SMU/Cox
November 4, 2005
Retail Formats and the
Myth of Shopper Loyalty
Professor Edward Fox
W.R. and Judy Howell Director
JCPenney Center for Retail Excellence
Old Paradigm
Location, Location, Location!
 Virtually every study of consumer shopping behavior
has concluded that:
Convenience is the most important factor in
consumers’ store choices
Price
EDLP, or
Promotional pricing
Product assortment
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 …
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
 The average household visits 2.2 grocery stores per week
 Over 80% of households visit their favorite grocery store fewer
than once a week
What is going on?
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
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
WITHIN SUPERMARKETS
 We tested “share of requirements” loyalty within
format for two supermarkets
"Share of Wallet"
between Supermarkets
Non-Shoppers
0% - 25%
26% - 50%
51% - 80%
81% - 100%
TOTAL
Number of
Shoppers
2091
1149
582
480
267
4569
% of All
Annual Store
Annual Store
Shoppers
Rev. / Shopper Rev. / Segment
45.8%
$0
$0
25.1%
$180
$206,486
12.7%
$786
$472,831
10.5%
$1,338
$643,124
5.8%
$2,100
$533,153
100.0%
$406
$1,855,593
We found that …
 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
Source: ACNielsen multi-outlet panel data, 1993-4
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
ACROSS FORMATS
 We also examined shopper loyalty across formats and
found that…
Shoppers are much more likely to shop at two or more
retail formats during a week than to shop at
supermarkets alone
40%
20%
0%
Grocery Only
Grocery + Mass
Grocery + Drug
Grocery + Club
So … households shop in multiple formats
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
ACROSS FORMATS
 Category by category, in which retail formats are
packaged goods purchases made?
Packaged Goods Purchases in Retail Formats for Selected Categories
Sales
Ranking
1
2
3
4
5
8
11
12
14
20
25
Description
REGULAR SOFT DRINKS
READY TO EAT CEREAL
LOW CALORIE SOFT DRINKS
REFRIGERATED SKIM/LOW-FAT MILK
SHELF STABLE BREAD
CIGARETTES CARTON
TOILET TISSUE
DISPOSABLE DIAPER/LINER
INTERNAL ANALGESICS TABLET
DRY CELL BATTERY
PAPER TOWELS
% Spending % Spending % Spending % Spending
in Grocery
in Mass
in Drug
in Club
88.5%
7.7%
2.0%
1.8%
91.3%
4.7%
0.3%
3.8%
88.9%
8.2%
2.1%
0.7%
90.3%
1.5%
3.9%
4.3%
95.3%
3.5%
0.4%
0.8%
31.0%
52.4%
35.8%
36.9%
25.2%
46.4%
36.2%
35.5%
55.8%
29.1%
47.9%
40.1%
10.4%
3.0%
5.9%
27.4%
20.1%
2.0%
22.4%
9.1%
2.5%
6.6%
6.8%
11.4%
Many large packaged goods categories are now
bought predominantly outside of grocery stores
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
ACROSS FORMATS
 How are shopping trips and packaged goods spending
allocated across formats?
Shopping Trips and Packaged Goods Spending Across Retail Formats
Supermarket
Mass
Drug
Club
% of Shopping Trips
64%
20%
11%
5%
% of Spending
74%
14%
5%
8%
$27.64
$15.86
$10.64
$37.24
100%
96%
91%
54%
Spending/Trip
% of HH Shopping
The vast majority of households shop in grocery,
mass, and drug stores
Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
LOYALTY SEGMENTS
 Segmentation based on store loyalty within and across formats
0.8
Store / Format Loyal
Size: 15%
Moderate Store / Format Loyal
Size: 26%
Pct of Trips
0.6
0.4
0.2
0.0
Pct of Trips
0.8
0.6
0.4
0.2
0.0
Other
Fav
GROCERY
Fav Other
MASS
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
Fav Other
DRUG
Fav Other
CLUB
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
LOYALTY SEGMENTS
 Segmentation based on store loyalty within and across formats
Format Loyal / Store Switcher
0.5
Size: 39%
Pct of Trips
0.4
0.3
0.2
0.1
0.0
Size: 10%
Format and Store Switcher
0.5
Pct of Trips
0.4
0.3
0.2
0.1
0.0
Other
Fav
GROCERY
Fav Other
MASS
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
Fav Other
DRUG
Fav Other
CLUB
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
LOYALTY SEGMENTS
 Segmentation based on store loyalty within and across formats
Primary Mass Merchandiser
Size: 7%
0.5
Pct
Pct of
of Trips
Trips
0.4
0.3
0.2
0.1
0.0
Size: 3%
Primary Warehouse Club
0.5
Pct of Trips
0.4
With
22% of households now using supercenters for
0.3
their
primary shopping trips, this segment has
0.2
grown!
0.1
0.0
Fav Other
GROCERY
Fav Other
MASS
Source: IRI panel of 364 panelists from Oct 1995 - Oct 1997
Fav Other
DRUG
Fav Other
CLUB
2005, Edward J. Fox. All rights reserved.
Why Aren’t Shoppers Loyal?
2005, Edward J. Fox. All rights reserved.
Why Aren’t Shoppers Loyal?
 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 – The consumer may use
multiple stores to meet her/his needs
 Consumers shop strategically!!
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
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
 The more a shopper needs, the more important price
becomes
2005, Edward J. Fox. All rights reserved.
Store Switching
“STOCK UP” VS “FILL IN” TRIPS
 Basket sizes, for store switchers, at the …
Neighborhood Store
Low-Price Store
24.3%
48.5%
27.2%
Common Replenishment
Extra Replenishment
Stockpiling
We find that:
 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
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
2005, Edward J. Fox. All rights reserved.
Shopper Loyalty
MULTI-STORE SHOPPING
 “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
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?
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.
2005, Edward J. Fox. All rights reserved.
Multi-Store Shopping
CHERRY-PICKING
“Instead of going to the same outlet each week, every
week, to complete their grocery shopping, priceconscious 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)
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)
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
We find that cherry-pickers:
Save an average of $14 on cherry-picking trips
Are more vigilant shoppers, even when they don’t cherry-pick
Source: Fox & Hoch 2005
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
2005, Edward J. Fox. All rights reserved.