When a Sunday shopper stocks up for the week at a big-box store, she expects to have a variety of products to choose from—with different colors, sizes, fragrances, flavors, and brands. But when this same shopper ducks into a drugstore midweek to pick up toilet paper on the way home from work, she is less concerned about the variety of offerings.
Such shopping habits should guide retailers’ decisions about what to stock, suggests research by University of North Carolina’s Pranav Jindal, a graduate of Chicago Booth’s PhD Program; Purdue University’s Ting Zhu; and Booth’s Pradeep K. Chintagunta and Sanjay K. Dhar.
Retail stores all face a fundamental question: What products should they stock on limited shelf space? Every decision affects sales volume and profitability, as numerous studies have established that consumers make many of their purchase decisions right at the shelf—and according to the US Department of Commerce, brick-and-mortar stores still account for more than 90 percent of retail sales, despite the explosion of online retailing, where consumers have almost unlimited choice.
How retailers resolve the what-to-sell conundrum depends on whether price, convenience, or choice of brands matters most to a store’s specific clientele, the researchers argue. Comparing sales patterns by brand, price, and other point-of-sale variables (size, color, flavor, etc.) at supermarkets such as Kroger, big-box stores such as Target and Walmart, drugstores, and convenience stores, they find that the priorities differ for each retail category.
The researchers analyzed store-level Nielsen Retail Measurement Services data (from the Nielsen Datasets at the Kilts Center for Marketing) from 2011 to 2014 across four product departments—dry grocery, nonfood grocery, dairy, and frozen products. The top 10 product categories by spending were orange juice, dry dog food, ready-to-eat cereal, ground coffee, frozen pizza, refrigerated yogurt, refrigerated milk, heavy-duty liquid detergents, toilet tissue, and paper towels.
Studying point-of-sale decisions at each type of store, the researchers find that brand shares at convenience stores and drugstores were more sensitive to assortment changes, such as packaging, flavors, and fragrances, and less sensitive to price changes. They reason this is because consumers running into a convenience store or a drugstore often need the product right away and therefore aren’t dissuaded by higher prices. However, they find that urgency and convenience is less a factor at supermarkets and big-box stores.
Changes in point-of-sale variables affected store brands the most at supermarkets and the least at drugstores, according to the researchers. At big-box stores, increasing the assortment of national brands over store brands raised profits, most likely because shoppers at these mass merchandisers tend to stock up on a wide variety of items and expect many choices. At drugstores and supermarkets, however, increasing the choice of national brands at the expense of store brands didn’t help profits. That’s probably because these consumers are more interested in lower cost than in a wide range of higher-priced national brands.
The message for retailers, according to Dhar, is to understand the priorities of customers. An array of national brands will do well where customers plan to stock up on many household staples, for example. But when shoppers are in a hurry, they may be willing to live with fewer choices and higher prices.
“Retailers will have to think about the products they’re adding to their portfolios considering that they can’t increase the size of their buildings and carry all products,” Dhar says. “They have to consider which variables will matter more.”