Economic Evaluation of Category Management of Dairy Cases in Grocery Stores Chanjin Chung Oklahoma State UniversityPresentation at Chon–Buk National University May 22, 2008 ?

학사, Agricultural economics, Konkuk University, Seoul, Korea 석 사, Agricultural economics, Konkuk University, Seoul, Korea 기업 경험, Purchasing Manager Ralston Purina International, Seoul, Korea 박 사, Applied Economics/ Marketing, University of Minnesota Cornell University Oklahoma State University

강의 과목 : Econometrics, Price Analysis, Agricultural Marketing for MS and Ph.D. students 연구 활동 : Commodity advertising and promotion Supply chain management and traceability Economics of biotechnology Industrial organization

1. Dairy Case Management Program (DCMP) and Objectives 2. Literature Review 3. Model Specification 4. Data 5.Evaluation Results 6.Conclusions/ Future Research Presentation Outline

What is Category Management ? Category management has to do with space utilization of dairy cases in retail food stores to maximize sales of fluid milks. Generally, retailers increase sales using 1. Out-of-store tactics 2. In-store tactics Category management focuses on “in-store” tactics Retailers can boost sales by better managing existing shelf-space via store-level shelf space management.

Why Should Space Management Matter ? Changes in space influence their probability of being out-of-stock Changes in space can affect consumer attention; altering the visibility of a product through changes in location/ number of facings => probability of purchase Any theoretical or empirical justifications?

Consumer attention in the store is malleable. Majority of consumer decision making occurs in store. Only 1/3 of purchases are specifically planned in advance of visiting the store. Studies in marketing literature suggest…… Consumers show low level of involvement with in-store decisions Total amount of dollars spent on any store visit is quite discretionary and elastic in quantity. Returns to increasing consumer attention may be high!

Dairy Case Management Program (DCMP) ADADC grocery retailers in the NYS milk marketing area Help design “optimal” space allocation – “Apollo” program produces planogram as an output - Increase/decrease in facings - Change in shelf height - Change in product positioning - Delete slow-moving items Weekly audit: planogram, cleanliness, temperature, out of stock, price, ……………

Objectives 1. Develop an empirical framework that can be used to evaluate shelf space management 2. Examine the effect of product rearrangement vertically/horizontally 3. Evaluate Dairy Case Management Programs in a NYS market

1.Experiment method: compare baseline period (store) vs. experiment period (store) American Dairy Association, Cox, Krueckenberg………. Difficult to control temporal differences and differences in characteristics of stores How to Evaluate Shelf-Space Management? - Literature Review

How to Evaluate Shelf-Space Management? - Literature Review 2.Econometric analysis: generate location and space variables for each SKU from the planograms before and during the test period Control marketing variables such as package size, price, store type, promotion, etc.

Supermarket: Branded integrated product by fat content Creation of Beverage section Size trade up

Convenience/Drug Store: Increase space from other categories Integrate by fat content

Model Specification Location: From each planogram, the location of each SKU will be measured by the coordinates of the center of its facings. Quadratic functional form – the optimal position can be in the middle or both edges of shelf depending upon estimates of  ’s

Space: the amount of space allocated to each item by the actual cross-sectional area occupied by the product. Package dimension x no. of facings = total space For example, 3 inches x 8 inches x 4 facings = 96 square inches

Elasticity of location Elasticity of space:  6

Data Collected from Poughkeepsie, NY, May – August SKUs from 8 grocery chains with 26 stores 4 package sizes – 16, 32, 64, and 128 ounce pre- and post-planograms observations: convenience stores – 120 supermarkets data sets: convenience, supermarkets, and all stores

Estimation Heteroscedasticity test: LM => MLE RESET: linear vs. log-log

Did DCMP increase sales?

Elasticities of Location, Space, and Score

How would the horizontal or vertical movement of a product affect sales? All Stores

Convenience stores

Supermarkets

Do functional forms matter? – log-log vs. linear Horizontal - All Log-log Linear

Vertical - All Log-log Linear

Log-log Linear Horizontal - Supermarkets

Vertical - Supermarkets Log-log Linear

Evaluation Results All stores: 10.8% increase in milk sales Supermarket stores: 10.1% Convenience stores:12.5% Dreze, Hoch, and Purk: Supermarket stores: 4-5% increase in sales Convenience stores:7-11% Toothbrush, toothpaste, cigarettes, detergents, …….

Conclusions Milk sales in retail grocers can be improved by better managing dairy cases. Effects from horizontal movement was relatively small while vertical movement showed consistently that an eye-level location was most desirable. DCMP increased 10 to 12% increase in milk sales in the Poughkeepsie market.

Directions for Further Research Further research with bigger data sets with smaller data interval (e.g., weekly) - better price data Effects of vertical/ horizontal product movement: alternative functional forms and bigger data sets