By Tom Ryan
Extreme-price grocery shoppers, or those who contribute negative gross margins to a retailer, account for a very small share of the market and don't have significant adverse effects on retail profits, concludes a study by researchers at the Yale School of Management and SUNY Buffalo.
Widely speculated to be a considerable drain on retailer profits, this segment makes up only about 1 percent of a grocery store's shoppers and reduces the retailer's profit by less than 0.2 percent, according to the study.
In their assessment, the authors of the study integrated the two ways that consumers look for the lowest prices: across stores (spatial) and across time within the same store (temporal). They believe past research analyzed the two dimensions separately, thereby underestimating both shopper response to price promotions and the impact of promotions on retail profit. Within the two dimensions of search, consumers fall into four price search profiles:
Incidentals - don't search for price promotions at all;
Temporals - loyal to one store and time their purchases to coincide with the price promotions at that store;
Spatials - travel to different stores on any given shopping trip to find the lowest prices;
Spatio-temporals - make regular weekly trips to more than one store to get the lowest prices over time and across stores for an item.
According to the study, geography and opportunity costs are key predictors of the price search strategy a household will use. When competing stores are close together, a household performs a more spatial search; when a household lives close to a store, it performs a more temporal search. Higher opportunity costs of time reduce either type of search.
Not surprisingly, the spatio-temporal shoppers who search the most for low prices are the most effective in getting good deals, obtaining 76 percent of the potential savings available in the marketplace. But incidentals who search the least were able to intercept 54 percent of the potential savings by simply being at the right place at the right time.
Despite all the savings, the study found that all four price search segments were profitable to retailers on average. Incidentals contributed the highest profit margin; spatio-temporals, contributed the lowest. But the store-loyal temporal segment contributed the greatest average profits, even more than the incidental price searchers who have greater profit margins. This suggests that, though periodic price promotions are often thought of as a means of acquiring price sensitive shoppers, they play an important role in retaining profitable store-loyal customers.
"Retailers should be reassured by our results on their use of promotions. Price promotions serve an important role in retaining profitable store-loyal customers, while the negative impact through extreme cherry picking is minimal," said Prof. Sudhir.
Discussion Question: What do you draw from the study's conclusion that bargain hunters have a small net impact on grocery store profit? What about its overall positive take on promotions, especially in the key role they play in retaining profitable store-loyal customers?