Are your customers spoilt for choice
Why people shop where they do and the potentially adverse impact of carrying too many brands. First published in New Zealand Retail magazine, March 2010. Author John Varcoe
I own a Briard – it’s a large shaggy breed of sheep dog originally from France. She’s an awesome part of the family, loved by us all. But she can be a little bit odd, if truth be told. Whenever someone comes home she rushes about the house trying to find a used sock to bring to the door as a greeting gift. Should she happen to find more than one sock, she has a dilemma – should she bring just one, or perhaps two or three, or the whole assortment from the laundry basket? Almost inevitably that means a large mouthful and a trail of odd socks falling to the floor in her rush to return to the front door. Weird, but wonderful all the same.
Sasha finds making those choices a daily challenge – is it best to run the length of the house to the laundry or stay close and live with the (slightly) more limited choice to be found strewn over the nearest teenager’s bedroom floor?
It’s strange to consider that consumers, just like my Briard, can also find choice a bit of a dilemma. In fact, it’s often at the heart of why they shop where they do – and how much they decide to buy. So, unlike my family’s sock collection perhaps, it’s certainly a matter worthy of serious investigation.
Conventional wisdom would have us believe shoppers prefer larger stores and larger assortments of products, and stores in relatively close proximity to home. It seems logical that they’d gravitate to those larger stores and product assortments. The trouble is, recent academic research failed to demonstrate any positive relationship between assortment size and category sales in grocery stores. Research however has demonstrated that, unlike lower prices and more convenient locations, consumers do not always prefer larger assortments of products.
By now I’ve probably got some of you just a little worried – you’re possibly thinking about the retail site selections, and competitor analysis modelling, you’ve put in front of the board and the company’s bankers over the years based on the assumption that the retail gravitation theory’s a valid planning tool. You might now have cause to revisit some of those recommendations just to be sure.
Reductions in operating costs and out-of-stocks could make SKU reduction an effective and profitable strategy
Research by authors Briesch, Chintagunta and Fox published in the Journal of Marketing Research (April 2009) builds on the studies by Bell, Ho and Tang (on the effect of retail price formats on store patronage) by taking into account product assortment and the effect it has on consumer decision making (other variables considered in their study were price, feature advertising, and travel distance).
Briesch, Chintagunta and Fox were able to observe:
- The number of brands offered by stores had a positive effect on store choice for most households studied.
- The number of SKUs per brand, sizes per brand and the proportion of SKUs that are unique to the store (ie house brands) have a negative effect on store choice for most of the households studied.
- Convenience (ie travel distance) had a greater effect on store choice than price and product assortment. The effect of price in particular is much smaller than that of convenience.
- A more heterogeneous response by consumers to assortment than to either price or the convenience of a store’s location
It was also interesting they found if stores carried more brands that were household favourites, there was a greater likelihood the average household would choose that store. No great surprise there. Yet at the same time they were able to demonstrate that retailers offering fewer SKUs/sizes/brands and proportionately fewer house brands also increased the probability the average household would choose that particular store. Those findings are not a contradiction as it happens. Previous research, for example, demonstrated that consumers want SKUs in grocery stores only if they add meaningful variety, and Briesch et al’s work would seem to support those earlier studies in this regard.
So, what does all this mean for retailers? The obvious points are that category sales are unresponsive to assortment, and that SKU reduction is likely to meet with a favourable response by consumers. As the authors note with caution, “If retail assortments can be reduced without eliminating brands, particularly consumers’ favourite brands, the associated reductions in operating costs and out-of-stocks could make SKU reduction an effective and profitable strategy.”
Briesch, Chintagunta and Fox are cautious in their conclusions because they observed a significant minority of households seemed to prefer stores that offered more SKUs, more sizes/brands and more unique SKUs, but fewer different brands. As Briesch and co comment, “It seems that the less importance a household assigns to assortment, the more it values convenience, and vice versa.”
This suggests no one assortment works best, but rather each store should build the assortment that best suits the preferences of their target customers. It’s clear that, at that point, assortment management becomes a useful competitive weapon for retailers.
And for what it’s worth, this one consumer’s looking for the store with the product assortment that includes a wide selection of single, unchewed, size 9 men’s socks.