Högskolan i Skövde

This study creates a framework for evaluating the sales impact of adding an online channel to an existing network of physical stores. Using a unique database consisting of pooled customer data from a Swedish retailer's online and offline stores, it investigates the purchase behavior of customers before and after the introduction of an online channel. The data overcome a crucial obstacle present in previous studies in that they permit matching of individual-level customer data for both online and offline behavior. The results show significant and substantial effects of online channel introduction on customer acquisition as well as on cannibalization of physical stores.

Ever since introduced and rolled out on the market during the 1950's and 1960's the supermarket format of grocery retail stores has played an important role in the grocery retail sector in Sweden, as well as in other countries. Although the sector in Sweden has evolved into a sector harbouring various store formats, the supermarket remains the major one - about half of the total volume of sales currently goes through supermarkets. Issues referring to the economic performance of supermarkets, and its antecedents, are thus of interest not only to retailers, but also to consumers as well as to society, overall.

This study contributes to previous research by explicitly addressing bottom-line performance of supermarkets, and by bridging different fields of research. With the structure-conduct-performance (SCP) paradigm as theoretical underpinning, a cross-sectional design is developed for the study, comprising the economic performance of 168 supermarkets. By pooling data from various sources a unique database is developed, providing prerequisites for a comprehensive investigation into the effects of scale of operation, local market conditions, and supermarket conduct on various aspects of supermarket performance, all the way to bottom-line profitability performance.

The results show that profitability performance of supermarkets is a consequence of a complex network of relationships between various aspects of economic performance, scale of operation, local market conditions and supermarket conduct. The profit margin, i.e. the span between gross margin and operating costs%, turns out as the major determinant of profitability performance. The profit margin, in turn, is found related to productivity, which in turn is found related to the volume of sales. Scale of operation and local market conditions are found working themselves into profitability performance, via conduct and various aspects of economic performance. However, neither scale nor favorable local market conditions turns out as the determinant of high rather than low profitability performance. Among the most as well as among least profitable, there are small and large supermarkets, facing local markets of favorable as well as unfavorable conditions. Rather, the dividing line between the low vs. highly profitable lies in the interplay between market conditions and conduct. Results from analyses of internal and external characteristics of the least and most profitable show important dissimilarities referring to their interplay with local market conditions. As such, the study provides important implications for retailers, from a strategical, tactical, as well as operational perspective.

Abstract:

Purpose – The purpose of this study is to describe the determinants of profitability in terms of the strategic profitability model (the Du Pont model), depicting the “route” to high profitability in grocery retail stores located in market areas possessing dissimilar competitive conditions. Design/methodology/approach – Different physical characteristics (e.g. store formats) have traditionally been used as control criteria, but it is argued in this paper that management principles in retail chains should be based on different clusters of stores, formed from local competitive conditions. The paper proposes a clustering method based on five indicators of local competition. The research results are derived from local competitive conditions and the performance of 168 supermarkets, located in Sweden, and controlled by one retail chain. Findings – The paper identifies four clusters of local markets labeled monopoly, fleet market, venue, and duopoly, based on local competitive conditions. The findings show that the “route” to profitability significantly differs between the clusters. In monopoly the route to high profitability goes through high-gross margin, while in fleet market the key figures are low cost, large number of shoppers per week, and high productivity. Venue and duopoly both gain from high-average transactions per shopper. Practical implications – Supermarkets under different competitive conditions have different critical success factors and would probably be better managed, supported and evaluated on a different basis, i.e. retail chains need to adjust their approach to their supermarkets depending on local competitive conditions. Originality/value – Based on the findings the paper proposes unique management strategies for different clusters of local markets to further enhance current strength areas.