DECLINE IN SHOPPING FREQUENCY SPURS LOSSES TO WAL-MART

Jon Springer

PITTSBURGH -- Supermarkets anticipating a competitive supercenter opening nearby should target large-basket shoppers who have children and pets, because they are the most likely to abandon it when the supercenter opens, according to a study by Carnegie Mellon University here.

Using data from a frequent-shopper program, researchers at Carnegie Mellon's Tepper School of Business tracked shopper behavior at a conventional supermarket for a period of 20 months before and after Bentonville, Ark.-based Wal-Mart Stores opened a supercenter 2.1 miles away.

Results of the study suggest that while the supercenter had a considerable impact on sales volume and revenue at a supermarket, about 70% of the lost revenue could be attributed to just 20% of a store's shoppers -- and that shopper frequency, not basket size, accounted for much of that loss.

The store used in the study was identified as a suburban store on the East Coast that is part of a large chain using high-low pricing and a frequent-shopper program. The store includes specialty bakery, deli, seafood and custom meat departments, as well as pharmacy, photo, video and banking services.

Wal-Mart's opening cost the store 17% in volume, or around $250,000 in monthly revenue, said Vishal Singh, an assistant professor of marketing at Tepper and lead author of the study. In an interview with SN, Singh acknowledged that while such numbers can cripple a supermarket, understanding precisely how that revenue escapes is the first step to winning it back.

"If you look at the revenues lost, it's just a few thousand people out of a base of 20,000 customers who account for the biggest loss," Singh said. "With shopper-card data, you can pinpoint who the particular customers are who are causing this and learn their preferences."

Singh suggested that supermarkets target the departing customers with offers on the products they commonly buy. His research showed that while such customers shopped less frequently after a supercenter opened, their spend and their shopping basket tended to remain similar when they did visit the supermarket.

"The main thing [a supermarket] needs to do is to get the customer back into the store, because they behaved almost the same once they came in. Target them with specific offers and force them to walk into the aisles," he explained. "The basket size hadn't changed much."

According to Singh, the study began in November of 1999 at the request of an unnamed retailer to help it devise a strategy against supercenters it could use in other locations as well. He said the store did not have a specific game plan in place when Wal-Mart arrived. The supermarket understood some customers would be lost to the new competitor, but it did not know which customers, nor the products and price offerings best suited to keep them.

"They played around with a bunch of different products, mainly looking at pricing and promotion. They didn't have a clear strategy about what products should be promoted and at what price," he said. The supermarket also tried emphasizing produce and other fresh offerings in anticipation of the opening, he added.

After analyzing the purchasing behavior of shoppers, the study determined that customers likely to leave a supermarket for a supercenter are typically large-basket shoppers who have a pet at home and an infant in the family. They tend to shop on weekends and frequently buy store brands, Singh said. Conversely, customers who tend to buy produce, seafood and prepared foods are unlikely to change their shopping patterns when a Wal-Mart arrives, he said.

According to Singh, retail chains that are able to dig deeply into their loyalty-card data may discover they already possess the information they need to be better competitors. Many, however, do not tap this resource.

"Supermarkets initially felt these cards created loyalty, but clearly, they didn't," Singh said. "The only thing they are giving is a wealth of information, but the problem is, retailers aren't utilizing it. Most will just track an aggregate measure of what you spend and award a free turkey. But there is so much more they can do with it."

For example, researchers geo-coded the mailing addresses of cardholders to determine what, if any, affect location would play in determining the likelihood of customer shifts. But despite some evidence showing that customers who lived closer to the new Wal-Mart than to the supermarket reduced their number of supermarket visits, neither location nor block demographic data applied to those locations could by themselves explain customer shifts, Singh said.

The study will appear in a forthcoming edition of Marketing Science. It was co-authored by Karsten T. Hansen and Robert C. Blatt-berg of the Kellogg School of Management at Northwestern University.