ANALYZING THE IMPACT OF SUPERMARKET PROMOTIONS: A CASE STUDY USING TESCO

CLUBCARD DATA IN THE UK

Melanie Felgate and Andrew Fearne

Kent Business School, University of Kent, United Kingdom

ABSTRACT

The paper demonstrates the benefits of the analysis of loyalty card data for identifying promotional impacts and ensuring that
retailers and their suppliers choose promotional strategies that result in overall category growth rather than cannibalisation.

INTRODUCTION

The use of promotions in retailing has increased rapidly in recent times (Nielsen 2009a and 2009b), yet all too often
promotions are implemented without an understanding of their impacts beyond immediate (and often temporary) sales uplifts.
Promotions can attract trialists and boost purchase frequency but if used indiscriminately they can damage category growth
and inadvertently change the profile of consumers with serious implications for market strategies in the long term (Moreau et
al 2001).

Previous research has focused on the potential effects of promotions, including brand switching, category expansion and
purchase acceleration (e.g. Foubert and Gijsbrechts 2007; Manning and Sprott 2007; Putsis and Dhar 2001). However, the
vast majority of these studies have relied upon small scale scanner datasets and small-scale experiments which cannot be
considered representative of supermarket shoppers as a whole. The lack of applied research using robust large-scale panel
datasets has been highlighted by Grewal and Levy (2009). This paper seeks to address this issue, demonstrating how
supermarket loyalty card data can be used to evaluate promotional impacts at the category level and on distinct shopper
segments.

The example used in this paper is fresh meat a key destination category for most supermarket chains, with a particular
emphasis on fresh beef, which in the UK accounts for 56% of fresh meat sales. However, the model used could be applied to
any product category in order to help retailers and food manufacturers make better (more informed) decisions with regard to
promotional planning. In particular, by identifying how different types of shoppers respond differently to different types of
promotions, retailers and manufacturers will also be able to target their promotional activity more effectively.

The Use of Promotions and their Impact on Retail Performance

The use of sales promotions has increased significantly over the last decade, particularly in grocery retailing where
competition between retailers has intensified. Nielsen Wire (2009a) reported that in May 2009 a record 32 percent of all
grocery sales in the UK were made up of products on promotion. In the US the figure is even higher, with a reported 42.8
percent of grocery sales made on promotion in September 2009, up from 40.8 percent in 2008 (Nielsen Wire 2009b).

This has resulted in both UK supermarkets and their (branded) suppliers becoming increasingly dependent on promotional
activity to drive sales growth. It is our contention that much (if not most) of this activity has occurred with limited analysis
(and thus understanding) of the impact of promotional activity beyond the uplift in sales of the promoted products. Over the
last few decades substantial inroads have been made in empirical research into the effects of retail promotions and what
influences their effectiveness. For a promotion to be profitable for a retailer it must increase overall category sales, not just
switch sales between brands.

Reviewing the extant literature revealed that factors which can influence how effective promotions are, including:
x The type of promotional mechanic used (e.g. Manning and Sprott 2007)
x The length of promotions (e.g. Blattberg and Wisniewski 1987)
x The frequency of promotions (e.g. Mayhew and Winer 1992)
x Product specific characteristics such as perishabilility and bulkiness (e.g. Bell et al 1999; Wansink and Deshpand
1994)

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 x Characteristics related specifically to the shopper, including household size, age and income (e.g. Raju 1992; Inman
and Winer 1998)

HYPOTHESES

Our review of the literature review confirmed that panel data of this type or on this scale has not been used in previous
empirical studies on the impact of promotions. It also informed the generation of the following hypotheses:

H1: Positive promotional impacts at the product level do not systematically result in category growth.
H2: Promotional impacts are sensitive to the specific mechanic used
H3: Promotional impacts are sensitive to specific product characteristics
H4: Promotional impacts are sensitive to the demographic characteristics of specific shopper segments

METHODOLOGY

Multiple regression was used to generate estimates of the promotional impacts on promoted products as well as switching and
substitution effects between products within the fresh pre-packed meat category. Regression analysis is well suited to the
analysis of large samples of data and for measuring the effects efficiently across different product sub-groups, identifying
switching and substitution effects between products and differences across segments of shoppers. The method enables several
independent variables to be modelled at the same time, taking into account interactions, and is a logical choice given the
available dataset

The model was specified as follows:

SALESit 0 1SPCit1 2MPCit2 3LPCit3+ 08/7,it4+ eit

In the model, SALESit represents the dependant variable sales value per store for a given product sub-group, i, in a given time
period, t 7KH SDUDPHWHUV RI WKH PRGHO DUH 0, which represents a fixed unknown parameter, and a series of 0-1 dummy
variables representing the different types of price promotion for product sub-group i in the time period t. Single unit price
reductions were by far the most commonly used form of promotion in the fresh meat category and these were split into three
different levels of price reduction. Small price reductions of less than fifteen per cent off (SPC), medium price reductions o f
between fifteen and thirty per cent off (MPC), and large price reductions (LPC) of more than thirty per cent off the original
price. The final independent variable represented all types of multi-buy promotions (MULTI). The error term, e, incorporates
all the immeasurable factors which may also be influencing sales aside from promotions. The beta coefficients are reported in
the results to show which promotions have the largest effects on which products, and amongst which consumers, segmented
by life-stage.

DATA

For this study weekly supermarket purchase data was used from all Tesco stores across the UK, collected via the Clubcard
loyalty scheme, which covers approximately 80 percent of total Tesco sales. At the time of analysis, 14million households in
the UK owned a Clubcard loyalty card, with a 10% sample (1.4million shoppers) being captured within the database. The
dataset combines the benefits of both store-level scanner data and panel data, and is collected on a much larger scale than
those datasets previously used for promotion research. The power of using retailer loyalty card data is the ability to generate
purchasing data at a segmented level on a large scale. For the purposes of this research the database was used to create a
cross-sectional panel data set, with sales data sorted by shopper life-stage and TV advertising region.

The dataset comprised weekly purchases of over 100 fresh beef products from in excess of 2000 stores, segmented by
shopper life-stage (young adults, young families, older families, older adults pensioners) and fourteen regions across the UK
over a period of 86 weeks, 29th May 2006 to 21st January 2008.

In the UK, the majority of fresh meat sold through supermarkets is private label. While there is no branding, as such, products
are positioned differently with a range of price tiers, from value products through to premium and organic. These different
tiers of products can be considered in essence to be separatHEUDQGVDQGWKHPRGHOHQDEOHV us to identify switching effects
betZHHQ WKHVH GLIIHUHQW EUDQGV :LWKLQ WKH EHHI FDWHJRU\ WKHUH ZHUH Iive WLHUs VWDQGDUG ODEHO HJ 7HVFR SULYDWH Oabel

472
brand), premium (e.g. Tesco Finest brand), organic, value (economy) and healthy label (e.g. lean). As well as different tiers
there are also different cuts such as roasting joints, ground beef, and steaks.

RESULTS

The results of the model will now be presented, testing each hypothesis in turn. The tables report only those results which are
significant at least at the 5 percent significance level.

Hypothesis 1: Positive promotional impacts at the product level do not systematically result in category growth
Table 1 reports the results of the regression analysis at the total (fresh beef) category level, showing the impact promotions
had on the value of the beef category overall. Promotions account for just 14% of the variance in sales of beef at the category
level, which tells us that promotions are just one of several factors likely to be influencing sales. At the total category level
the impact of promotions overall was found to be insignificant, however when divided into specific promotional mechanics, it
can be seen that multi-buys added value to the fresh beef category while medium price cuts de-valued the fresh beef category.
This result is important as it shows that not all promotions add value to the retailer, and indicates that it would be highly
beneficial for retailers to make informed decisions when deciding promotional plans. However, this result does not
necessarily mean multi-buys are the best promotion to use for all fresh beef products.

Hypothesis 2: Promotional impacts are sensitive to the specific mechanic used

Table 1 also reports the coefficients from the regression analysis, showing the overall effect on sales at the cut level as a
result of the different promotional mechanics. Promotions have the biggest influence on sales within the fry/grilling beef
category, since the R-Squared value tells us 38 percent of the variance in sales is attributable to promotions. Within the
roasting category, large price cuts were found to have the greatest significant positive impact on sales value, indicating that
sales value (per store) will increase by 120 during the promotion. Within the ground beef category multi-buys were the only
promotion to have a significant impact overall, while medium price cuts were the only promotion to have a significant impact
on fry/grilling beef sales. Small price cuts did not have a significant impact on sales across any of the beef cuts.

Hypothesis 3: Promotional impacts are sensitive to specific product characteristics

Table 2 reports the regression results for the ground beef sub-groups with respect to different price promotions, as an example
WRVKRZKRZSURPRWLRQDOLPSDFWFDQYDU\EHWZHHQGLIIHUHQWWLHUVRUEUDQGVRIWKHVDPHSURGXFW. Within the ground beef
sub-group promotions have the biggest impact in the healthy subgroup, where promotions account for 54 percent of the
variance in sales. Multi-buy promotions on healthy ground beef have a significant positive effect on sales of healthy ground
beef, but consumers will switch to organic when on promotion. Within the standard subgroup, multi-buy offers have a large
positive impact on sales, but consumers will switch from standard to premium when premium ground beef is on offer. Sales
of organic ground beef are negatively affected by promotions on standard and premium products. Harder to explain is the
positive impact on premium ground beef of multi-buy promotions on healthy and standard ground beef. However it may be
that consumers, who only want one unit of the product, switch to premium because they do not want to partake in the multi-
buy promotions on healthy or standard ground beef that they otherwise would buy. This would therefore suggest that multi-
buy offers have a negative impact on some shoppers, who will actively switch to a substitute product as a result. Similar
affects are observed elsewhere in the sub-group, for example standard multi-buy promotions apparently increase sales of
premium ground beef.

Hypothesis 4: Promotional impacts are sensitive to the demographic characteristics of specific shopper
segments
Table 3 reports the results of the regression analysis, again just for ground beef as an example, by life-stage segment with
respect to the various promotions. Standard multi-buy promotions had a large and positive effect on sales of standard ground
beef within all segments except Pensioners. The segment for which sales value increased the most in response to the standard
ground beef multi-buy promotion was young families. Similarly the young families were the segment for which sales of
standard ground beef fell the furthest in response to the price promotions on premium ground beef. Sales value of standard
ground beef amongst both older adults and pensioners actually increased in response to multi-buy promotions on healthy
ground beef. This indicates that shoppers within these segments were put off by the multi-buy offer on healthy ground beef,
which perhaps they normally purchase, and instead switched to buying standard ground beef. Older adults and pensio ners
perhaps do not want to purchase multiple packs of ground beef since they do not have families to feed, so switch their spend
to a product not on offer.

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 CONCLUSIONS

This paper contributes to our understanding of promotions in two ways. First, it highlights the heterogeneity of promotional
impacts and the need to evaluate promotional effectiveness beyond the level of short term sales uplifts of promoted products.
Second, it illustrates the value of supermarket loyalty card data in permitting the analysis of promotional impacts in far
greater detail than is possible with small and more highly aggregated purchasing datasets. Whilst the results presented here
cannot be generalised, as they relate to a specific category (fresh meat) and a specific retailer (Tesco), the principles are
transferable, the model is generic and loyalty card data is becoming increasingly available as more supermarkets turn to
loyalty cards as a more effective way of targeting shoppers with products and promotions that are more relevant to the needs
and wants of distinct shopper segments.

As supermarkets come under increasing scrutiny over the sustainability of their strategies, tactics and operations, the role of
promotions is likely to be increasingly questioned who do they really benefit, how, for how long and at what cost? Answers
WRWKHVH TXHVWLRQV DUH HVVHQWLDO LI VXSHUPDUNHWV DUH WR EUHDN RXW IURP WKH UDFH WRWKH ERWWRP WKDWKDV SURPSWHG DQG EHHQ
prompted by the indiscriminate use of promotions in many (if not most) categories. This paper presents a simple
methodological approach that exploits the depth of insight provided by the richest source of shopper data a source that is
becoming more wildly available, is universally relevant and which academics should make more use of in their quest for a
more profound understanding of shopper behaviour and the implications thereof for retailing, marketing and the use of
promotions therein.

TABLES

Table 1: Regression results for the fresh beef category with respect to different Promotional Mechanisms

Coefficient (/week)
Promotion
Total Beef Category Roasting Beef Ground Beef Fry/Grilling Beef
Small Price Cut (<15%)
Medium Price Cut (15-30%) -186524.5 89.26**
Large Price Cut (>30%) 120.44**
Multi-buy 229238.9 9.78** 270.65**

R-Sq 0.1437 0.132 0.106 0.380

**p<0.01 *p<0.05

Table 2: Regression Results for the Ground Beef sub-groups with respect to different Price Promotions within the Ground
beef category
Coeficient (/week)
Organic Ground Healthy Ground
Promotion Standard Ground Beef Premium Ground Beef Beef Beef
Premium - Medium Price Cut -335.089* 18.16696* -25.0329*
Healthy - Multi-buy 170.707* 18.83326* 16.26799* 401.6603**
Organic - Multi-buy 28.81646** -105.194**
Standard - Multi-buy 378.365** 16.3145** -17.19021*

R-Sq 0.164 0.26 0.113 0.544

**p<0.01 *p<0.05

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Table 3: Regression Results by Consumer Life-stage for the Standard Ground Beef sub-group
Coeficient (/week)
Young Young
Promotion Older Adults Adults Older Families Families Pensioners
Premium - Medium Price Cut -221.1436** -439.846** -670.0788** -95.0449**
Healthy - Multi-buy 248.365** 122.1197**
Standard - Multi-buy 246.5703** 363.3129** 556.3392** 666.7191**

R-Sq 0.1419 0.1282 0.1263 0.1332 0.1021

* * p< .01 * p< .05

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