing on specific sales and marketing tactics that bring these customer back into their store," noted Singh.
As well as weekly circular specials or in-store events, strategies to get these shoppers back might include select competitive pricing on key items that lure defectors to supercenters -- even at the risk of cutting into individual product margins -- as a way to drive store traffic. Since these customers come back with comparable purchase levels, they'll help mitigate or overcome the overall volume of sales that was lost.
As most big-box store openings are known about beforehand, small grocers can use the existing shopper data to pinpoint potential defectors and start taking action in advance, said Singh.
"In many cases, local retailers already possess the information they need to be potent competitors," said Singh. "The challenge is to figure out how to best use this data to improve performance and compete effectively."
The study will appear in an upcoming issue of the journal, Marketing Science.