European Retail Research: 2010 I Volume 24 Issue I

Peter Schnedlitz, Dirk Morschett, Thomas Rudolph, Hanna Schramm-Klein, Bernhard Swoboda (Eds.) European Retail Research...

Author: Peter Schnedlitz | Dirk Morschett | Thomas Rudolph | Hanna Schramm-Klein | Bernhard Swoboda

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Peter Schnedlitz, Dirk Morschett, Thomas Rudolph, Hanna Schramm-Klein, Bernhard Swoboda (Eds.) European Retail Research

GABLER RESEARCH Editors Dirk Morschett, University of Fribourg, Switzerland, [email protected] Thomas Rudolph, University of St. Gallen, Switzerland, [email protected] Peter Schnedlitz, Vienna University of Economics and Business, Austria, [email protected] Hanna Schramm-Klein, Siegen University, Germany, [email protected] Bernhard Swoboda, University of Trier, Germany, [email protected] EDITORIAL ADVISORY BOARD In the editorial advisory board, a number of distinguished experts in retail research from different countries support the editors: – Steve Burt, University of Stirling, UK – Michael Cant, University of South Africa, South Africa – Gérard Cliquet, University of Rennes I, France – Enrico Colla, Negocia, France – Ulf Elg, Lund University, Sweden – Martin Fassnacht, WHU - Otto Beisheim School of Management, Germany – Marc Filser, University of Dijon, France – Thomas Foscht, University of Graz, Austria – Juan Carlos Gázquez Abad, University of Almeria, Spain – Arieh Goldman, Hebrew University, Israel (†) – David Grant, University of Hull, UK – Andrea Gröppel-Klein, Saarland University, Germany – Herbert Kotzab, Copenhagen Business School, Denmark – Michael Levy, Babson College, USA – Cesar M. Maloles III, California State University, USA – Peter J. McGoldrick, Manchester Business School, Manchester University, UK – Richard Michon, Ryerson University, Canada – Dirk Möhlenbruch, University Halle-Wittenberg, Germany – Heli Paavola, University of Tampere, Finland – Luca Pellegrini, IULM University Milan, Italy – Barry Quinn, University of Ulster, Northern Ireland – Will Reijnders, Tilburg University, The Netherlands – Thomas Reutterer, Vienna University of Economics and Business, Austria – Jonathan Reynolds, Oxford, UK – Sharyn Rundle-Thiele, University of Southern Queensland, Australia – Brenda Sternquist, Michigan State University, USA – Gilbert Swinnen, Universiteit Hasselt, Belgium – Ikuo Takahashi, Keio University, Japan – Waldemar Toporowski, University of Goettingen, Germany – Volker Trommsdorff, Technical University Berlin, Germany – Gianfranco Walsh, Koblenz-Landau University, Germany – Barton Weitz, University of Florida, USA – Joachim Zentes, Saarland University, Germany

Peter Schnedlitz, Dirk Morschett, Thomas Rudolph, Hanna Schramm-Klein, Bernhard Swoboda (Eds.)

European Retail Research 2010 | Volume 24 Issue I

RESEARCH

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

”Jahrbücher zur Handelsforschung“ were first published at: Physica-Verlag (1986-1988) Gabler Verlag (1989-1999/2000) BBE-Verlag (2000/01-2004) Kohlhammer Verlag (2005-2007) The 24th Volume Issue I is sponsored by

1st Edition 2010 All rights reserved © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2010 Editorial Office: Ute Wrasman | Sabine Schöller Gabler Verlag is a brand of Springer Fachmedien. Springer Fachmedien is part of Springer Science+Business Media.. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Umschlaggestaltung: KünkelLopka Medienentwicklung, Heidelberg Printed on acid-free paper Printed in Germany ISBN 978-3-8349-2254-0

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Preface of the Editors EUROPEAN RETAIL RESEARCH is a new bi-annual that is in the tradition of the reputable and distinguished book series „Handelsforschung“ (Retail Research) which has been published by Prof. Dr. Volker Trommsdorff in Germany for more than two decades. With Volume 22 appearing in 2008, Prof. Trommsdorff handed over this publication to a team currently consisting of retail researchers from Austria, Germany and Switzerland. The aim of the publication is to publish interesting manuscripts of high quality with a focus on retail researchers and lecturers, retail students and retail executives. As it has always been, retail executives are part of the target group and the knowledge transfer between retail research and retail management remains a part of the publication’s concept. Following the international development in the field of retail research and publication, the new team has decided to introduce some changes and extensions to the concept: - Language - articles will appear in English - Content - manuscripts will be double-blind reviewed and the book will invite manuscripts from a wider regional context but with a focus on Europe - Institutional - a permanent team of editors will be supported by an Editorial Advisory Board Frequency - EUROPEAN RETAIL RESEARCH will be published in two parts per year, Issue I in spring and Issue II in fall. The review process will support the authors in enhancing the quality of their work and will offer the authors a reviewed book as a publication outlet. Part of the concept is an only short delay between manuscript submission and final publication, so the book is intended to become a quick publication platform. Therefore the deadlines are always fixed. Issue I (publication in April): submission deadline: End of August, notification of acceptance: End of October, re-submission of revised manuscript: End of January. Issue II (publication in October): submission deadline: End of February, notification of acceptance: End of April, re-submission of revised manuscript: End of June. An electronic database with all published articles will be prepared and will be available with an adequate delay after the printed edition. EUROPEAN RETAIL RESEARCH welcomes manuscripts on original theoretical or conceptual contributions as well as empirical research – based either on large-scale empirical data or on the casestudy method. Following the state of the art in retail research, articles on any major issues that concern the general field of retailing and distribution are welcome, e.g. - different institutions in the value chain, e.g. customers, retailers, wholesalers, traders, service companies such as logistics service providers, but also manufacturers’ distribution activities, - different value chain processes, esp. marketing-orientated processes (e.g. innovation, customer relationship management, category management), supply chain processes (e.g. purchasing, logistics), organisational processes, informational or financial management processes,

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Preface of the Editors

- different aspects of retail management and retail marketing, e.g. retail corporate and competitive strategies, incl. internationalisation, retail formats, e-commerce, customer behaviour, branding and store image, retail location, assortment, pricing, service, communication, instore marketing, human resource management, - different aspects of distribution systems, e.g. sales management, key account management, vertical integration, alliances and networks, channel power, conflicts and multi channel strategies. However, EUROPEAN RETAIL RESEARCH is also interested in manuscripts that focus on wholesaling, distribution concepts, specific strategies or country markets and we accept that non-English literature is used to. Basically, we are considering different types of papers. Articles can be based on large-scale empirical data, on the case-study method or on conceptual issues: - Research articles should provide a relevant and significant contribution to theory and practice; they are theoretically well grounded and methodologically on a high level. - Manuscripts submitted as more practice- or conceptual-based articles show new questions, issues, solutions and contributions from practice or conceptual issues. These papers are selected based on relevance and continuing importance to the future retail research community as well as on originality. Manuscripts are reviewed with the understanding that they are substantially new, have not been previously published in English and in whole, have not been previously accepted for publication, are not under consideration by any other publisher, and will not be submitted elsewhere until a decision is reached regarding their publication in EUROPEAN RETAIL RESEARCH. The only exceptions are papers in conference proceedings that we treat as work-in-progress. Furthermore, the editors invite articles from specific authors, which address the retailing situation in a specific European country. Those articles will also be double blind reviewed. Contributions should be submitted in English language in Microsoft Word format by e-mail to the current EUROPEAN RETAIL RESEARCH managing editor or to [email protected]. Questions or comments regarding this publication are very welcome. They may be sent to one of the editors or to the above mentioned e-mail-address. Full information for prospective contributors is available at: http://www.european-retailresearch.org. For ordering an issue please contact the German publisher “Gabler Research” (www.gabler.de). We are extremely grateful for editorial assistance provided by Eva Lienbacher, Robert Zniva and Ruth Angerer. Fribourg, St. Gallen, Siegen, Trier and Vienna, Summer 2010 Dirk Morschett; Thomas Rudolph; Hanna Schramm-Klein; Bernhard Swoboda Peter Schnedlitz (managing editor for Volume 24 Issue I)

Contents Interactive Web 2.0 Applications in the Multi-Channel Marketing for Retailers.................. Dirk Möhlenbruch, David Elias Blunck and Falk Ritschel

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How to Maintain a Process Perspective on Retail Internationalization: The IKEA Case ..... 27 Anna Jonsson Trade Credit Periods in Retail Commerce for Products of Mass Consumption: An Application to Spanish Legislation.................................................................................. Javier Oubiña, Jaime Romero and María Jesús Yagüe

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Customer Satisfaction with Loyalty Card Programs in the Austrian Clothing Retail Sector - an Empirical Study of Performance Attributes Using Kano’s Theory ................................ Eva Walter, Claudia Steyrer and Stefan Wiesel

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Clustering Customer Contact Sequences - Results of a Customer Survey in Retailing........ 97 Sascha Steinmann and Günter Silberer The In-Store Antecedents and Consequences of Perceived Shopping Value for Regularly Purchased Products ......................................................................................... 121 Wolfgang Weitzl and Robert Zniva Strategic Differentiation in the Japanese Convenience Store Business. The Example of Lawson’s Format Variation.......................................................................... 149 Ari Huuhka, Nobutoshi Shimizu and Martti Laaksonen

Country Reports Retailing in the United Kingdom - a Synopsis...................................................................... 173 Steve Burt, Leigh Sparks and Christoph Teller The Danish Retail Market: Overview and Highlights ........................................................... 195 Jesper Aastrup, Mogens Bjerre, Niels Kornum and Herbert Kotzab

EUROPEAN RETAIL RESEARCH

Vol. 24, Issue I, 2010, pp. 1-222

Interactive Web 2.0 Applications in the Multi-Channel Marketing for Retailers Dirk Möhlenbruch, David Elias Blunck and Falk Ritschel

Abstract This literature review recapitulates the state of the art knowledge about the characteristics of Web 2.0 instruments and deduces application options for multi-channel marketing by retailers. The different instruments of Web 2.0 and the theoretical foundations of multi-channel marketing are introduced. The authors assign the specific Web 2.0 applications through the instrumental areas of retailing by confronting their particular features and functions with the specific chances, risks, goals and the operational and strategic demands (needs) of multi-channel management. This systematization gives retailers the chance to choose their instrumental assignments strategically, based on their specific goals in multi-channel marketing.

Keywords Retailing, Multi-Channel Marketing, Web 2.0, Cross-Channel

Dirk Möhlenbruch (corresponding author) Department of Business Administration, Martin-Luther-University Halle-Wittenberg, Halle, Germany (Tel: ++49 345 5523391; E-mail: [email protected]). David Elias Blunck Institute for Innovation and Entrepreneurship, Martin-Luther-University Halle-Wittenberg, Halle, Germany. Falk Ritschel Department of Business Administration, Martin-Luther-University Halle-Wittenberg, Halle, Germany.

Received: Revised: Accepted:

September 3, 2009 February 23, 2010 February 25, 2010


Vol. 24, Issue I, 2010, pp. 1-26

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1.

European Retail Research, Vol. 24, Issue I, pp. 1-26

Introduction

The discussion about Multi-Channel-Systems in retail business might not be new - but it has gained momentum against the background of consolidations and mergers, the development of information and communication technologies (ICT) and experiences of disillusionment with pure e-commerce players (Dohmann et al. 2002; Barth et al. 2007). This is additionally evidenced by the increasing number of academic publications and the gain in importance of multi-channel distribution in retail-practice - where many pure e-players have augmented their structure of distribution with alternative channels (Tang/Xing 2001; Schögel et al. 2004). Despite the lively discussions on the part of academic researchers and the growth of experience in practice, there is still an unsatisfactorily low level of knowledge - which might be the reason why companies often fail in the realization or achieve only suboptimal levels of channel integration - even though the domination of multi-channel companies in the B2C e-commerce sector (with the exception of a few companies, e.g. eBay or Amazon) implies a great potential for success (Hudetz/Baal 2005; Emrich 2008). For this reason most authors seem to agree upon the potential as well as the relevance of multi-channel distributors. Hudetz/Baal identify multichannel companies “a good starting base to get even more dominant in the future” (Hudetz/Baal 2005, p. 136). Emrich agrees that multi-channel strategies might become “crucial to survive” (Emrich 2008, p. 1), and Ahlert/Hesse (2003) substantiate with empirical studies the preference that customers have for multi-channel distributors. The ability to establish, integrate and uplink different distribution and communication channels becomes one of the main challenges in retail management. This applies especially against the background of the enormous intensity of competition in this field. Even though there is an undisputedly high impact of the internet on the buying decisions of consumers, many retail companies use this important medium not as a strategically integrated interactive communication and customer-retention tool, but more like an encrypted business card (Silberer 2002). In this context, Web 2.0 and its applications gain importance but are often disputed as controversial. Neither Web 2.0 nor its applications can be limited to a single technology - in fact it should be understood as new perceptions and uses of the internet, with a strong leaning towards interaction (Thackeray/Neiger 2009). While roles on the internet have been separated in the past between the active content producers and passive content consumers, today the use of interactive instruments - like wikis, blogs, virtual communities and RSS feeds for example - allows not only new business models in e-commerce but enables a close and interactive dialog between companies and their relevant stakeholders (Kollmann/Häsel 2007). Despite the already-mentioned range of scientific and practical-oriented specific literature about the topics of Web 2.0 and multi-channel marketing and against the background of the

Möhlenbruch, D.; Blunck, D.E.; Ritschel, F.

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importance of the online-channel, surprisingly little attention has been paid to the specific potentials of Web 2.0 applications in multi-channel marketing in the retail business, and Web 2.0 is still in an experimental stage in practice (Marfleet 2008; Ailawadi et al. 2009). This article therefore describes the necessary theoretical backgrounds of multi-channel marketing and Web 2.0, displays the characteristics of the specific instruments, and confronts their particular features and functions with the explicit chances, risks, goals and operational- as well as strategic demands of multi-channel management to deduce a systemization of application fields of Web 2.0 applications through the different instrumental areas of retailing. This gives retailers the chance to choose their instrumental assignments strategically based on their specific goals in multi-channel marketing.

2.

Theoretical Background of Multi-Channel Retailing

The complexity and heterogeneity of retailing, combined with inconsistent market structures (Zentes/Morschett 2005) are important reasons that a comprehensive characterization of the market environment cannot be carried out in adequate dimensions. We will therefore limit the description to the spurring factors with the highest influence on the general development in retail business (Barth et al. 2007) and on Multi-Channel-Business in particular (Ahlert/Hesse 2003; Bachem 2004). Increasing mobility and the development of ICT (which, among other things, leads to new marketing channels and increasing capacities in the back end) expand the competitive situation in retail business to an additional geographical level (Purper 2007). The intensity of competition increases the need for a consistent orientation toward customer requirements, market demarcation, and boosts accelerated tendencies towards consolidation processes in reseller markets (Zboralski/Gemünden 2004; Weinberg/Purper 2006). Accordingly, the changes in society’s values - which precede the changes in buying behavior - have a higher impact on developments in the retail business. There has been a lively scientific discussion about changes in consumer behavior for quite some time, but the dynamics as well as the dimensions of those developments present themselves in a new quality (Foscht/Swoboda 2007). While the debates about brand- and price-related behavior have been supplemented since the early 1990s by terms like “hybrid customer”, “smart shopper”, “bargain shopper”, “variety seeking” and “convenience orientation” is the phenomenon of “multi-optional consumers” increasingly mentioned in modern marketing literature (Hurth 2002; Foscht/Swoboda 2007). Those types of consumers follow different acting principles at once and change their behaviors and group memberships as well, which results in multi-optional buying behavior and shifts between different distribution channels during a single buying process (Wegener 2008; Ahlert/ Hesse 2003). Their differentiated needs are not limited to the actual transaction but range over the whole buying process including pre- and post-buying phases (Möhlenbruch/Schmieder 2002). These developments have a great impact on multi-channel distribution and lead to the

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necessity of meeting the differentiated needs of consumers during the various phases of a buying process through the implementation of an integrated multi-channel system (Hurth 2002; Kilcourse 2008; Kwon/Lennon 2009). Even though multi-channel marketing is not a new phenomenon (Möhlenbruch/Schmieder 2002; Barth et al. 2007.) the scientific literature does not offer a standardized definition (Schramm-Klein 2003; Hudetz/Baal 2005; Wirtz 2008). In fact there are a multitude of terms and definitions dealing with sales and communications via several channels which appear similar at a first glance, but often differ in meaning (Wirtz 2008). Multi-channel marketing of retailers is defined in this paper as “market oriented management of retailers using a multitude of parallel and integrated information, communication, and distribution channels” (Möhlenbruch/Schmieder 2004, p. 104). This includes the strategic planning and operational application of the whole marketing-mix of retailers with the objective to develop new distribution channels or to strengthen existing ones, respectively. While strategic retail management establishes new potentials for success, operational retail management is geared to tap the full potential of existing chances for success and defines the operational instruments to serve as strategic pillars (Ahlert 2002). The integration of different channels with an otherwise homogeneous system allows retailers to meet the multi-optional behavior of consumers and their differentiated needs during the respective phases of a buying process (Schramm-Klein 2003; Möhlenbruch/Schmieder 2004). There are potentials for integrated multi-channel systems, especially during the initiation phase, for upscale products and distance selling (Baal/Hudetz 2007). Additional customer acquisition, retention and win-back potentials open up through the integration of distance channels, the expansion of market areas and the chance to meet the channel-specific preferences of customers (Schröder 2005). Furthermore, empirical studies prove a higher loyalty of consumers to integrated Multi-Channel-Systems (compared to mono- or multiple-channel retailers) and higher turnover per customer and therefore invalidating the fear of channel cannibalization (Ahlert/Hesse 2003; Baal/Hudetz 2004; Wegener 2008). According to these findings, multichannel retailing allows for increasing market share at the expense of competitors’ (SchrammKlein 2003; Schröder 2005). The combination of different channels can also build trust and enlarge the perceived service competence. Additionally, the integration of innovative channels can help to vitalize the brand image and demarcate markets (Wegener 2008). Last, but not least, the potential to decrease costs in communication and market research through direct- and individual customer approaches and an active navigation of interaction to the most efficient channel should be mentioned (Schröder 2005). On the other hand, channel conflicts and a lack of channel flexibility are potential risks of multi-channel strategies (Kilcourse 2008). If synergetic effects and goodwill transfer are seen as important goals of an integrative branding of marketing channels it is obvious that negative experiences can also have unwanted effects on the whole


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system (Hurth 2002). Imperfect channel integration can complicate communication with customers and can lead to confusion in cases of incoherent goods and services, image positions, levels of prices, and service quality in the respective channels (Möhlenbruch/Schmieder 2002; Ahlert/Hesse 2003; Kreutzer 2008). Integrative planning, monitoring and controlling of different channels and their differentiated sale- and handling processes, combined with the necessary rearrangement of cross-channel customer contacts, implies a high coordination effort and often leads to the limiting of integration efforts to standardized purchase transactions (Ahlert/Hesse 2003; Wegener 2008). Realizing the already mentioned potentials for success, however, requires increased effectiveness of market cultivation as well as using efficiency- and synergy effects (Bachem 2004). While the first is dependent on a consistent perception of the retail brand in all channels, integrated merchandise planning, control systems and customer relationship management system are basic prerequisites for the second (Hurth 2002; Böing et al. 2003). This requires a corresponding infrastructure, cross-channel coordination of the marketing-mix, and a relocation of channelspecific marketing budgets (Hansen/Madlberger 2007). The knowledge of customer needs and their basic trends gains importance in the specific market environment of retailing (Möhlenbruch et al. 2007; Promondo 2007). Multi-channel retailers have to use all contact points with their customers to gather relevant information concerning buying behavior and have to combine this with a comprehensive and differentiated picture of consumers (Schröder 2005). In chapter 3 we will analyze the specific contributions of Web 2.0 applications to the already mentioned requirements, tasks and goals of multi-channel marketing.

3.

Foundations of Web 2.0

The internet and associated technologies are developing rapidly. Consequently, the portfolio of technical resources for the effective and efficient ascertainment, archiving, processing, and transmission of data, information and knowledge is continuously growing. Accordingly, the electronic realization of business processes through electronic media has obtained more and more economic relevance for an increasing number of vendors in the last years (Lihotzky 2003). Many of the technological changes are summarized under the term “Web 2.0”, which is not yet precisely defined. Most of the attempts to define Web 2.0 go back to a definition of O’Reilly, who understands the term more as an approach than a technology (O’Reilly 2005). Even though there is no precise definition, most publications seem to agree in the characterization of the central idea of Web 2.0: Internet users transform from passive consumers of mostly static content to active, content producing and distributing participants (Kreutzer/Merkle 2008). According to O’Reilly (2005), there are a number of other characteristic requirements for applications belonging to the term Web 2.0:

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- The application is net based; only a web browser is essential. - The content is not static but is going to be dynamically generated. It will change depending on the input of the user. - There are possibilities for users to generate content by themselves. - Role and authorization models enable the differentiation of who is enabled to view which content and who is allowed to edit the information. - Users own their data and are able to edit it by themselves. There are possibilities for personalized content and layout. - Users are able to comment on articles by other people and communicate among each other. - A strong community feeling is going to develop between users. Since economic and technical principles are as important for Web 2.0 applications as socioeconomic, psychological and legal aspects, it’s safe to say that the limitation of the phenomenon Web 2.0 to specific instruments or technologies is not valid. In fact it is rather based on a modified attitude towards electronic media on the whole and the internet in particular (Kollmann/ Häsel 2007; Möhlenbruch et al. 2007). To discuss the specific potentials of Web 2.0 applications for multi-channel marketing for retailers later on, it first seems necessary to take a closer look at the paradigms and underlying motivational structures of internet users. Due to the dynamic changes in electronic media the following explanations can make no claim to be complete. Efficient search-engines, open interfaces and usability of web-based software gain in importance by enabling user self-service and orientation (Alby 2008; Kreutzer/Merkle 2008; Töpfer et al. 2008). This technological development combined with growing user participation enable new possibilities for personalization and individualization and therefore a consequent orientation on the differentiated consumer needs (Schenk 2007). Moreover, internet applications are increasingly based on user-generated content and have to open themselves for participation (O’Reilly 2005; Schenk 2007). At the same time Web 2.0 is changing the proportions between individuality and collectivity, culminating in a virtual collective intelligence which is learning with every new participator (Richard 2008). Additional benefits in terms of knowledge quality improvement are generated through collaborative inspection, systematization and validation of information on the internet (Kollmann/Häsel 2007). Those benefits increase, according to Metcalfe’s Law, with the number of active internet users (network effects) which develop a sense of community over the time (Möhlenbruch et al. 2008). Nevertheless, Web 2.0 applications have to be understood as a part of a continuous development process which is not an expression of defective planning but of inherent adaption flexibility (Kollmann/Häsel 2007). Simplicity and lightweight user interfaces of net-based software applications have relatively low hardware requirements for end-user devices and boost an increasing convergence of the internet, television and mobile telephony (Kollmann/Häsel 2007). Open interfaces and technologies like AJAX enable the combination of separated (knowledge) resources as well as the cross-linking of interactive information and collaboration (O’Reilly 2005; Souders 2007).


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It has to be mentioned that user generated content and the joint development of open source software create specific problems concerning copyrights. On the one hand it is essential to provide open licenses to benefit from the collective cooperation in communities but on the other hand there are growing concerns of users about the (commercial) use of personalized data, content and applications (O’Reilly 2005). But it’s not enough to limit the view on new technological options of participating users, in fact it’s necessary to take a closer look at the motivation of users to participate and provide information and content (Schenk 2007). Self-expression and image cultivation by publishing, for example, one’s own interests, opinions or achievements are the driving factors for providing user generated content (Mühlenbeck/Skibicki 2008). This is closely connected to a general talkativeness of some individual users and their desires for (virtual) contacts. Needs can be satisfied through Web 2.0 in manifold ways (Sassenberg 2008). Furthermore there are a lot of platforms like Second Life or Weblin which allow users a temporarily escape from reality (escapism) and enable them to present themselves in a way they are prevented from doing in real life (Kreutzer/Merkle 2008). Since the number of active participants in Web 2.0 is much lower in proportion to passive content consumers, and the quality of additional benefits and network effects depends on the amount and quality of user-generated content, provider and other business models should try to satisfy the commercial motives of users in order to reward their content supply (Drüner et al. 2007). While searching for relevant information during buying decisions reduces transaction costs, consumer-generated content helps the social orientation and reduces the social risks of buying decisions. Moreover, there is a strong bonding phenomenon inside social communities, even for passive users who often provide each other additional technical assistance for the use of products or services (Hennig-Thurau 2005). The paradigms described above lead to a number of applications often linked to the term Web 2.0 (see Figure 1). Figure 1: Description of Web 2.0 Applications Application

Definition

Authors

Customer Reviews and Virtual Opinion Platforms

Virtual opinion platforms are special forms of virtual communities and offer users features to evaluate revue and/or comment the service-performance or product quality. Customer reviews are able to influence the buying decision process and enable companies to communicate a high level of transparency.

Richter et al. 2007; Baumgarth 2008; Enderle/Wirtz 2008; Töpfer et al. 2008.

Mashups

Mashups are (re-)combinations of different, technically independent internet applications (or their content, respectively) to a new service. The individual services are linked on the basis of open interfaces and generate added value by connecting different bits of content (like store locations or transparent price comparison e.g.).

Alpar et al. 2007; Alby 2008; Emrich 2008; Möhlenbruch et al. 2008; Hudson-Smith et al. 2009.

(Continued at p. 8)

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Figure 1: (Continued) Application

Definition

Authors

Podcasts/ Vodcasts

Podcasts/Vodcasts are digital audio-/video files which can be downloaded to a computer or any other compatible device (e.g. a mobile phone) and consumed independently of time and place. So called “podcatchers” allow users to subscribe to podcasts and download them automatically.

Bienert 2007; Haygood 2007; Klee 2007.

RSS-Feeds

RSS is a file format for the XML-based exchange of information of all kinds and it allows users to subscribe to regularly-updated content automatically. The information is archived and provided to feedreaders which are integrated into almost all modern e-mail software and web browsers. If the information on a website changes, the feed will be updated and a notification (either an abstract or the complete file) will be sent to the feedreader.

Klee 2007; Alby 2008; Bienert 2007; Koller/Alpar 2008.

Social Bookmarking and Tagging

Social bookmarking can be described as the storage, exchange and indication of personal bookmarks with content describing catchwords via Social Bookmarking Services like mister-wong.de, del.icio.us, yigg.de or furl.net.

Bienert 2007; Möhlenbruch et al. 2008; Warr 2008; Panke/Gaiser 2009.

Social Shopping

The term social shopping describes the adoption of the interaction potentials of virtual communities, regarding the product purchased or their combination with online-shops (combined with it being possible to exchange, for example, personal experiences or concrete recommendations). This implies that socialization processes, human expertise and an additional level of cooperation and communication in e-commerce are taking center stage.

Purper 2007; Richter et al. 2007; Mühlenbeck/Skibicki 2008; Schäfers 2008; Töpfer et al. 2008.

Virtual Social Networks

Social networks are definable, (sometimes loosely-) linked nodes of actors/groups of actors (individuals, families, organizations, political parties, etc.) tied together by one or more types of interdependence based on power, rituals, vivid exchange of information, emotional bonds etc. Modern information and communication technologies facilitate the dissolution of spatial determinations so that virtual social networks can emerge in intangible environments such as the Internet.

Baeumle-Courth et al. 2004; Kunz/Mangold 2004; Cyganski/Hass 2008.

Virtual Worlds

Internet based virtual worlds are artificially created, three-dimensional simulations in which users move via animated alter-egos (so called avatars) in real time and within the scope of specially defined physical laws.

Thomas/Stammermann 2007.

Weblogs

A Weblog (short: blog) is a regularly updated chronological listing of articles (similar to a diary) published on the internet.

Reitler 2007.

Wikis

Wikis are content management systems which do not differentiate between read and write access and which allow the editing of content directly and without any special programming-knowledge via the web browser, and to influence the whole structure of the system as well by linking to internal or external content.

Algesheimer/Leitl 2007; Pleil/Zerfaß 2007; Cronin 2009.


4.

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Web 2.0 in Multi-Channel Retailing

Assuming a sustainable influence of Web 2.0 on consumer behavior, suppliers will have to meet those developments (Graßmann 2004). The differentiation between strategic and operational fields of Web 2.0 applications in multi-channel retailing, used to systemize the following statements cannot always be mutually exclusive and exhaustive - a problem of demarcation that Ahlert (2002), using the example of information in retail-management, illustrates that which “do not per se have a strategic or an operational character”.

4.1.

Strategic Potentials

As mentioned before, retailers find themselves in an increasingly dynamic and discontinuous environment, a situation that requires and complicates long-term strategies at the same time. A key responsibility of strategic planning is to secure existing potentials and to develop new ones for success in the already mentioned areas of retail management (Ahlert/Kenning 2007).

4.1.1. Market Research Marketing decisions require an adequate information background, especially in view of actual and prospective buying behavior, its principles and variability (Bänsch 2002). A comprehensive understanding of customer needs and preferences can lead to significant advantages in competition (Zboralski/Gemünden 2004). Accordingly, the collection of information about customers and their behavior via interactive media gains importance for retailers (Möhlenbruch/Schmieder 2004). This applies especially for multi-channel retailers which, in the ideal case, manage to collect information about their customers at every contact point (Schröder 2005; Emrich 2008). Hence Web 2.0 instruments can be used as subjects of research (e.g. the exploration of virtual communities in view of consumer behavior) and as platforms for research (e.g. investigation of market acceptance of innovative products) (Kunz/Mangold 2004). User-generated content, especially, allows deep insights into customer requirements and gives access to information about (potential) consumers (Drüner et al. 2007; Stampfl 2007). Systematic monitoring of blogs, forums, tagging platforms or virtual communities delivers information about company-, productor brand-image, for example, and allows the researcher to detect social trends, changing lifestyle concepts or hints about the general change in values (Drüner et al. 2007; Ammann/Bentele 2008). In addition there are new approaches for the categorization of consumers in the context of customer value analyses created through the monitoring of user-generated content in communities, blogs or forums (Stampfl 2007). The collected data can be used to develop user-, consumptionand preference-profiles or to identify lead users (Drüner et al. 2007). While the transfer of industry driven lead-user concepts to consumer goods marketing is considered to be difficult due to the multitude of potential customers and the wide range of goods and services, the mon-

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itoring of Web 2.0 creates new approaches to lead-user identification in the retail business (Ernst et al. 2004). Once identified, relevant content of specific users has to be analyzed in view of use- and object-knowledge, trend leadership and innovativeness. Similar potentials open up for customer lifetime value analyses. Taking the social position of users in virtual communities and their influence potentials on other members into account can lead to completely deviant customer categorizations (compared to a limitation of the examination on the values of, for example, sales taken place) (Stampfl 2007). Additionally Web 2.0 allows one to contact relevant (groups of) customers directly after their identification because, unlike traditional market research and futurology methods, it connects the information directly to its author (Drüner et al. 2007; Herstatt/Sander 2004). Further dialog can be used to gather additional information regarding innovation processes, for example, or the (de)listing of products and services, however, the utilization of Web 2.0 instruments for market research creates specific difficulties as well. First of all it has to be decided whether to choose a (passive) observation of blogs, communities etc., or an (active) dialog-oriented exploration (Herstatt/Sander 2004). An active approach would be pointless without the previous identification of suitable interaction partners, their approval, and the resources required for individual communication. Similar difficulties result from the complex task of filtering the relevant information from the enormous multitude of data. This is shown by Koller/Alpar (2008) in an analysis of selected blogs, where less than 0.5% of private posts dealt with companies, but those usually contained valuable information. While manual filtering requires a lot of time and resources, automatic scanning methods are not yet able to assure adequate data quality. Once identified, interesting blogs can be monitored relatively resource-friendly via RSS feeds (Koller/Alpar 2008). Problems in data quality are one of the major points of critique in online market research and have to be taken into account in results evaluation (Emrich 2008). It has to be questioned whether or not users of Web 2.0 applications can build representative samples for general analyses of consumer behavior (Kunz/Mangold 2004). This gets even more important when explorations are limited to company-owned or topic-specific applications to ensure the exclusivity of the results or the efficiency of the survey (Ernst et al. 2004). The sheer number of more than 60 million weblogs with more than 1.2 million daily posts in 2007 (Drüner et al. 2007) demonstrates the potentials for information as well as the difficulty in identifying relevant data. The results have to be critically examined in view of representativeness as well. Therefore it does not seem to be advisable to substitute traditional market research methods through the analysis of Web 2.0 applications. Rather, it is suggested to use their specific potential to get insights on trends or to include consumers into innovation processes (Herstatt/Sander 2004; Drüner et al. 2007).

4.1.2. Communication The integration of new media into consistent communication strategies comprehensive to all channels is one of the main challenges of multi-channel marketing (Möhlenbruch/Schmieder


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2004). In this regard, the potentials of Web 2.0 range from the direct one-to-one dialog between companies and their relevant stakeholders as well as internal knowledge transfer, up to the communication between customers amongst each other (Bughin/Manyika 2007; Kreutzer 2008). There are application fields for RSS feeds in communication policy which, for example, allow one to build an innovative, customized push channel as well as for communities, whose members can be provided with additional information (Möhlenbruch et al. 2008). The user-initiated subscription of feeds and thereby indicated preferences can be used to customize the communication with an individual customer across all channels. Blogs and their functions for commenting on posts and linking to other blogs provide a fast and wide platform for communication and can be an adequate basis for viral marketing campaigns (Langner 2007; Emrich 2008). Such an advertising message can be placed in forums, blogs or communities and spreads out without any additional costs to the initiator (Mühlenbeck/Skibicki 2008). Humans in social relationships show, according to the sociological concept of “homophily”, similarities regarding their level of education, social status and their buying preferences, and spread information mainly to interested people in their environment (Mangleburg et al. 2004; Stampfl 2007). User-initiated downloads and RSS subscriptoins of pod- and videocasts reduce waste coverage and allow for the efficient measuring of diffusion rates simply by counting the numbers of accesses and downloads (Mühlenbeck/Skibicki 2008). Because the message is delivered by one’s own circle of acquaintances, viral marketing reduces the defensive demeanor of consumers against classical advertising messages and is able to increase the probability of cognition (Emrich 2008; Mühlenbeck/Skibicki 2008). Although viral marketing is not bound to specific media in principle, Web 2.0 enlarges the possibilities for spreading information with enormous speed and improved efficiency and allows one to influence personal opinions in the buying process (Hein 2007; Schelske 2007). Additionally, the chance increases that topics from the blogosphere or virtual communities are adopted into the classic media, because Web 2.0 applications are more and more included into the research done by the classic media (Töpfer et al. 2008). Nevertheless, sufficient added value for multipliers, additional incentives and an appealing presentation of the content remain substantial conditions for viral marketing (Langner 2007). Besides, a continuous monitoring is necessary to observe the spreading and to influence the discussion by active participation in case of need (Schönefeld 2006) and it has to be mentioned that there are varying channel- and product-specific effects (for example, online purchases are nearly twice as often influenced by viral marketing as offline purchases) of viral marketing (Riegner 2007).

4.1.3. Harmonization and Integration of Marketing Channels The integration of different marketing channels into a consistent system is an important area of responsibility for multi-channel marketing. Extensive knowledge about customers and markets are fundamental for avoiding channel conflicts (Emrich 2008). The specific potentials of different Web 2.0 applications to generate information have been stated already, but blogs and cus-

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tomer diaries, especially, can help to identify critical incidents in view of channel integration and should be mentioned again. Against the background of the intangible elements of the retail business, the reliance of customers towards a retail brand can be considered a key factor in retail-management (Zentes/Morschett 2005). Because positive experiences in one marketing channel have effects on the whole system of channels it can be assumed that the usage of Web 2.0 applications has cross-channel positives. Those positives are especially based on a high credibility level of usergenerated content (Enderle/Wirtz 2008). In this regard, wikis, blogs and reviews, especially, seem to be able to convey authenticity, reliability and transparency (Richter et al. 2007). To meet the consumer’s expectations, particular care must be taken in regard to the safety of userspecific information and to the non-restrictive publication of even negative opinions (Möhlenbruch et al. 2008; Schnieders 2008). At the same time, Web 2.0 applications can be used to support cross-channel marketing campaigns. Virtual worlds, for instance, could support real events or product presentations in an interactive, 3-D environment (Thomas/Stammermann 2007).

4.1.4. Internal Communication and Knowledge Management Web 2.0 applications also show great promise for internal communication in complex organizations facing dynamic environments (Warta 2007). As described before, this characterization applies especially to multi-channel-retailers. Wikis and blogs for example are able to accelerate communication and collaboration processes and can be cost-saving alternatives to commercial knowledge management systems (Algesheimer/Leitl 2007; Drüner et al. 2007). Those instruments are especially able to build location-independent communities of practice, to contribute to organizational learning and to globalize company-specific knowledge in a decentralized structure (Zboralski/Gemünden 2004; Schütt 2007). Internal blogs can be used to announce product decisions and to discuss them with branch managers or suppliers in order to include their field-specific knowledge into decision making. Staff blogs on internal platforms allow employees to document their work, search problem-specific information and contact persons or to identify best-practice alternatives inside the organization (Algesheimer/Leitl 2007). In addition, the amount of internal waste coverage by unspecific email can be reduced through RSS feeds. Wikis could, too, by the construction of a companyspecific knowledge and information platform or they could serve as a continuous basis for exchange and collaboration, training or further education (Oeltjen 2005; Bienert 2007; Warta 2007). Their main advantage is the objectification of subjective knowledge resources through collective validation and improvement of existing information (Müller 2008). Since the necessary software is usually open source, free of charge and easy to use, Web 2.0 instruments are often more cost-effective than commercial applications (Algesheimer/Leitl 2007). Nevertheless, the lower number of potential users of internal wikis limits their growth speed and requires


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active promotion by the executives to secure a successful implementation. The necessary commitment on the part of the management, however, can be limited because this approach towards self organized communication and knowledge management defies direct control, makes expert knowledge available corporation wide and flattens hierarchies (Warta 2007; Müller 2008). To avoid the misuse of sensitive data, specific access rights for different staff levels and rigid user administration have to be assured - which erects barriers and reduces the growth speed of internal wikis even more (Oeltjen 2005).

4.1.5. Acquisition of New Target Groups and Customer Retention Management Against the background of the dynamic market environment of retail business, retail management attaches high importance to the “acquisition of new target groups” and “customer retention management” objectives (Möhlenbruch/Schmieder 2004). The potential contributions of Web 2.0 to meet those objectives are mainly based on the ability to enable interactive communication between retailers and (potential) customers as well as among customers themselves (Drüner et al. 2007; Ammann/Bentele 2008; Kreutzer/Merkle 2008). This can be illustrated with the example of a telecommunication company which was able to raise the speed of the acquisition of new customers up by a factor of five by addressing community members having contact with steady customers (Stampfl 2007). Web 2.0 is especially able to increase the level of awareness of retail brands in young target groups with a high affinity for the internet (Wegener 2008; Thomas/Stammermann 2007). Based on the assumption that perceived interactivity of a website goes along with a more positive brand- and company image and an increasing involvement of users into the communicated content (Gerpott 2004; Lueg et al. 2006), it can be assumed that there are positive effects of Web 2.0 on customer retention management. Besides the use of communities (esp. company-owned communities) which are able to increase the density of communication, design of an interactive brand environment and expanding the customer relationship on an emotional level; pod- and videocasts, RSS feeds or wikis can affect customer retention in a positive way (Wirtz 2001; Kunz/Mangold 2004; Möhlenbruch et al. 2008). While communities enable retailers to provide customers with additional and emotionally charged information during the post-purchase phase (Klee 2007), wikis and their user generated content can be used to replace FAQs and act as a first source consulted by customers in case of problems (Pleil/Zerfaß 2007). Furthermore, the cooperative buying processes in social shopping enhance the tendency for cross- and re-buying, the recommendations of other community members affect trust and customer loyalty, and the emerging social bonds create switching costs (Hsieh et al. 2005; Möhlenbruch et al. 2008; Verhoef et al. 2009). Additionally, there are interesting perspectives to identify constraining factors for successful customer retention management via customer diaries or blogs, respectively. The chronological listing and the detailed description of customer contacts allow for the identification of crucial experiences and to display them as whole chains of events. The systematic comparison of different customer diaries

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can provide an overall picture of the customer experience and become the basis for uncovering drivers of enthusiasm and frustration (Bauer et al. 2008). Those findings can then be transferred into strategic recommendations to optimize customer experiences. This field of application gains importance against the background of the heretofore mentioned problems regarding the integration of different marketing channels into an integrated multi-channel-system and multichannel-behavior. Those positive effects of Web 2.0 instruments for customer retention management and the acquisition of new target groups come along with the risk of negative expressions of opinions and spill-over effects on other customers (Herstatt/Sander 2004). Furthermore, attempts at manipulation of communities can be perceived as annoying by their members (Möhlenbruch et al. 2008). Multi-channel retailers should also try moderate dosages of the interaction potentials of Web 2.0 and to regard it as situational to avoid additional negative attitudes caused by cognitive overload (Gerpott 2004). It is also disputable that retailers will always succeed with building their own virtual communities because their wide product ranges and heterogeneous target groups reduce the chance to reach a critical mass of community members with equal interests. To avoid this, thematic networks could be a solution.

4.2.

Operational Potentials

Multi-channel marketing includes the operational planning, implementation and evaluation of all demand-orientated instruments: those that contain merchandise, price and communication (Barth et al. 2007).

4.2.1. Merchandise The orientation by retailers on customer value gains importance because of the competitive environment and high failure rates of market launches for consumer products (Ernst et al. 2004; Zboralski/Gemünden 2004). There are interesting fields of application for Web 2.0 instruments in view of the differentiation potentials of merchandise accruing from the analysis of user-generated content. On the one hand, Web 2.0 enables retailers to detect wishes, needs and trends (for example, through passive monitoring of communities, blogs, social bookmarking platforms), while on the other hand it allows them to directly integrate customers into product (range) development processes (Schönefeld 2006; Schnieders 2008). A representative survey about the buying behavior of Germans regarding distance selling verifies that consumers want their needs to be taken into account and that they are willing to participate in innovation processes (Promondo 2007). This would secure the consequent orientation towards customer value and could contribute to cost efficiency, reduced development times and accelerated market launches (Bartl et al. 2004; Algesheimer/Leitl 2007). It additionally communicates close-


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ness to customers and can therefore have a positive effect on company image and customer acquisition (Herstatt/Sander 2004). RSS feeds enable a customized information supply about product availability and additional services and the information displayed about preferences can be used to optimize the product line (Möhlenbruch et al. 2008). Accordingly, this can help to optimize goods in stock and generate cross-selling effects. The German multi-channel retailer “Tchibo” follows an interesting approach to customer integration into its internal processes with the “Tchibo-Ideas” community, www.tchibo-ideas.de, a platform where users can post interesting innovations and participate in idea competitions. It is intended to check innovative ideas in view of technical feasibility and to realize them in collaboration with the inventor. Even though Tchibo ideas has engendered no successful product launch yet, the potentials in principle and the willingness to participate are proven by the number of 4,500 registered members. But this approach requires the unconditional clarification of patent and copyright issues and it seems to be necessary to offer added value in monetary form or at least in form of detailed feedback to secure the long lasting participation of users (Zboralski/Gemünden 2004). The level of openness in a community is a tightrope walk. Free access opens a community to a wide range of target groups and enlarges the potential for innovation but this allows access for competitors as well (Ernst et al. 2004). Additionally, the inclusion of customers into innovation processes can encounter internal opposition which can manifest itself in specific defense mechanisms of the organization against outside ideas (Bartl et al. 2004). Furthermore, examples from industry areas hint that there is often not enough innovation potential inside open communities to actually lead to new products (Herstatt/Sander 2004).

4.2.2. Pricing The rising importance of electronic business has already had a high impact on price management (Wirtz 2001). There are not only new options to orientate pricing more exactly according to the individual’s willingness to pay, but new ways to realize differentiated prices for customized goods and services as well (Weiber/Weber 2002). Insufficient knowledge about the willingness to pay made such pricing strategies difficult to implement. Monitoring of blogs, forums and virtual communities can enlarge the basis of information and can simplify such pricing decisions (Möhlenbruch et al. 2008). Customer oriented pricing can affect the perceived price-performance risk and helps (along with price transparency and price consultation) to transfer it to price satisfaction, which strengthens customer loyalty and can result in competitive advantages (Diller 2005). Following this line of argumentation, customer reviews and rating functions can increase the perceived price transparency and lower price-performance risks. This also applies to social shopping, where user-initiated price discussions and collective buying activities opens up interesting application fields in price policy (Möhlenbruch et al. 2008).

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Nevertheless, passive monitoring in view of pricing can quickly become unprofitable because companies and their pricing policies are seldom subjects of private blogs, forums or communities. Because value-added-services increase the perceived quality of buying experiences and decrease price sensitivity, wikis and mashups can have positive effects in price policy, too, and raise the probability of transfering website visitors into loyal customers (Panten 2005). Theoretically, it is also possible to receive information about the willingness to pay via RSS feeds and to inform customers about special offers and prices, but this contains the risk of directly informing competitors about one’s own actions as well. Research also shows that online-consumers are less price sensitive provided there is non-price information available on brand, quality and product features (Ailawadi et al. 2009).

4.2.3. Communication The individual need of customers for guidance and advice depends on the breadth and depth of the product mix and its complexity as well as on the necessity for explanations of the products themselves (Madlberger 2004). This is the determining factor of the necessity for retailers to have a counseling service. Research shows that the absence of social interaction is one of the main reasons why many customers still avoid online shopping (Doolin et al. 2006; van Dolen et al. 2007; Weathers et al. 2007). The quality of electronic counseling depends on the information content and its didactic preparation, and therefore concerns web-design aspects and editorial content creation as well. The ability of some Web 2.0 instruments to let users create content or to embed third-party content proffers interesting fields of application for mashups, wikis, communities and forums to shift retail functions (in this case counseling) over to the customers themselves and therefore decreases costs. At the same time, retailers are able to reduce the perceived high buying risks in online purchasing through the high levels of reliability and authenticity shown by consumers to user-generated content (Laroche et al. 2005; Enderle/Wirtz 2008). It must be mentioned though, that this comes with a loss of control for the retailer, especially regarding statements made on third-party platforms (Hennig-Thurau 2005). Therefore, it seems useful for companies to provide those functions on their own platforms in order to retain reactivity and at least a limited amount of control in view of dissatisfied customers who expect transparency, honesty and a satisfactory problem-solving orientation in cases of criticism (Schnieders 2008). Those heretofore named fields of application for Web 2.0 in sales promotion and advertising policy can be demonstrated with two examples: The German DIY-store “Hornbach” upgraded its website with discussion forums and podcasts and an extensive virtual helpdesk where users could help each other (Michael/Rose 2008). Ikeafans.com is also an example of an independent virtual community where members post decoration suggestions or examples of use, describe their experiences with the furniture manufacturer or discuss the company and its policy in different forums. The presence of user generated content shows that communities enable companies to get direct access to the wishes and needs of their potential cus-


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tomers and even get suggestions for example for visual merchandising or additional fields of application. The “user-generated help” in cases of product-specific problems generates additional value for customers and therefore gains relevance in post-purchase marketing (Dellarocas 2006; Enderle/Wirtz 2008; Schnieders 2008).

5.

Conclusion and Implications

The previous chapters introduced several Web 2.0 instruments and analyzed their fields of application in multi-channel marketing. The prevailing growth rates in the sector of Web 2.0 suggest that this is not just short-term hype, but rather a sustainable and strident evolution of the information society, trending towards increasing levels of participation, information, and integration of internet users and an increasing influence of consumers on goods and services (Riegner 2007; Rölver/Alpar 2008). The version number in the term Web 2.0 already implies that this is just an intermediate step in an ongoing development (Schnieders 2008). Even though some instruments are currently only used by small user groups, it can be assumed that in the course of the proceeding development of the internet and end-user devices there will be an ongoing diffusion into all classes of population and age groups (Klee 2007). Even though this opens up innovative perspectives for marketing, there is hardly any systematic utilization of potentials. This might be the result of the dynamic and complex nature of the topic which contributes to the fact that the innovation potentials of some instruments are widely accepted, but their whole range of application fields is not yet identified. The following Figure 2 (see p. 18) shows the results of this paper and categorizes the range of application fields for Web 2.0 instruments. The potentials of Web 2.0 instruments accrue from the online channel and allow a manifold strategic and operational cross-channel usage of their effects based on the interaction between the different channels in integrated systems. It is therefore possible for multi-channel retailers to create advantages in competition and increase the potentials for success with the addition of this approach. A general rating of the performance potentials of single instruments seems impossible against the background of inhomogeneous target groups and the range of goods and services of multichannel retailers and will therefore be avoided. In fact it is advisable to give specific instruments a thorough context sensitive check regarding the product range and the focused target group. Although some instruments can be used as substitutes, a coordinated and differentiated implementation of different Web 2.0 applications, in line with the market, can be considered meaningful (Alpar et al. 2007; Enderle/Wirtz 2008). Their integration into aligned cross-media communication strategies can even increase their potentials. Additionally, it seems to be appropriate to increase the positive effects of virtual communities for example by exclusive (live) events for members.

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Figure 2: Range of Applications for Web 2.0 in Multi-Channel Marketing Cross Channel Fields of Application Strategical Strategie Operational Market research Virtual Communities Weblogs

x Virtual x Subject/Object x Marketing of Research x Targeted Custumer x Monitoring Approach x Trend x Internal Analysis Communix Lead User cation

x Information Pod/ about Videocasts preferences

Web 2.0 Instruments

Communication

x Appealing information design

Bookmarking/ Tagging

x Search x Monitoring engine x Trend analysis Marketing

Virtual Words

x Information about market acceptance

Wikis

Social Shopping

Customer Channel CommuniMerchandise retention integration cation x Switiching barriers

x Customer diaries x Critical incidents x Emotional/ assistance oriented information

x Assistance of real Events

x Internal knowledge management

x Increasing service

xCross-buying Crossbuying xRe-buying Re-buying

Mashups

Revisions

x Monitoring

x Preferences

RSS-Feeds x Monitoring of blogs

x Trust and credibility x Perceived competence

x Additional pushchannel

x Substitution x Monitoring of retailview of functions to willingness Customers to pay x Decreasing buying risks x Presentation of examples of use

x Monitoring x Trend analysis

x Rejuvenation x Young target of brand groups image

x Information about willingness to pay

x (passive) Monitoring x (active) Integration

Pricing

x Crosschannel information

x 3-D Environment for product presentation x Substitution of retailfunctions through user-generated-content x Decreasing buying risks x Presentation of examples of use x Information about willingness to pay x Integration of x Valueadded third party services content x Substitution of retailfunctions through usergenerated content x Decreasing buying risks x Presentation of Examples of use x Information x Preferences about x Cross-selling product availability

x Decreasing price sensitivity

x Collective price negotiation

x Information about willingness to pay

In summary it has to be stated that there is still need for further research. For example, comprehensive approaches for the systemization of Web 2.0 instruments are still missing. Those found in the scientific literature are mostly too rough and often not well-founded. Accordingly, there is need for further (especially empirical) research to explore the motivational structures and main focuses in use of Web 2.0 instruments as a potential basis for stable approaches to


19

a systemization of Web 2.0. While some instruments like blogs are used quite frequently and have already become an important part of corporate communications, other instruments (e. g. virtual worlds and internal wikis) are still in the stage of development and their fields of application in multi-channel marketing should be seen as a learning arena. In this regard, there is a lack of empiric research, e.g. regarding the interrelationship between real and virtual buying behaviors. This applies to market research with Web 2.0 applications and the transfer of lead-user-concepts from the field of industrial goods to consumer goods as well. There is also a special need for systems for the automatic filtering of relevant posts in forums or communities (Ernst et al. 2004; Herstatt/Sander 2004). Further difficulties in the practical use of the described Web 2.0 instruments result from the limited controllability and measurability of their profit contribution. This applies especially because positive effects will most likely only appear over time and can hardly be resolved into isolated activities. Because the generally necessary critical mass of participants is often hard to attain and in view of the dynamic of consumer behavior, the question arises that some instruments like Second Life or other specific communities might not have enough lasting potential to legitimate long term investments. Strategic manipulation by third parties is another risk resulting from handling user-generated content, reviews and the anonymity of the internet. Dellarocas even models a user-anticipated manipulation through the retailer in a theoretical game analysis (Dellarocas 2006). Following these thoughts, companies would actually be forced to manipulate ratings and reviews to match their anticipated level of manipulation. But this would imply the additional risk of a substantial loss of image and trust in case of exposure (Enderle/Wirtz 2008). It should also be noted that, besides of the effects of Web 2.0 on consumer behavior and especially on click behavior, “traditional” factors like the perceived cost/performance ratio, the urgency of the fulfillment of demands, the financial situation or buying comfort will not lose their importance (Gerpott 2004). One of the major tasks of multi-channel marketing in regard to Web 2.0 is therefore to assess the specific risks and potentials of the different channels and their instruments in view of target groups and offered goods as well as services, and to derive strategic investment decisions on that basis. It is essential to consider the resulting changes concerning the increasing transparency, hierarchical conflicts and the necessary adjustments of company structures and resources. Capitalization of interaction potentials of the respective Web 2.0 instruments in the context of multi-channel strategies requires the renunciation of traditional mass-communication and a new approach towards the identification of target groups. Even though a prognosis as to the effects of the development of the internet on retail business seems impossible against the background of its dynamic, it appears that a great deal of adaptability is required to face changes in the environment for retailers in the era of Web 2.0.

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How to Maintain a Process Perspective on Retail Internationalization: The IKEA Case Anna Jonsson

Abstract The retail industry has witnessed fast international growth during the last couple of decades and various models and theories have been proposed for how to best explain the process and why some firms succeed while others fail. Recently researchers have argued that not only do we need more in-depth longitudinal case studies, and case studies from different sectors, but we also need to understand the core activity of internationalization, namely the learning processes of how to manage the complex process of entering and operating in different markets. While much research has focused on market and marketing aspects of internationalization, organizational aspects have received less attention. This article aims to fill that gap by focusing on the international home furnishings retail firm, IKEA, and their organizational routines for ensuring and managing a process perspective on their so-far-successful international expansion.

Keywords Retail, Knowledge, IKEA, Internationalization, Organizational Routines Acknowledgements: The author would like to thank the following: Handelsbanken’s research foundations, SSAAPS, SI, and HUR for funding this study; the staff of IKEA for their help and contributions; Professor Steve Burt, Professor John Dawson, and her former supervisors Professor Ulf Elg, Associate Professor Kristina Eneroth and Professor Pervez Ghauri for interesting and valuable discussions in relation to retail internationalization and knowledge sharing. Anna Jonsson (corresponding author) Lund University, School of Economics and Management, Department of Business Administration, P.O. Box 7080, Lund SE-220 07, Sweden (Tel: ++46 (0)46 222 36 48, E-mail: [email protected]).


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1.


Introduction

The retailing industry has witnessed fast international expansion and many researchers have sought explanations and new models for explaining the internationalization process and why some firms succeed while others fail. Recently, Burt et al. (2008) presented a review of existing models and theories for retail internationalization. It was stressed that when trying to simplify and categorise, i.e. when trying to present yet another model for retail internationalization, there is a risk of leaving out important variations in behaviour and outcomes. In their conclusion they state that “retail internationalization is a process in which management learning is a core activity” (Burt et al. 2008, p. 91). It is further argued that strategies cannot be linear and static as the internationalization process is very complicated. In general, external market and marketing aspects of internationalization are often stressed, while internal aspects focusing on why organizations fail often receive less attention. In order to deepen our understanding of the retail internationalization process it is crucial to comprehend how firms learn (if they do) from their experiences of entering international markets. In order to be able to do so there is also a need for an in-depth study of how an international retail firm learns from its experiences. This is further supported by Burt et al. (2008, p. 91) who claim that in order to make sense of strategic business practices and the outcomes which we tend to interpret, we need more longitudinal and in-depth case histories and studies of many more retailers from different sectors, countries and with different histories. Retailing is more complex than and different from manufacturing in several aspects. For example, in terms of its strategic objectives, its responsiveness to local culture, the dispersed nature of operations and the large extent of network activities with many consumers and suppliers (e.g. Dawson 2000, 2007; Elg 2003; Helfferich et al. 1997; McGoldrick 2002). Retailers offer an intricate mix of products and services and in order to meet the consumers’ varying and changing needs and wants requires effective research procedures in order to understand cultural differences that will influence buying behavior. Consequently, an international retailer needs to operate on three organizational levels: a global corporate level; a national market level responsible for stores in the specific market; and at a third level, each individual store (Elg 2005). Moreover, retailing is interesting, as the industry has witnessed fast international expansion and the retailer’s role has shifted from being a sales agent to a production agent for the consumer (Dawson 2007); and some of the world’s largest firms are retail firms (Kumar 2005). This supports the argument that we need more and better in-depth studies of the process rather than static, market and marketing related, explanations. Many retailers, such as IKEA, have evolved from small domestic and local stores to large retail chains providing them with a basis upon which they then later chose to develop abroad (Helfferich et al. 1997). The retailers’ power has increased dramatically as they have grown into international, global, multinational and transnational retailers. It is argued that various IT solutions have provided the opportunity to acquire and share information and knowledge across borders. Still, publications on the impact and im-

Jonsson, A.

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portance of how knowledge is created and shared in the retail internationalization context are rather scarce (e.g. Palmer/Quinn 2005). The subsequent aim of this article is to develop our understanding of organizational routines on how to manage the internationalization process by focusing on an in-depth case study of how knowledge is shared within an international retail firm. In the following section recent research on retail internationalization as well as theories of knowledge sharing will be discussed. The empirical case study of IKEA is then presented with a focus on their internationalization process and the IKEA organizational structure. A discussion of organizational routines about how IKEA manages its internationalization process is then presented. Some general conclusions and implications for future research and management are also presented.

2.

Retail Internationalization

During the last two decades, research on international retailing has developed from empirical observations toward more conceptually grounded models and frameworks (Alexander/Myers 2000). While some of these conceptual frameworks have sought integration with or inspiration from the more general international business or marketing literature, others have sought to develop these without drawing from general theories. Picot-Coupey (2006, p. 218) notes that most research focusing on factors for entry mode choice are not grounded on theoretical frameworks but rather on empirical findings. Burt et al. (2008) further notes that many of the proposed models are too simplified and do not offer reasonable explanations for the complex process that retail internationalization is characterised for. Research on retail internationalization may be classified into three themes (Evans et al. 2000; Jackson/Sparks 2005). One theme concerns the geographical spread of international activity. The second concerns motives for internationalization. The third theme regards the selection of entry modes. Other themes have been on retail internationalization and corporate culture, and management style and its implications for organizational learning. These other themes are argued to be examples of research searching for a wider and deeper understanding of the internationalization process. However, as it will be discussed further, researchers on retail internationalization have not fully explored the research on, for example, organizational learning and knowledge management, but rather have developed their own concepts derived from empirical studies (Palmer/Quinn 2005). Picot-Coupey (2006) stresses, as does Evans et al. (2000), that research on retail internationalization should benefit from more theoretically grounded approaches and that researchers have so far neglected coherent theoretical frameworks. Doherty (1999), too, criticizes research on retail internationalization for focusing on descriptive and empirical studies. It is further noted that few others have focused on market entry strategy. By drawing on internalization theory,

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agency theory and information asymmetry, she develops a framework for explaining this process. Doherty represents those researchers who argue that there are many deficiencies in the existing research on retail internationalization, due mainly to the ignorance of other research streams and for being mainly derived by models from empirical studies. This is partly in conflict with Burt et al.’s (2008) argument that there is a need for more detailed, in-depth studies trying to explain the process rather than trying to simplify and codify it. Alexander and Myers (2000, p. 349) argue that too much attention has been paid to the process and too little to “the consideration of such developments within the broader framework of conceptual thought on international business”. Still and what might be contradictory is that Alexander and Myers (2000) are among those researchers reluctant to draw on general internationalization research. Although Dawson (e.g. 2007) is reluctant and hesitates to adopt general research models to retail internationalization, it is stressed that research on organizational learning should be able to contribute to the retail literature. It has also been stressed by, for example, Doherty (1999), Dawson (2000, 2003) and Palmer and Quinn (2005). This research acknowledges both strands by offering both an in-depth case study and by drawing on existing research focusing on knowledge sharing within the MNC as will be further outlined below. Another type of criticism, i.e. separate from the criticism of loosely theoretically grounded studies, relates to the discussion of the importance of taking a process perspective on internationalization. Dawson (2003) argues that questions about why, where and how retailers enter new markets have been in focus but that there is still much to develop. There is a need for more process-oriented research about retail internationalization. Most research on retail internationalization has focused on episodes of internationalization rather than on the processes of market entry and internationalization (e.g. Jackson/Sparks 2005). As also noted by Picot-Coupey (2006, 2007) researchers have focused on the entry mode choices but not on the choice of further expansion and what might influence those choices. The argument put forward in this article is that market entries should be viewed as part of the internationalization process. Jackson and Sparks (2005) argue that research about retail internationalization needs to focus much more on the implications and impact of “how” and “why” questions regarding retail internationalization. The “how” is very much linked to the question of how knowledge is shared within the retail organization when expanding and entering new markets. But before reviewing literature on organizational routines as to how knowledge is shared across borders a few words need to be said, in order to contribute to a better understanding of retail internationalization, about the context of international retailing.

2.1.

Retail Internationalization – a Different Context?

Retail internationalization is viewed by retail researchers as a field of research separate from general research on internationalization and international business. Why do researchers on

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retail internationalization claim that retail is different from general internationalization research and therefore should be viewed in a special context? This is an important question, sometimes neglected in the academic debate, to pose in order to underline the argument that we need more in-depth studies on the process of retail internationalization. Some of the arguments provided are that retailing is more complex and different from manufacturing in several aspects; for example, in terms of strategic objectives, its responsiveness to local culture, the dispersed nature of operations, the large number of products and services offered, and the large extent of network activities with many consumers and suppliers (e.g. Dawson 2000, 2007; Elg 2003; Helfferich et al. 1997; McGoldrick 2002). Furthermore, it is argued that retailers offer a complex mix of products and services in order to meet the consumers’ varying and changing needs and wants. Another difference is the high cost and risk of setting up operations abroad compared to straightforward goods exports. Many of these explanations relate to market and marketing aspects of internationalization. However, it is possible that because of the peculiarities with retailing; i.e., its close contact with the end-consumer and local suppliers, researchers have tended to focus on these aspects. It is also possible that although there are differences from a marketing perspective there may be similarities from an organization perspective, so that although there are different marketing challenges between retail and manufacturing firms, there may be organizational similarities for handling these challenges, i.e., in terms of how to share knowledge. As noted by (Birkinshaw 2005) the service sector is characterized for competing not on manufacturing assets but on the collective capabilities of their employees. It is therefore surprising that there is a dearth of research focusing on the organizational aspects of retail internationalization. Because of the lack of research on intra-organizational processes in the literature on retail internationalization there is a need for investigating this issue further (e.g. Burt et al. 2003). It is possible that a process lens focusing on routines regarding how to share knowledge illustrates that there are more similarities between industries than the episodic perspective has suggested so far. Within the international retailing literature there are a number of different views as to whether or not it is possible to adopt general theories about internationalization to retailing. When some researchers argue that it is not possible or that it should be avoided, (e.g. Alexander/Meyers 2000; Dawson 2007) some argue that it is possible (Sternquist 1997), and some argue that it is possible as long as they are adapted to better fit a retail context (Vida/Fairhurst 1998; Vida et al. 2000) [1]. Dawson (1994) argues that it may be possible to borrow some concepts from internationalization theory but that it is unlikely to apply them directly to the retail industry because their structure, process and behavior are different from those of manufacturing firms. These conflicting views stress the need for additional research. Dawson (2007) underscores that, at the very least, researchers should be aware of these differences. Still, and despite these views, general research should be able to learn from a study in a retail context because of the complexity that stems from retail operations in different markets.

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It is interesting to note that researchers of general internationalization make no claims of differences between general research on internationalization and retail internationalization, whereas retail researchers do. Researchers focusing on internationalization in general have not paid much attention to retail firms (Dawson 2007). As pointed out by Doherty (1999, p. 396), it is surprising that the general internationalization literature virtually ignores international retailing. Researchers should look beyond the traditional international marketing studies for new and interesting perspectives. The complexity that international retailers face should be interesting to study. The lack of research within the general internationalization and international business field that focuses on retail internationalization opens up many research opportunities. In relation to this study which focuses particularly on the retail industry, the following argument by Walczak (2005, p. 330) stresses the importance of studying knowledge sharing across borders within a retail firm. The worldwide economy has shifted from industrial manufacturing, product oriented economy to one based on knowledge and service, where the principle commodity is information or knowledge. Furthermore, as noted by Foss (2002, p. 11), tasks and activities in the knowledge economy need to be coordinated in a manner that is very different from the management of traditional manufacturing activities, with profound implications for the authority relation and the international organization and boundaries of firms.

2.2.

Knowledge and Learning in the Retail Internationalization Process Literature

Researchers focusing on retail internationalization have expressed the possible contribution of theories on knowledge and learning to a better understanding of the process perspective on retail internationalization (e.g. Doherty 1999; Dawson 2003, 2007; Palmer/Quinn 2005; Palmer 2005). Palmer and Quinn (2005) note that researchers have implicitly discussed issues of knowledge and learning but not in relation to research. A few examples of research studies, implicitly discussing issues related to knowledge sharing in international retailing, are briefly discussed in the following paragraph. The ambition is to underscore the importance of putting knowledge sharing in retail internationalization into a theoretical context, i.e. in relation to existing research focusing explicitly on knowledge sharing. Palmer (2005) notes that focusing more explicitly on knowledge and learning may increase the understanding of retailers’ internationalization processes and at the same time provide an opportunity to reinterpret and re-evaluate existing research. However, as argued in this article it is also important to understand that knowledge and learning have been discussed by researchers within different fields and to go beyond knowledge management.

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There are many examples of research that could be linked to the topic of knowledge sharing in retail internationalization. Burt and Mavrommatis (2006) focus for example on the international transfer of store image. Here, the term “standardization”, although not explained, is sometimes used interchangeably with replication a concept within research on knowledge sharing of organizational routines (Winter/Szulanski 2001). However, the focus is not on how this image is transferred but rather on what and whether or not the store image is standardized. Another example is the study by Currah and Wrigley (2004) on transnational retailers. Drawing on findings by Dawson (1994) that it is extremely difficult for retailers to protect knowledge (because of its open nature) or store and retail offerings, Wrigley and Currah (2006) note that transnational retailers need to pay attention to trying to achieve embeddedness. The authors analyze and contextualize the geographies of organizational learning and adaptation among those transnational retail corporations. The competitive advantage of transnational retail corporations lies in the ability to adapt retail formats to different and changing consumer landscapes. However, much of their discussions relate to contextualizing international retailers as transnational corporations rather than on how knowledge is shared within the organization, and on how that influences the internationalization process. Another study which more explicitly focuses on knowledge sharing, although not in relation to existing research on the retail internationalization process, is the study by Hurt and Hurt (2005). They discuss the transfer of managerial practices and work routines by food retailers from France to Poland. From empirical studies, it was found that the French management had problems in transferring or reproducing their business model with the behavioural model of the Polish recruits. This is an interesting case, focusing the problems of transferring French managerial practices and work routines to Polish store management and floor personnel. However, as noted by Burt et al. (2008) there is a need for research on retail internationalization in different sectors. Focusing on IKEA, a member of the home furnishing retailing sector, should therefore contribute to a better understanding of the retail internationalization process. Recently, Palmer and Quinn (2005) presented a framework for international retail learning. Drawing on research on organizational learning and on retail internationalization that implicitly focus on learning aspects, Palmer and Quinn (2005) present 16 research propositions for an increased understanding of retail internationalization learning. When outlining the propositions related to the first group, i.e. dimensions of international retail experiences, Palmer and Quinn (2005) stress the importance of incorporating both internal and external circumstances when focusing on what retailers can learn from their international experiences. In a subsequent article, Palmer (2005) analyzes Tesco’s experiences from international retailing, focusing on the dimensions of international retail experiences. The focus is on explaining what retailers can learn from their international experiences, derived from interviews with retail managers. From the discussion, it is clear that the lessons learned emphasize both internal and external circumstances although these do not necessarily have to be distinguished. Furthermore, Palmer and

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Quinn (2005) propose that researchers need to investigate the “degree of learning” and the “locus of learning diffusion”. The degree of learning relates to how knowledge is absorbed by the organization; that is, the ability to adopt and adhere to acquired knowledge. The locus of learning diffusion relates to how knowledge is coordinated, diffused and embedded within the organization. Furthermore, it is suggested that the ability to diffuse knowledge is related to the level of international experience. In a subsequent article, Palmer (2005) focuses on what mangers at Tesco learned from their international experiences. However, it is not shown how knowledge is developed nor how it is shared and it is questionable whether Palmer (2005) focuses on knowledge or just information. Still, the work by both Palmer (2005) and Palmer and Quinn (2005) illustrates the importance of investigating knowledge sharing in retail internationalization by adopting research on, in this case, organizational learning. It is noted that because knowledge is such a complicated concept there are many wins with looking into research explicitly focused on knowledge sharing.

3.

Knowledge Sharing Across National Borders

Although research on retail internationalization has only recently recognized the importance of knowledge, general research on internationalization has for a long time acknowledged the importance of transferring knowledge from HQ to subsidiaries. Foss (2006, p. 6) argues that the theory of MNC has some lead-time with respect to understanding how knowledge and organizations connect, particularly relative to the economics of organization. However, as Foss and Pedersen (2002, p. 50) argue, focus on knowledge has traditionally been a (static) matter of explaining the existence of the MNC by focusing on failures in markets for knowledge rather than on (dynamically) stressing the MNCs distinct capabilities of realizing competitive advantages through managing knowledge flows. As pointed out by Ambos et al. (2006) the role of HQ as the source for knowledge is changing and subsidiaries have grown to become important providers of knowledge necessary to stay competitive in the increasingly global and competitive environment. As noted by Holm and Sharma (2006), knowledge is no longer created in only one market, rather simultaneously in a number of markets. The traditional hierarchically structured HQ-subsidiary relation has been replaced by a more responsive structure; for example, “heterarchical” (Hedlund 1986), “multifocal” (Prahald/Doz 1987) or “transnational” (Bartlett/Ghoshal 1989) that can meet different “demands of innovation and knowledge creation in a dynamic global economy” (Nohira/ Ghoshal 1997, p. 3). The differentiated MNC literature has become increasingly mainstream and challenges the traditional transaction cost theories to focus more on issues related to knowledge sharing (e.g. Nohira/Ghoshal 1997; Frost/Zhou 2005). As pointed out by Ambos et al.

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(2006, p. 295) the transnational solution adheres to the view of the firm as a “knowledge integrating institution” (Kogut/Zander 1993), where the MNC is a result of the ability to integrate, combine and create new knowledge within it. When adopting the view of the MNC as a transnational corporation, subsidiaries become “strategic partners” (Bartlett/Ghoshal 1989, p. 102) and it is important to recognize that within the MNC knowledge may originate from subsidiaries as well and thus take different flows. Ambos et al. (2006, p. 294) address the question as to what drives the benefits that headquarters can gain from learning from subsidiaries. It is argued that changes in both the subsidiary’s context and its capabilities to process knowledge drive the efficiency of the knowledge integrating MNC. Ambos et al. (2006, p. 296) further discuss forward, reverse and lateral knowledge flows within MNCs. Forward knowledge flows refer to knowledge from HQ to subsidiaries, reverse knowledge flows refer to knowledge from subsidiaries to HQ and lateral knowledge flows refer to knowledge flows between subsidiaries. There is also an expressed need within the general internationalization and MNC literature to develop our understanding for how an organization manages knowledge flows and the micro perspective of how the individual co-worker is motivated to contribute to share and benefit from knowledge flows within the organization (e.g. Felin/Foss 2005).

3.1.

Organizational Routines for Knowledge Sharing

Research on knowledge sharing stems from different fields such as technology and innovation, strategic management, organizational learning and knowledge management, stressing different factors for what might make or break knowledge sharing (e.g. Dierkes et al. 2001; EasterbySmith/Lyles 2003). The manifold suggestions may be categorized into different groups. One suggestion is to focus on knowledge or cognitive issues (e.g. tacitness, absorptive capacity, causal ambiguity and cognitive variety), organizational context (e.g. structure, intra-organizational integration and training) and institutional forces (e.g. individual and group motivation, and norms and values) for knowledge sharing (Ciabuschi 2005; Kalling/Styhre 2003). Most of the empirical work on knowledge sharing, and especially research focusing on IT systems as a means of knowledge sharing, strongly emphasizes knowledge issues as explanatory factors whereas organizational context and, in particular, institutional forces are more rarely addressed. However, in order to fully understand the impact of knowledge sharing it is necessary not only to investigate the role of IT systems but also routines and work methods in order to capture more tacit pieces of knowledge. It therefore becomes even more important to understand the organizational context and institutional forces. Recently, researchers have stressed the need for more research on organizational context and institutional forces to reach a better understanding of what enables or hinders knowledge sharing (e.g. Ciabuschi 2005; Gertler 2003, Gupta/ Govindarajan 2000; Kalling/Styhre 2003; Kane et al. 2005; Tsai 2000; Walczak 2005). This is especially important when considering how organizational routines for managing a process like retail internationalization develop. Organizational context and institutional forces seem to be

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especially evident in research focusing on knowledge sharing within MNCs (i.e. in the general internationalization and international business literature). It is likely that knowledge factors alone are unable to explain the complexity of knowledge sharing within MNCs. The need for more research on organizational routines is stressed by Heimeriks and Duysters (2007, pp. 26-27) who argue that […] few studies have been able to explain how experience can be translated into a capability [and that] little empirical evidence exists with respect to how firms can best distribute and institutionalize organizational knowledge. More precisely the mechanisms that allow for knowledge transfer which can enhance adoption of new practices have hardly been analyzed.

4.

Method

This research is based on a case study. In order to develop an understanding of the process perspective on retail internationalization process it is important to delve deeply in order to gain an understanding of this phenomenon (Tsoukas 1989; Yin 2003). The main reason for choosing a case study is when the aim is to search for new insights, findings and interpretations rather than to test certain hypotheses (Merriam 1998). This research adheres to Dyer and Wilkins (1991, p. 617) notion of case studies, namely that the researcher’s ambition should be to tell good stories rather than striving to create good constructs the classic case study approach has been extremely powerful because these authors have described general phenomenon so well that others have little difficulty seeing the same phenomenon in their own experience and research. We turn to the classics because they are good stories, not because they are merely clear statements of a construct. It is important to offer rich descriptions in order to be able to offer alternative aspects on how to develop our understanding of the retail internationalization process. This was also further supported recently by the argument in Burt et al. (2008). IKEA is an interesting case to study. It is the biggest global retail furniture company with annual sales of almost 20 bn EUR in 2008. So far most in-depth case studies, as well as other studies, have focused on international food retailers. IKEA was founded by Ingvar Kamprad in 1943 and is today owned by a foundation, the Stitching INGKA Foundation. During the last 40 years IKEA has grown from being a small Swedish family-owned company to the world’s largest home furniture retailer with 283 stores in 36 countries, of which the IKEA Group owns 262 stores in 24 countries, employing 127,800 people. In 2009 the IKEA Group plans to open 26 new stores in 13 different countries. IKEA has witnessed a fast international expansion during the last five to six years, the fastest expansion in IKEA history [2]. IKEA’s strategy is to expand, both organically [3] and through franchising, with a standardized business model and concept offering one standardized product range. IKEA was to look and be perceived as exactly the same, no matter whether you visit a store in Älmhult in Sweden or Tokyo in Japan.

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The empirical data was mainly gathered through in-depth semi-structured interviews about the international expansion of IKEA and knowledge sharing. In total, 70 interviews were carried out with IKEA between 2003 and the present. Interviews were conducted at market level in Russia (23), China (11) and Japan (17). Although not all of them were used for this specific article they all provide an interesting and necessary background to understand IKEA’s replication strategy for internationalization and how knowledge is shared across national borders. In addition to the interviews at market level, 19 were conducted at the global Service office in Sweden as well as with IKEA of Sweden and Trading & Distribution and IKEA Inter Services AB. These interviews focused on IKEA’s internationalization approach, strategic orientation, culture and values as well as strategies for knowledge sharing. In each country, interviews were carried out with employees from different parts of the organization, encompassing managers at the national service office and store managers as well as a number of employees responsible for certain product categories in the store. The interviews started with open and inductive questions about IKEA’s international expansion. As the interviews progressed, the questions gradually became more structured, inquiring more about routines for knowledge sharing within IKEA. All the interviews lasted between 90 and 180 minutes. Participant observation looking for ways in which knowledge is shared in the day-to-day work was also carried out. The observation in an IKEA store in Tokyo, Funabashi, Japan [4], took place over a period of five days in December 2006. And for three days participant observation was used when a Business Area (BA) Manager (and part of the time) her co-workers were followed and observed in their daily work. In addition, secondary sources such as corporate material, documents and manuals, as well as books and magazines about IKEA’s history and business ideas were collected (Merriam 1998). The empirical findings were compared with the theoretical framework, according to Yin’s (2003) pattern-matching method of analysis.

5.

IKEA’s International Expansion

In order to understand IKEA and its internationalization process it is important to establish a starting point as to how the business idea and the IKEA concept have evolved over time and even more so regarding how IKEA has learned from experience. The exploration of the business model is expressed by IKEA in the following manner [5]: The IKEA concept has evolved over more than 50 years as a result of serious opportunities and experiences, both large and small in many different areas. The result today is a strong, tried and tested concept, which has proved that it is possible to combine global business ideas with local business opportunities. The IKEA business idea is to offer “a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them” [6], and in order to do so it is expressed that it is important to find solutions that are both innovative and

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cost-efficient. Thus as will be discussed further, organizational routines on how to work for IKEA are actually embedded in the business idea. In the following section the reader is introduced to the “IKEA-world” by discussing how IKEA has evolved into a global home furnishing retailer and how IKEA is structured. More specifically the discussion will underline arguments as to how IKEA manages to maintain a process perspective on their internationalization process, i.e. using standardised solutions while at the same time constantly searching for new opportunities and better solutions through successful knowledge sharing by focusing on their organizational routines. In the subsequent section links to the theoretical discussion about retail internationalization and knowledge sharing will be made.

5.1.

The International Expansion of IKEA

In the following paragraphs the international expansion of IKEA is summarized, structured according to a time-line where critical events are discussed and serve as explanations for how experiences and lessons learned have influenced the ongoing internationalization process. IKEA started its international journey in 1965 by entering the Norwegian market. Six years later IKEA entered the Danish market. In 1973 Ingvar Kamprad decided that it was time to go even further away from Älmhult. The first store outside Scandinavia opened in 1973 outside Zurich, Switzerland. The international expansion was a direct consequence of saturated growth and an ambitious idea that larger volumes could enable IKEA to lower prices and therefore become more competitive. The process and that decision is described by one manager (Salzer 1994, pp. 59-60) who said, have you heard about how we started abroad? By then we had entered Norway, but that was by mistake, you know… a kind of consultant who had duped us to buy some building lot. And then they pondered, which market is the most conservative when it comes to furniture? Well, it’s Switzerland. So they took the train to Switzerland. Well it was Janne [Jan Aulin] and Kamprad. And they stood outside the shops that sold modern furniture in Switzerland, you know, and they stood there and they asked the people who stopped and looked in the windows. […] And when they had been standing there for half a day they were assured that there were enough people who liked that kind of furniture but that it was too expensive, so there must be a market, they thought, and then they went back to Sweden. And so we bought a building and started the first store in Switzerland. … And it’s continued like that. The initial process of entering new markets can be described as a trial and error process. It was during the 1960s and 1970s that IKEA learned the “basic techniques” for entering foreign markets. IKEA acquired the necessary learning in order to enter new markets more rapidly during the 1980s–1990s (Torekull 2003, p. 175). During this period IKEA opened so-called “test stores” in city centers. However, this decision was later changed to open up bigger stores on city outskirts with good infrastructure instead, and to make all IKEA stores similar; that is, to paint

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them blue and yellow. Over time it has become even more important to standardize the store format and there is nowadays a minimum size for new stores, thus securing the possibility for bigger volume. Standardized marketing solutions enable IKEA to focus more on the organizational aspects, i.e. the organizational routines on how to support the internationalization process. During the initial phase of IKEA’s internationalization process there was a special team responsible for entering new markets. The expansion team normally moved into a new market, set up the first store, and then left for another market. This phase can be described as the exploration phase, as IKEA explored the techniques for setting up new IKEA stores in new markets. The expansion team had a great entrepreneurial spirit and was very enthusiastic. However, their role was not always appreciated as they left once the store had opened and the store manager was left behind with problems. During this period there was a saying about “the action group fool Humlan [the bee]” meaning that the signals sent from HQ (by that time Humlebaeck in Denmark) would not always be followed (Torekull 2003). In 1979 a project called “Kraft 80” was initiated. There was an increasing concern that IKEA had grown too fast and the project was a reaction to the risk of “losing the heart” (Salzer 1994, p. 66). A few drawbacks made IKEA realize that conceptualization was important and that IKEA could benefit from a more conceptualized business, i.e. from replicating their business when entering new markets. The “IKEA Way”, an internal document, is one result of those efforts where guidelines for replicating IKEA are clearly stated. Inter IKEA Sytems B.V describe the IKEA Way as consisting of: the IKEA culture (the common platform); the IKEA concept (the framework for turning the business idea into reality); and the organization, processes methods, policies, guidelines and supporting systems that are all necessary to achieve the business idea. However, many of these ideas had existed since the beginning of the 1970s but had not been documented. A manager at Inter IKEA Systems B.V stressed that the ideas and the concept were already clear but there was a greater need, as a consequence of the growing company, to conceptualize and document them. The second phase of IKEA’s internationalization can be characterized as exploiting a business mode. IKEA sent out the “expansion group” to set up new stores in new countries before moving on to the next country. Standardized marketing solutions were in focus for reasons of costsavings. Format stores were developed and the blue and yellow stores were “planted” in new cities and new markets. The reason why IKEA stores are standardized; that is, painted in blue and yellow and having a standardized layout, is to save costs on building the IKEA stores. However, IKEA later realized that by standardizing certain solutions they could spend more time on finding the right organizational routines for running and managing IKEA according to the IKEA way. This is a rather new insight and characterizes what can be described as a third phase, or the current phase, of IKEA’s internationalization process.

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During the last five to seven years there have been almost 100 store openings in 19 different markets, of which three are new markets. During these years IKEA has witnessed the fastest international expansion ever in its history. This phase can be described as a phase of both exploration and exploitation, i.e. where small adjustments and improvements are made to the concept. In order to survive a competitive environment it is important to be innovative, and this can only be achieved through both exploration and exploitation. In an internal document, “The future is filled with opportunities” (Salzer 1994, p. 61), it is clearly stated that IKEA will continue to grow and furnish the world and in order to do so it is important to be able to both explore and exploit. Today you will find IKEA all over the world and IKEA’s size will give rise to new problems, problems that will be solved in the same unconventional way that IKEA has always solved its problems. IKEA will never be completely finished. Life will feed IKEA with new problems. Problems that create new ideas and new solutions. Solutions that will change IKEA.

5.2.

The IKEA Organization

IKEA is not just IKEA. IKEA consists of many different organizations with different responsibilities but with the common goal of satisfying the IKEA customer. The background to the current organization structure stems from the many challenges with the international expansion of the 1970s and 1980s and the efforts of conceptualizing IKEA. The present ownership structure was developed during the exploration phase and IKEA was given away to the INGKA Stitching foundation. In the beginning of the 1970s Ingvar Kamprad had already started to think about the time after his death and what would then happen to IKEA. There was a need to conceptualize in order to protect the organization from external interests and hostile takeovers as well as a way of solving the problem of high taxes in Sweden. In 1976 the “Furniture Dealer’s Testament” was written, an internal document explaining the IKEA concept, norms and values that are and have been important for the internationalization process. This document has become a key document for IKEA. For Ingvar Kamprad [7] himself “maintaining a strong IKEA culture is one of the most crucial factors behind the continued success of the IKEA concept”. In 1996, 20 years after “A furniture Dealer’s Testament”, Ingvar Kamprad wrote what is known as the “IKEA values”. It is stressed that the IKEA values are part of the work environment at IKEA and from the perspective of knowledge sharing across borders it is interesting that through the IKEA work environment “you’ll be able to contribute to the development of others”. This clearly emphasizes that knowledge sharing between “co-workers”, as they are called, is important. The IKEA values are part of the Human Resource Idea and through these values new IKEA co-workers are recruited. From the perspective of knowledge sharing these values represent an important factor for knowledge sharing, i.e. focusing on institutional forces or what motivates people to share knowledge (e.g. Kalling/Styhre 2003). IKEA describes the recruitment process [8] by saying,

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Our goal is to employ co-workers who understand and embrace our core values and who will reflect and reinforce those. We want to recruit the candidates most suited for work life at IKEA, based on value set and attitude, in addition to skills and experience. We can support the recruitment process by working through the words of our core values using effective questioning techniques. In the middle of the 1980s IKEA was restructured and the “three legs”, the IKEA Group (“the blue group”), Inter IKEA Systems (“the red group”) and IKANO (“the green group”) were created. It is claimed that the major reason for this organizational structure is that Ingvar Kamprad wanted IKEA to be structured in such a way that the IKEA concept would not get lost and that IKEA would be able to continue to grow. In Torekull’s (2003) book about IKEA the organization is described as being controlled by both the “hand” and the “spirit” and that Ingvar Kamprad personifies this idea. The “hand” controls the physical ownership such as in the stores, whereas the “spirit” controls the IKEA concept. In the middle of this there is Älmhult in Småland, where it all started. Ingvar Kamprad notes (Torekull 2003, p. 199) [9], the IKEA spirit emanates from those lessons we learnt during the first pioneer years in this countryside. Both as a smålänning and as a rational thinker I defend the idea that Älmhult is our heart, our spiritual home. In order to understand the IKEA concept it is important to comprehend the whole pipeline; i.e. Retail, Distribution and Range. To be able to offer IKEA to the customers, the IKEA stores; i.e. IKEA Retailing, needs to be supported by Distribution; Purchasing; Industry group (Swedwood); IKEA of Sweden (IoS), responsible for developing the range; and various expert and supporting functions including, e.g. IKEA IT and IKEA Communications. Inter IKEA Systems gives IoS the assignment of developing the IKEA range so that the IKEA concept is maintained. All other parts of IKEA operate on the local level. Concerning the relationship between IKEA Retail, IoS and IKEA Inter Systems, one manager describes the relationship between the organizations thus: We do our job but we are totally dependent on each other. We kind of live in a symbiosis. The organizational structure of the IKEA Group is a matrix. It is important to understand the matrix especially in order to understand how knowledge is shared within IKEA. Each country has a Service Office (SO). The SO will support the stores in that market. In each store there is a store manager and department managers for HR, Sales, Restaurant, etc. Under the Sales department there are managers responsible for different product areas. Then in the Service office there is an overall Sales manager, overall HR etc. In relation to factors for knowledge sharing, organization structure is important (e.g. Kalling/Styhre 2003) in order to understand how knowledge flows within the firm. The matrix organization and ideas about a shared vision reminds one of the ideas about the transnational solution (Bartlett/Ghoshal 1989), where knowledge takes multiple paths as it flows between levels and markets.

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The people of IKEA are vital for its growth including its expansion into international markets. As one manager at IoS expressed it, I can see that IKEA as a company is very much driven by development. We talk about growth. And I used to say that, we need growth, we need to grow as a company. But then we need growing people. In some sense it starts with recruitment, to have people that really see the challenge in this not to be stable and secure but willing to take risks, willing to expose themselves. […] And in that sense it is motivation and maybe it is hard to relate to that, because we can see that people, at least the people that we want to stay with us, they take the challenge and they want to grow as the best reward. And I think that is why we don’t need to give a lot of salary, and a lot of other compensation benefits because we don’t promise that. We promise that we will grow and expand with you. It is significant for one group of IKEA employees that they stay with the company for many years. In an internal brochure [10] it is expressed as “Masses of jobs for masses of people in masses of places”. The average employee or “co-worker” (the title IKEA uses for their employees) at IKEA has worked for many years and has tried many different positions at both the strategic and the operational levels in the IKEA-world. “Many years” normally means 15-30 years. One IKEA co-worker described it as “part of the natural development of the organization”. The typical career path within IKEA is to try new positions within IKEA (i.e. the different organizations forming IKEA) in order to get broad knowledge about IKEA and to understand the whole pipeline. CEO Anders Dahlvig (Kling/Goteman 2003, p. 37) argues, what is fundamentally important for us is for people to work well together across functions because they have to understand our pipeline. We have always been good at knowing certain parts, but now more of a pipeline-oriented understanding is required. However, it is not just that people move around from one position and country to another. On IKEA’s Intranet [11] rules for expatriates are to be found, where it is stressed that knowledge sharing is important. People who move across borders and learn different parts of IKEA gain an insight into different cultures and expand their network. People who move across functions learn new and different skills. This gives them an opportunity to contribute more to both the daily work and development of the company. There are of course also a number of co-workers who remain for only a few years. These are people who usually work only part-time in the stores. The employee turnover is a huge challenge which can vary considerably between different countries. In some stores in the US, the turnover can be up to 70% whereas in Italy, for example, it can be no more than 3%. In terms of knowledge sharing, it is the group of part-time co-workers that is a real challenge for IKEA; how to motivate these people to learn and also to share their experiences. Therefore, IKEA puts a lot of emphasis on IKEA values when recruiting new co-workers. A “climate check” is made every year when an internal survey called the “Voice” is sent to IKEA co-workers where the IKEA culture is mirrored in the questions. Many of these questions are related to motivational or institutional factors for knowledge sharing within the organization.

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Routines for Knowledge Sharing within IKEA

In order to be able to replicate IKEA the IKEA way in new markets and to prevent IKEA from turning into a German or a Russian IKEA there are different methods for sharing knowledge across national and intra-organizational borders. The organization responsible for the IKEA concept and for securing its replication all over the world is Inter IKEA Systems B.V. The “commercial review” is an internal tool used for measuring how the IKEA concept is followed in other countries and in various functions. The purpose with the commercial review is both to control adherence to the concept and to acquire new business opportunities and new “best practices”. Best practices explored from the review process are then published on the Intranet or in the manuals provided by Inter IKEA Systems B.V. As one manager describes the process: To conceptualize is very much about documenting and making the concept accessible all over the world. Best practices are thus explored and exploited in the IKEA-world. Best practices are spread both through manuals and via the Intranet, through what is called a Toolbox. In an ad in the internal newspaper IKEA Ideas it is written that the IKEA toolbox is a digital concept communication system from Inter IKEA Sytems BV where information about IKEA retailing know-how and tools to use within the IKEA concept […] Take a look in the IKEA tool box and see how you can use it to improve your skills. And save time and money [12]. The Intranet is considered an important tool for sharing knowledge about best practices. However, depending on ones position within the organization it is regarded as more or less important. Part-time co-workers working on the shop floor do not have much time or easy access to the Intranet. Different solutions, such as installing computers in the staff canteen, can provide the means for all co-workers to explore the Intranet and learn more about IKEA. The IKEA Group is responsible for the organic growth of IKEA and thus for securing that these best practices and “proven solutions” are followed. However, part of the IKEA concept is to question and seek new solutions, to explore new opportunities. There is an organizational structure for guiding co-workers in new countries in their search for new solutions at the same time as they adhere to the IKEA concept. From the interviews it is obvious that knowledge sharing is central to IKEA’s expansion and for securing the IKEA way of doing business. Part of IKEA’s strategy when entering new markets is to send out expatriates to share their knowledge about IKEA. This solution is an example of organizational factors explaining knowledge sharing (e.g. Kalling/Styhre 2003). One HR manager expresses it this way: When the expatriates leave it is necessary that it has grown under the tree because otherwise we will have a huge problem … . […] So that you really work with transferring your knowledge, to really share with others. You can’t sit in a corner with all your knowledge and give orders without sharing - then there will be a vacuum when you leave.

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Expatriates and existing co-workers are responsible for sharing this knowledge with new coworkers. Having a “buddy”, an experienced IKEA employee, is one solution for IKEA to educate new employees in the IKEA way of doing business and to share their knowledge about IKEA. In each country there is one IKEA store functioning as a learning centre for new IKEA stores managed by that country’s Service office. In this learning centre new co-workers are trained according the IKEA principles. When entering a new market, and if a learning centre is not yet in place, employees are sent to other markets in order to learn about IKEA. This is applied both for co-workers working at the Service office and for co-workers and department heads working in the store. In addition, expatriates are not only employed for the purpose of entering a new market and to set up the business but also to train local employees according to the IKEA way. Having a foundation and long-term strategies enables the organization to work with knowledge sharing at all levels, ensuring that everybody can identify with the IKEA concept. In the HR idea it is explicitly stated that, as an IKEA employee you are willing to share your knowledge and experience with all IKEA employees (IKEA HR Idea). As an IKEA co-worker you continually learn from your own and other’s experiences, which enable you to solve and complete your own tasks (IKEA HR Idea).

6.

Concluding Discussion

This article has taken an intra-organizational perspective on the retail internationalization process, by focusing on organizational routines and specifically on knowledge sharing in order to better understand how to manage and maintain a process perspective on retail internationalization. Because of the lack of research on knowledge sharing in the context of retail internationalization, this present study provides an opportunity to reinterpret and re-evaluate existing research on retail internationalization. The case study of IKEA illustrates how knowledge is shared within the IKEA-world. Focusing on organizational routines for supporting multiple knowledge flows across national and intraorganizational levels. The dynamic capability of IKEA to manage the internationalization process according to “IKEA way” is a result of what has been learnt from the international expansion. As IKEA learns from challenges met in new markets, best practices are spread to IKEA worldwide. There are a number of routines and mechanisms for sharing knowledge and supporting the international expansion of IKEA. These have developed over time and as a consequence of experiential knowledge. Knowledge sharing has become increasingly important as an enabler for the expansion of IKEA. Knowledge sharing was often mentioned as part of the IKEA culture, which is important to understand as it explains the institutional forces driving knowledge sharing across borders. Knowledge sharing within the IKEA world is also supported by a matrix organization, ensuring multiple knowledge flows throughout the organization.

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The central organization, in this case both the IKEA Group and Inter IKEA Systems, also plays an important and coordinating role in terms of both securing that experiential knowledge is acquired from different markets and that the replicating formula is kept viable; i.e., where adjustments are made in accordance to gained experiences, and shared and followed within the IKEA-world. The method for how knowledge is shared within IKEA corresponds with recent research stressing the importance of acknowledging the organizational context and institutional forces (e.g. Ciabuschi 2005; Kalling/Styhre 2003). This view also corresponds with the ideas about the transnational corporation as first introduced by Bartlett and Ghoshal (1989). An interesting link to this discussion is the argument by Özomer/Gençtürk (2003) that, when taking a transnational view, it becomes clear that it is also necessary to incorporate reasoning on how experiences gained in one market will influence the ongoing replication process, and on how knowledge flows across national borders. In relation to the contribution to research, this study contributes to the expressed need for developing our understanding of the process perspective of retail internationalization and where management learning is a core activity (Burt et al. 2008). By focusing on how knowledge is shared within an international retail firm this study also contributes to research that has expressed the need for a deeper understanding for knowledge and learning in the retail internationalization process (e.g. Dawson 2007; Doherty 1999; Palmer/Quinn 2005). There is also a need to incorporate and benefit from existing research and move away from a focus on only descriptive or empirical studies (Picot-Coupey 2006). By linking existing research on knowledge sharing, and illustrating that knowledge and learning are complex concepts spanning different research fields, this research aims to meet that criticism. This study also contributes to general internationalization and MNC research seeking more details on how experience can be translated into a capability and how firms can best distribute and institutionalize organizational knowledge (Heimeriks/Duysters 2007). In terms of implications for managers this study has focused on the organizational routines supporting the retail internationalization process. The IKEA case clearly illustrates the importance of always being open to learning from experiences, good and bad, in order to be innovative and cost efficient; i.e. to understand and take a process perspective. A part of the IKEA business idea stresses that it is essential to always search for new opportunities and better solutions. Organizational routines must embrace continuous learning in order to employ such a pattern. From the IKEA case it is clear that HR plays an important role in building and nurturing a strong corporate culture supporting organizational routines such as those for knowledge sharing. Drawing on the insights of this in-depth case study it is clear that managers will have to pay more attention to how knowledge is shared in order to facilitate international expansion. For international firms this has to do with the challenges of entering new markets, and at the same time maintaining growth and gaining market share in existing markets. Market entries must be

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supported but the ongoing activities in existing markets must also be recognized and supported. Thus it is crucial to understand the process perspective of the retail internationalization process. Not only is knowledge sharing important from a cost-efficiency perspective, but also from an innovation perspective when new opportunities or lessons learned are explored and then exploited throughout the organization. When focusing on factors for knowledge sharing it was illustrated that when knowledge sharing has become part of the corporate culture and work routines, less effort has to be put into steering knowledge flows.

Notes [1] For an overview of research on retail internationalization that has drawn from general internationalization. [2] Figures from August 2009 (http://www.ikea-group.ikea.com, accessed August 30, 2009). [3] All IKEA stores are franchise operations that have been granted their franchise licenses by Inter IKEA Systems B.V. When referring to organic growth it is expressed that this is run by means of internal franchising as the IKEA concept and brand is owned and controlled by Inter IKEA Systems B.V. [4] In July 2002, the IKEA Group established IKEA Japan KK. IKEA opened its first store in Tokyo, Funabashi in April 2006. The second store also placed in Tokyo, Kohoku opened in September 2006. The entrance is described as the biggest Greenfield foreign investment ever made in Japan. Initially, IKEA plans to launch eight to twelve outlets, with the first stores in Tokyo. In a longer perspective IKEA plans to open 46 stores in Japan. [5] “Inter IKEA Systems B.V - The owner and franchisor of the IKEA Concept”, Inter IKEA Systems B.V. 2002: 8. [6] “The IKEA Symbols - leadership by example”, Inter IKEA Systems B.V. 2001: 10. [7] http://www.ikea.com/ms/en_GB/about_ikea/timeline/full_story.html, accessed May 11, 2007. [8] “Recruitment through our values”. Inter IKEA Systems. [9] My translation. [10] “IKEA - We’re looking for more enthusiasts to help us prove that nothing is impossible”, Inter IKEA Systems B.V. 2006. http://www.ikea-group.ikea.com, accessed August 30, 2009. [11] “Mobility - working abroad with IKEA”, IKEA Intranet, 2006-01-11. [12] Ad in IKEA ideas 3.03. Inter IKEA Systems B.V.

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Trade Credit Periods in Retail Commerce for Products of Mass Consumption: An Application to Spanish Legislation Javier Oubiña, Jaime Romero and María Jesús Yagüe

Abstract Trade credit periods from providers constitute a key indicator of the market power of large retail groups in distribution channels. The current study uses a database of financial statements of retail and production firms to demonstrate that the legal measures established at the European level in general, and specifically in Spain, to fight delinquency in commercial operations are having an appreciable effect on reducing payment periods for retail firms. On the other hand, an analysis of trade credit periods at the level of manufacturers enables us to confirm that manufacturers also postpone a substantial part of their payment to their respective suppliers of raw materials. Finally, we propose an explanatory model for trade credit periods in retail firms that, once contrasted, enables us to conclude that the explanations for trade credit periods should be found in the market power, efficiency and level of indebtedness of the retail firms.

Keywords Trade Credit, Payment Period, Manufacturer-Retailer Relationship, Market Power, Distribution Channel Acknowledgements: This study received support from project ECO2008-00488 of the Spanish Ministry of Science and Innovation and from the agreement signed between the SECRETARY OF STATE OF TOURISM AND COMMERCE of the Ministry of Tourism and Commerce and the Autonoma University of Madrid to analyze the trade credit periods in retail commerce for products of mass consumption. Javier Oubiña (corresponding author) Departamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid, Spain (Tel: ++34 914973551; E-mail: [email protected]). Jaime Romero Departamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid, Spain. María Jesús Yagüe Departamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid, Spain.


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1.


Introduction and Objectives

“Commercial credit”, that is, credit that firms provide amongst themselves, is the first form of extended credit that appears as society develops. For example, the manufacturer who provides the distributor with specific merchandise enables him or her to defer payment until the distributor has resold the merchandise and received payment from the end consumers (Petersen/Rajan 1997; Alfaro 2005). At present, this is one of the most problematic issues of manufacturerdistributor relations, as it is one of the key elements demonstrating the market power of large retail groups in distribution channels (Cruz et al. 1997; Sheu/Hu 2009). The concern shown by the main associations and groups that represent European manufacturers indicates the importance of this topic, as do the legal initiatives that government bodies in each of the European Union member countries have undertaken. The European Economic and Social Committee takes this market power approach when it makes the claim that long-term payments often stem from the abuse of a dominant position and that reducing payment deadlines must be an economic policy objective (EESC 1998; Iglesias et al. 2007). In Spain, specifically, Law 3/2004 of December 29, which went into effect January 1, 2005, introduces legal regulations to limit the excessive use of this kind of commercial practice. This article is a practice and conceptually based article that will use a series of simple research methodologies to answer the main questions that should be considered in the study of trade credit periods granted by providers in the distribution channels. The main objective is to confirm the effect of European governments’ legislative measures to combat excessive numbers of days of trade credit in commercial operations. We will take as our reference the impact of the Spanish law cited above, which establishes measures to fight delinquency in commercial operations. The law fixes maximum limits for trade credit periods at 30 days for fresh or perishable products and 60 days for canned goods and non-food mass consumption goods. A full study of trade credit periods in the value chain of mass consumption products requires complementing information on retail firms’ deferrals of payment with data on the number of days that manufacturers of products of mass consumption in turn postpone paying their raw materials suppliers. In this way, we hope to identify the proportion of the financing cost of the commercialization process that each agent in the channel assumes until the products are in the hands of the end consumers. The second goal of this study is thus to quantify the manufacturers’ deferments to their respective providers. Finally, we cannot conclude this study without addressing the causes for trade credit periods among retail firms. We therefore propose an explanatory model based on the main theoretical focuses that have been contrasted empirically in different economic contexts. In the model, we incorporate different independent variables that reflect financial, competitive, and marketing arguments to explain the differences in entrepreneurial behavior observed among the main

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firms in the sector. The information on these variables comes fundamentally from the structure of their results accounts and balance sheets. We attempt to identify the main factors and their effect on the different periods of trade credit that retail firms establish in their commercial transactions with their providers. Thus, in this study we apply a twofold methodology. On the one hand we provide a descriptive analysis of the evolution of trade credit periods for both manufacturers and retailers. On the other hand we develop a regression model that aims to identify the drivers of trade credit period length.

2.

Literature Review

Distribution in Europe has undergone an especially intense and rapid process of modernization, changing in three decades from a distribution-based model of traditional commerce to the implementation of modern hypermarket and supermarket chains. This consolidation of mass distribution involved considerable increases in concentration levels in the retail step of distribution channels (Casares/Rebollo 2004). The first efforts to systematize knowledge of the distribution channels were based on the analysis of the functions to be performed by commercial distribution (Alderson 1954) and analysis of the efficiency of their execution (Bucklin 1965). This “economicist” perspective was followed by considerations of the distribution channel’s socio-political aspects (Stern/Reve 1980). This second perspective considered that issues related to market environment and connections between firms in the commercial process have components and repercussions that go beyond the strictly economic aspects of commercial transactions. However, “socio-political” and “economic” aspects are without doubt closely related to each other, as the exercise of market power by the party with a strong negotiating position is revealed in a series of economic concessions granted in one form or another by the party in a weaker position. Specifically, one of the most common ways that large retail groups show market power in distribution channels is the achievement of longer payment periods, through which these retail groups carry out a financial leveraging strategy to take advantage of the “cash flow” generated. If applied without proper financial analysis, this dynamic can considerably increase the risk of insolvency and ultimately the firm’s vulnerability if the guarantees that the financing itself provides decrease substantially. In the debate on trade credit periods from producers to distributors, it is usually argued that payment periods cannot be classified as “correct” or “excessive” when they emerge from the rules of the market itself. According to this view, agreements between the parties should determine the contract conditions, one of which is payment period. The principle of freedom of contract

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cannot be considered to have absolute validity, but only to be valid within a specific kind of environment. The principle of mercantile relations states that payment should be made when the transacted product is delivered, while admitting the possibility that the parties negotiate payment deferrals by mutual agreement in recognition of the need to finance the existing merchandise for the duration of the commercialization process. It is on this basis that the contracting parties establish the relation that leads to sharing responsibility for financing during the “maturation period” of the goods based on the average time of sale of each product in the different phases of the commercialization process. If the payment period exceeds the time of commercialization, it seems clear that this “denaturalizes” the economic foundation of the trade credit period. The credit can then be seen either as a strictly financial credit (at low cost) not motivated by the buying and selling of products, or as an “excessive” deferral outside common commercial practice. In Spanish markets, these “commercial practices” have traditionally been the well-known practices of cash payment at 30, 60 or 90 days, depending on the kind of product. The principle of freedom of contract thus has a basis in the commercial practices that serve as common, tacit pre-agreements whenever they appropriately include the different product maturation periods. In principle, we can thus consider “excessive” a payment period that goes beyond these common commercial practices. Based on the BACH database (Bank for the Accounts of Companies Harmonized) developed by the Commission of the European Communities and distributed by the Second Directorate General of the European Commission, Román (2000) argues that during the 1990s, Spanish retail commerce experienced a considerable difference between the period of payment to providers and the customers’ payment. At the same time, there was a greater laxness in payment periods in large firms relative to small and medium-sized enterprises. His results show that during this period Spain was, after Italy, the European country with the longest trade credit periods from providers, with periods considerably higher than in countries like France, Austria or Belgium. The patterns reported by Román (2000) are still valid (see Figure 1). Mediterranean countries, such as Italy, Portugal and Spain, have longer trade credit periods (around 80 days) than countries in Central Europe such as Austria, Germany, Finland and Belgium (around 40 days). This is partly due to differences in the legal environment of these nations. The regulations in Central Europe, which arise from Germanic Law, state that owning a good requires having previously paid for it. This has encouraged low non-payment rates and the acceptance of low trade credit periods. In contrast, the regulations in Mediterranean countries which come from Roman Law don’t require prepayment in order to transfer the property of a good. This has provoked a permissive attitude towards non-payment and the incorporation of trade credit periods as an important element in negotiations.


55

Figure 1: Trade Credit Evolution in European Countries

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Source: Boletín Económico ICE (2009, No. 2969, pp. 79-81).

The legislative measures to fight delinquency are based on the idea that providers are exploited by customers, who impose long periods for payment and payment delays without compensation. And apparently the large distributors obtain the longest deferrals of payment, while the small manufacturers are obliged to grant them, making trade credit periods the result not of efficiency but of the large commercial distributors’ abuse of their dominant position (Alfaro 2005). Cannari et al. (2004) in fact argue that large distributors with a good reputation obtain very long payment periods and the small providers, who lack such a reputation, suffer especially from these deadlines. The large firms receive better treatment, whether in prices or in payment periods, than the small ones. These findings are corroborated by the European Commission, whose “Guide for Companies on Directive 2000/35/CE” indicates that “the results of research performed show that large firms make delinquent payments twice as often as is recorded for SMEs and that, further, the delays in payment of large firms to SMEs are twice as long as the delays recorded for payments by SMEs to large firms.” The study by Iglesias et al. (2007) shows, however, that even if the theories on market power in distribution channels are essential to understand the phenomenon of trade credit periods, they are not sufficient and should be complemented by a focus on efficiency. According to this

56


study’s findings, some retailers use commercial credit as an instrument of protection against potential opportunistic behavior on the part of the provider. Likewise, distributors who invest in the provider’s brand image tend to obtain more commercial credit. Finally, distributors with high degrees of flexibility benefit from financial efficiency without having to have a strong negotiating position. Cruz et al. (1997) argue that the greater the degree of entrepreneurial growth experienced by the retail company, the greater the financing needs. We can thus expect that those retail organizations which are growing rapidly will focus their negotiating strategy on achieving longer trade credit periods. The goal is to find ways to finance their assets without explicit cost, ways that complement traditional sources of financing. In addition to their own resources, retail firms can turn to essentially two kinds of outside financing, one of these short- and the other long-term. In the case of retail businesses, the shortterm source is constituted fundamentally by financing from trade credits from providers, while the second involves using creditors or credit entities that grant a financing period of longer than one year. It is clear that the firms with a smaller proportion of long-term outside financing will tend to turn more to commercial creditors in the short term.

3.

Methodology: Database and Variables

To achieve the first goal proposed, we analyze the evolution of trade credit periods granted to retail firms by providers in recent years. By doing this, we hope to verify and quantify the effect of Law 3/2004, of December 29, which establishes measures to combat delinquency in commercial operations. As three years have passed since the law went into effect, we have a long enough time to make a sufficiently realistic and reliable evaluation of the influence of Law 3/2004 on trade credit periods from providers to retail firms. The sample of retail firms to be studied is formed of retail organizations belonging to non-specialized commerce (Group 521 of the NCEA - National Classification of Economic Activities). Our study focuses on the sector of products of mass consumption (primarily, fresh and canned foods, personal hygiene and home cleaning products). The study performed is based on analysis of the financial statements of these retail firms (profit and loss accounts and balance sheets). The information comes from CABSA [1] (Centre for Analysis of Balances), a firm that specializes in the creation and management of economic and financial databases included in the financial statements of firms in Spain. Further, this study includes complementary information provided by the DGPC (Directorate General for Commercial Policy of the Ministry of Industry, Tourism and Commerce).


57

We hope to achieve a fundamentally descriptive analysis whose keystone is the definition and quantification of the concept of the trade credit period from providers under study. The indicator for evaluation is “the number of days that firms on average postpone or defer payment to their providers.” Taking two of the items included in the financial statements of the retail firms, we construct a variable of trade credit period from providers (TCP) using formula (1), the formula usually employed in studies of commercial credit: TCP = Commercial creditors * 360/Sales costs

(1)

Where: Commercial creditors are the items so-named included under the rubric of short-term creditors of the liability of the balance, 360 is the number of days in the year and, Sales costs: the item in the profit and loss statement. The ratio above is used to calculate the trade credit period from providers for each individual firm. The aggregate indicator, the object of interest in our study, is calculated by the weighted sum of the individual ratios of trade credit periods for the billing percentage that each firm’s sales represent with respect to the total sales in the sample analyzed. The time period of the study includes the maximum number of years for which we have full information on the sample analyzed, 1999-2007. The time period 1999-2007 represents a sufficiently long period of time to observe the basic trend of trade credit periods from providers in recent years and the effect of the legal measure introduced during this period to regulate commercial delinquency. The common sample is constituted of 99 retail firms for which we have complete information from 1999-2007. We thus hope to minimize the presence of bias from the incorporation into the study of factors not controlled for, such as variation in the number and characteristics of the firms analyzed at different moments in time. In this way, differences in the results obtained cannot be attributed in any case to changes in the sample. According to AC Nielsen the sales volume of the five largest retailers of consumer goods in Spain represent a market share of more than a 60% in 2007. The 99 companies of our sample represent 38.97% of retail firms with more than 49 employees and 83.52% of sales volume in Spain, thus ensuring that the sample is representative. Further, we establish a classification based on size, using business turnover as a variable to measure size. We establish two groups of firms distinguished by whether their turnover in the last year analyzed, 2007, is less than 300 million EUR (SMEs) or greater than or equal to that figure (large firms). This segmentation of the sample seeks to confirm whether or not there are significant differences in trade credit periods by providers between both groups that might be attributable to differences in entrepreneurial size.

58


The second goal of this study is to complement the study of the evolution of trade credit periods for retail firms with a corresponding study of the evolution of trade credit periods by the manufacturers who supply those firms with products in order to identify what proportion of the cost of financing the commercialization process each agent in the channel assumes for the products of mass consumption before they reach the end consumer. The starting assumption of this analysis is that the financial burden is distributed or shared among the members of the commercialization channel. Contrary to this assumption, the manufacturers usually complain that they are victims who bear exclusively the entire cost of financing the commercial process of these products. The analysis is applied to a common sample of 319 producing firms belonging to the Grocery and Beverage Industry (Group 15 of the NCEA), which includes the following subsectors: Meat, Fish, Fruits and Vegetables, Greases and Oils, Dairy Products, Milled Products, Pet Food, Other Grocery Products` and finally, Beverages. See Table 1. The economic-financial information of the financial statements comes from the SABI database [2]. The study performed consists of analyzing the evolution of trade credit periods granted to providers by the manufacturing firms belonging to the subsectors indicated since 2005, the year in which Law 3/2004 against delinquency in commercial operations went into effect. To facilitate comparison, the TCP was calculated using the indicator applied to retail firms and Formula (1). Table 1: Sample Characteristics of Manufacturers

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To create the aggregate indicator we weighted the trade credit period of the individual firms by the percentage of each firm’s sales as compared with the total sales of the group considered. The third goal of this study is to propose an explanatory model of trade credit periods granted by providers.


59

To achieve this, we design a “cross-sectional” model applied to the last year, 2007, for which we have the information necessary to calculate both the variable to be explained and the variables representing the factors that influence the size of the TCP. Although the results obtained refer to 2007, we expect the significant factors explaining the phenomenon in one year to have a greater temporal validity, as financial and commercial decision-makers do not modify their decision rules with respect to the TCP in the short term. The model’s construction is based on the theoretical focuses that have been the subject of rigorous empirical contrast in different economic contexts (Cruz et al. 1997; Ng et al. 1999). Our model incorporates different independent variables that reflect the competitive, financial and marketing arguments supporting the factors that may potentially explain differences in entrepreneurial behavior observed between the main firms in the sector. Specifically, we see that the retail distributor’s market power acts as a key determinant of the TCP. Schiller (2003), building on industrial organization models by Bain (1956) and Scherer (1980) and the notion of extended rivalry by Porter (1979), proposes that market power refers to the ability of a firm to alter the market price of goods or services without the fear of losing customers to rival firms. This market power is often seen in the firm’s competitive position in terms of market share or participation (Rhoades 1985), which translates into greater dependence on manufacturers, who negotiate with these market-powerful retailers and are obligated to grant them longer payment periods. Another important indicator of market power is the gross margin [3] of the retail firm, defined as the difference between the sales figures and the sales costs. This indicator has been typically used as a proxy variable of market power in Industrial Economics. The relationship between gross margins and market power is supported by classical models of imperfect oligopolistic competition (Waterson 1980; Armstrong/Porter 2007). The purchase conditions are affected by incentives in the form of discounts and rappels on the tariff prices established, which exercise a decisive influence in increasing the gross margin. As these discounts are usually associated with amounts purchased, they should be more substantial for larger retail firms. Efficiency is another of the important explanatory factors of TCP, as improvements in efficiency should imply fewer financing needs and thus lower payment periods. A commonly used indicator of efficiency is rotation, defined as the relation between sales and assets, or economic profitability of assets, also understood as return on investment. In contrast, we expect that financing needs will be greater if the retail company experiences a higher degree of entrepreneurial growth. The indicators for measuring growth correspond to the inter-annual rates of variation in activity, in terms both of assets and of sales.

60


Finally, it is clear that among the factors determining TCP we find variables of financial management. To obtain the funds necessary to function, in addition to their own resources, retail firms can turn to two basic kinds of outside financing, one short- and the other long-term. In the case of retail businesses, short-term funding is constituted fundamentally of the financing from trade credits granted by the providers, whereas long-term funding involves creditors or credit entities that grant financing with a period of more than one year. It is obvious that firms with a greater proportion of outside financing in the long term will tend to use commercial creditors less in the short term. Along these lines, we can introduce a battery of explanatory variables into the model that reflect different ratios of the retail firms’ financing structure, on the level both of liquidity and debt quality and of solvency and financial autonomy. The description of the dependent variable used in the TCP model (number of days of the retail firms’ trade credit) and the independent variables incorporated into the final model [4] are the figures that contribute most to explaining the trade credit period (gross margin percentage, asset rotation, debt quality and indebtedness) and are shown in Table 2. We should point out that we also included a dummy variable in the analysis (1, 2) to indicate the size category to which the retail firm belongs. For SMEs (small and medium-sized firms), the dummy takes a value of “1” and for large firms (those whose billing volume exceeds 300 million EUR) a value of “2”. The empirical contrast of the explanatory model of the TCP is applied to a sample of 99 nonspecialized retail distribution firms (Group 5211 of the National Classification of Economic Activities, NCEA). [5] Table 2: Indicators of the Variables

Dependent Variable Explanatory Variables

4.

Name

Indicator Formula

Measure unit

Payment Period Gross Margin Asset Rotation Debt Quality Indebtedness

Commercial creditors * 360/Sales costs

Days

(Sales – Sales costs)*100 / Sales Sales / Assets Long-term creditors / (Long-term creditors + Short-term creditors) (Liabilities – Own funds) * 100 / Liabilities

% 0-1 0-1 %

Results

In this section we present two types of results. We first show a descriptive analysis of the evolution of trade credit periods of food products in Spain. Subsequently we present the results of our explanatory model for trade credit periods.


4.1.

61

Evolution of Trade Credit Periods in Retailers

Table 3, which corresponds to the graph shown in Figure 2, presents the results obtained in the analysis of evolution of trade credit periods from providers to Spanish retail firms in nonspecialized commerce for the period 1999-2007. In reading the table and the graph, we find information of considerable interest on the evolution of trade credit periods granted to retailers in Spain. First, for the total sample of firms considered in the last year analyzed, 2007, we observe a significant decrease - around 7 days, which increases to 10 days if we consider the period after Law 3/2004 comes into effect in 2005. To this we must add that, even in 2004, we see some anticipatory effect of the law when compared with 2003, as the economic agents in the sector knew that it was about to come into effect. Thus, the sum of successive decreases that occurred from 2003 until the last year available (2007) is quantifiable as 16 days. This analysis shows a clear effect: decrease in the trade credit period from providers in accord with the fundamental goal of Law 3/2004 to fight delinquency in commercial operations.

Table 3: Payment Period Evolution: Retailer

Source: Elaborated using information from CABSA

Second, the individual analysis of the evolution of trade credit periods granted to large firms, on the one hand, and to small and medium-sized firms on the other produces the following conclusions. 1) The tendency of the total sample is marked by the evolution of large retail firms that absorb most of the total sales in the sector, in spite of the fact that they are in the minority. This fact can be seen in the nearly parallel, almost superimposed, evolution of both functions. 2) The large firms maintain trade credits that are permanently longer than those of small firms. This evidence corroborates the proposal by Cannari et al. (2004) that the large distributors show greater market and negotiating market power to achieve longer trade credits. However, in recent years, the difference between large and small firms has decreased due to the fact that the large firms have reduced their number of days of delinquency more than the small firms have. 3) The cumulative decrease by the large distributors since the Law went into effect is ten days, while the SMEs’ reduction is just over one and a half days. 4) The weak negotiating position of the

62


small distributors vis à vis the providers is shown in their acceptance of shorter payment periods. In reality, we see a very constant tendency in SMEs to maintain their trade credit periods consistently around levels that range from 66-71 days of payment deferral. In sum, we see that the Law has affected principally the large firms, which have reduced their levels of TCP significantly. Figure 2: Payment Period (Retailers)

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Evolution in Trade Credit Periods in Manufacturers of Food Products

Table 4, associated with Figure 3, shows the evolution of the TCP both for the full sample of the firms manufacturing food products and for the firms belonging to each of the subsectors. For the total of the sample, we observe that the TCP is located around 50 days, although the quantity varies considerably based on the subsector considered. The TCP of firms that manufacture greases and oils is around 30 days on average, whereas the TCP for fruit and vegetables firms is approximately 60 days. Further, within the same subsector, we see variations over the three years considered. The TCP of manufacturers of dairy products, animal foods and other food products shows an increasing evolution throughout the period considered. In contrast, in the subsectors of fruits and vegetables and of greases and oils, the TCP has tended to decrease, whereas in subsectors for fish,


63

Table 4: Payment Period Evolution Manufacturers , ./,

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beverages and milled products, the period increases from 2005 to 2006 and decreases from 2006 to 2007. Finally, the TCP of meat companies hardly fluctuates, presenting a stable level throughout the three years considered. To provide evidence that supports or refutes our proposed assumption concerning the distribution of the cost of financing among the agents composing the chain for commercialization of

Figure 3: Payment Period (Manufacturers) 3

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64


products of mass consumption, we perform a comparative study of the TCP of the retailers and of manufacturers, Table 5, associated with Figure 4. The data indicate that the TCP of retailers is approximately the period shown, around 80 days, whereas that of the manufacturers is less, around 50 days. The TCP of retailers is thus 30 days longer than that of the manufacturers. However, the manufacturers postpone payment to their providers for a period of approximately two months. Therefore, the provider located at the beginning or at the origin of the physical distribution flow of the product in the supply chain is the one who assumes a good percentage - approximately two thirds - of the financial cost of the process.

Table 5: Comparative Analysis of Payment Period: Retailers vs. Manufacturers

% of trade credit periods of manufacturers over distributors Difference in retailer-to-manufacturer trade credit periods

2005

2006

2007

58 %

63 %

.68 %

35.27

29.64

23.52

Source: Elaborated using information from CABSA y SABI.

Figure 4: Comparative Analysis of Payment Period: Retailers vs. Manufacturers

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4.3.

65

Explanatory Model of Trade Credit Periods for Retailers

Now that we have analysed the temporal evolution of the TCP, from the perspective of both the production firms and the distribution companies, we present our work towards this paper’s third major objective. The basic idea is to estimate an explanatory model of trade credit periods granted by providers. The goal is to advance our understanding of the determinants of the differences observed between the TCPs of the individual firms for year 2007. In table 6 we show the average and standard errors of the dependent and explanatory variables of the model. The average payment period is 77.78 days (standard deviation: 47.17 days)

Table 6: Descriptive Statistics of the Variables Used in the Regression Model

Dependent Variable Explanatory Variables

Mean

Standard Deviation

Payment Period (Days)

77.78

47.17

Gross Margin

17.65

11.75

Asset Rotation

2.44

1.33

Debt Quality

.12

.15

Indebtedness

.64

.23

For the regression analysis, we apply the step-wise procedure, obtaining the results shown in Table 7. Here we can see the statistically significant effect of the independent variables indicated in the descriptive analysis. We should mention that the coefficient of determination R2 adjusted to the ascending model is “.28”, indicating that the model explains 28% of the variance of the dependent variable TCP. The F Snedecor obtained is 10.502, with a significance level of .000, which shows that the model as a whole is statistically significant.

Table 7: Multiple Regression Model of the Retail Payment Period 66 =3 = 7= = =3 = 7= = = =

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66


The results show that, in agreement with the hypotheses derived from our theoretical review, retail firms’ market power and their degree of efficiency show a statistically significant influence on trade credit periods granted by providers. Indeed, the results show that the retailers with efficient asset management measured as the quotient of sales volume over total assets (both fixed and current) postpone payment to manufacturers less, whereas a lower level of rotation means that the retailers must resort to greater financial leveraging to compensate for the minimal productivity of their assets. In contrast, the retailers who have greater market power, expressed in higher gross margins due to their negotiating market power, achieve longer deferrals. And the debt quality measured as the relation between long-term creditors and total outside funds (both long- and short-term) helps those firms with more long-term financing not to have to resort to the financing granted by commercial creditors in the short term. The results show that the fundamental explanatory factor of trade credit periods granted by providers, as well as the above-mentioned efficiency evaluated in terms of rotation, is based on the financial policy of the retail firms, specifically in their indebtedness policy. The degree of indebtedness was measured through the relation between outside funds and liabilities. That indebtedness takes a positive sign in the model shows that firms with fewer of their own resources which are therefore in greater need of outside funding achieve this funding, among other formulas, through the financing included in trade credit granted by providers.

4.5.

Managerial Implications

Some managerial implications arise from our analyses, particularly for retailers and manufacturers of consumer goods. First, companies do not negotiate trade credit periods without taking into account their financial situation. By contrast, even having the same profitability and/or growth objectives, the importance of trade credit periods of retailers varies according to their efficiency and market power. Thus, retailers with a high monopolistic power will probably consider enlarging trade credit periods as a way of reaching their objectives. On the other hand, an efficient retailer - with a business model based upon high rotation rates - will prefer reducing its supplying costs in exchange for accepting shorter trade credit periods. Similarly, retailers with a different financial structure will have a different attitude toward the employment of trade credit periods as a financial instrument. As a consequence, retailers that use trade credit periods for obtaining financial resources at a low cost as an alternative to long term indebtedness in order to pay for the growth of their fixed assets are assuming a high level of risk.


67

Manufacturers that need to sell their products through large retail chains (due to their size or other economic reasons) must foresee that they are going to be obligated to accept very long trade credit periods. They must find mechanisms to compensate for the financial cost of these credit periods. These mechanisms include: 1) increasing their prices (adequate for owners of strong brands), 2) neutralize the increase in financial costs by lowering manufacturing costs (appropriate for cost leader companies, usually very large firms) or 3) increase trade credit periods for their inputs suppliers. Similarly, manufacturers should deeply analyse the economic efficiency and the liabilities of the retailers they have to negotiate with, in order to check whether the distributors really need to postpone payments. Finally, our study also provides some insights for policy makers. In particular, our analysis makes clear that the identification of the links between the financial structure of retailers and their competitive patterns are very strong. Policy makers must take into account these links in order to set off control systems that allow anticipating when companies might stop paying their debts.

6.

Conclusions, Limitations and Future Lines of Research

Performing this study has enabled us to confirm that the legislative measures to combat delinquency in commercial operations have been having a considerable and continuous effect since the law went into effect in 2005. This effect began as an anticipated influence in 2004, producing a decrease in the trade credit period as compared to 2003. The credit continued to decrease in the first two years that the law was in effect (2005 and 2006), with a marked downward trend in the length of trade credit from providers to retail firms. This trend has been confirmed and consolidated in the last available set of statistics from 2007, the year in which the reduction of days that these firms postponed their payments was especially significant. The results obtained also show that larger retail firms always have longer trade credits than small firms in the period analyzed. This difference in the deferral between large and small-tomedium sized firms may be attributed in principle to the negotiating market power that larger distribution companies have in their transactions with production firms. On the other hand, the analysis performed of the TCP enables us to confirm that the average length of trade credit period from providers varies considerably based on the subsector considered. Therefore, we observe that not only do distributors delay payment to manufacturers, but manufacturers also defer payment to a lesser but not insignificant extent (especially in some subsectors) to their providers of raw materials. These initial agents in the value chain assume to a large extent, and in many cases the greatest part, of the financing cost for the production and commercialization process of the products of mass consumption.

68


To this we must add that, while the trade credit period of retail firms has declined consistently in recent years, the same trend does not occur in the case of manufacturing companies, which have tended to experience moderate growth or even remain stable in the last period. If we look for explanations for the extent of the trade credit period granted by providers, we find the cause to lie fundamentally in the strength of the negotiating position that comes with market power as well as in the firm’s capability to manage their retail business efficiently. Indeed, the regression analysis shows that the retail firms which defer payment most are those with the highest gross margins and the greatest asset rotation. This shows that the market-powerful retailers demonstrate their influence by, among other ways, obtaining longer trade credit periods. This enables them to easily reorganize and improve their profit and loss statements through effective management of the greater level of cash flow that they enjoy. On the other hand, there is less financial need in firms that manage their retail businesses efficiently, thereby decreasing the days of trade credit granted by providers. Although important, these two explanatory factors have less influence on the TCP than the two financial ratios: degree of indebtedness and debt quality. The former shows that the most indebted retail firms defer their payments longer, as part of this debt comes precisely from the short-term debt contracted with the commercial creditors. The second ratio shows that retail firms which obtain better long-term financing, associated with a better quality of debt contracted, do not have as great a need for the financing granted by their providers of goods. We must take into account that this study has a general and descriptive focus, as it is based on data from the profit and loss statements of the retail firms. This limitation in the sources of information has prevented us from incorporating into the analysis a series of explanatory factors used in other studies mentioned in the literature review as conditioners of the period of commercial credit. These are variables such as the length of the manufacturer-distributor relationship, the provider’s control over variables of its product marketing at the point of sale, by belonging to a purchase centre, and opportunistic behavior by the provider. In a future study, it would be interesting to obtain and introduce this set of variables. It would also be interesting to develop an explanatory model of trade credit periods for manufacturers. This would allow testing whether the drivers of trade credit periods are the same as for retailers, thus generalizing our model’s results. Not reaching similar results would indicate that the model should be adapted to each type of company. In any case, the debate over whether the legal regulation of trade credit periods is appropriate remains unresolved. It is perhaps important to remember that the key to combating delinquency lies not only in the passing of laws but also, as Brachfield (2006) indicates, in improving Spanish and European retail firms’ payment behavior through an ethical code that ensures self-regulation of payment periods.


69

Notes [1] The authors wish to thank CABSA (Central de Análisis de Balances) for its collaboration in providing without restrictions the information on the financial statements of the firms we analyzed. [2] Free access to SABI is available through the web server of Autonoma University of Madrid Library. [3] Gross margin can be considered as the operational variable of the theoretical concept underlying in Lerner’s index, which is an indicator of monopolistic power. [4] This explanatory analysis was performed using Minimum Least squares in stages until we determined the indicators that best explained the differences in the TCPs observed. [5] These 99 firms were obtained after filtering out cases that were either missing data for some variables or that include observati ons that they are not strictly retail firms.

References Alderson, W. (1954): Factors governing the development of marketing channels, in: Mallen, B. (ed.): The Marketing Channels: a conceptual viewpoint, New York. Alfaro, J. (2005): La nueva regulación del crédito comercial: una lectura crítica de la Directiva y de ley contra la morosidad, in: Revista para el análisis del Derecho, No. 3, July, pp. 2-26. Armstrong, M.; Porter, R. (2007): Handbook of Industrial Organization Series, Vol. 3, North Holland. Bain, J. (1956): Barriers to New Competition, Cambridge, MA. Brachfield, P. J. (2006): El aplazamiento de pago como fuente de financiación. Quince principios de buen comportamiento, in: Estrategia Financiera, January, XXII (224), pp. 24-29. Bucklin, L. P. (1965): Postponement, speculation and the structure of distribution channels, in: Journal of Marketing Research, Vol. 2, February, pp. 26-32. Cannari, L.; Chiri, S.; Omiccioli, M. (2004): Condizioni di credito comerciale e differenziazione della clientela, documento de trabajo, Banca de Italia, no. 495, http:// www.repec.org, accessed December, 2004. Casares, J.; Rebollo, A. (2004): Distribución Comercial, Madrid. Cruz, I.; Fernández, A.; Rebollo A. (1997): Estrategia de aplazamiento de pago en las empresas españolas de distribución de alimentación. Perspectivas del Sistema Financiero. Monograph on “Actividades financieras en la distribución comercial”, in: Perspectivas del Sistema Financiero No. 57, pp. 45-57. EESC European Economic and Social Committee (1998). Opinion of the economic and social committee on the ‘Proposal for a European parliament and council directive combating late payment in commercial transactions’, in: Official Journal of the European Communities (28. 12. 98), C407/50-55. Iglesias, V.; Vázquez, R.; Rodríguez del Bosque, I. (2007): Intra-brand differences in payment periods in marketing channels, in: International Journal of Research in Marketing, Vol. 24, No. 1, pp. 49-63.

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Ng, C. K.; Smith, J. K.; Smith, R. L. (1999): Evidence on the determinants of credit terms used in interfirm trade, in: Journal of Finance, Vol. 54, No. 3, pp. 1019-1029. Petersen, M. A.; Rajan R. G. (1997): Trade credit: theories and evidence, in: Review of Financial Studies, Vol. 10, No. 3, pp. 661-691. Porter, M. E. (1979): How competitive forces shape strategy, in: Harvard Business Review, Vol. 57, No. 2, pp. 127-136. Rhoades, S. A. (1985): Market share as a source of market market power: implications and some evidence, in: Journal of Economics & Business, Vol. 37, No. 4, pp. 343-364. Román, M. V. (2000): Situación del aplazamiento de pago en España: un análisis comparativo en el ámbito europeo, in: Boletín ICE Económico: Información Comercial Española, No. 2645, pp. 25-34. Scherer, F. M. (1980): Industrial Market Structure and Economic Performance, Chicago. Sheu, J. B.; Hu T. L. (2009): Channel market power, commitment and performance toward sustainable channel relationship, in: Industrial Marketing Management, Vol. 38, No. 1, pp. 17-31. Schiller, B. (2003): The Economy Today, 9th ed., New York. Stern, L. W.; Reve. T. (1980): Distribution channels as political economies: a framework for comparative analysis, in: Journal of Marketing, Vol. 44, No. 3, pp. 52-64. Waterson, M. (1980): Price-cost margins and successive market market power, in: Quarterly Journal of Economics, Vol. 94, No. 1, pp. 135-150.

Customer Satisfaction with Loyalty Card Programs in the Austrian Clothing Retail Sector an Empirical Study of Performance Attributes Using Kano’s Theory Eva Walter, Claudia Steyrer and Stefan Wiesel

Abstract The popularity of relationship marketing has increasingly grown in the past couple of decades. Retailers recognize that satisfying and retaining consumers by building relationships is one of the most sustainable competitive advantages. Although the use of loyalty cards is popular in retailing, a lot of customer loyalty programs are virtually interchangeable, lacking in attractiveness and differentiation. Therefore, it is important to identify the determinants of customer satisfaction relating to these programs. Does aiming for customer satisfaction mean understanding and anticipating what customers want from a loyalty card program? A Kano model of customer satisfaction is investigated; and “attractive”, “must-be”, “one-dimensional” and “indifferent” requirements are identified based on a sample of 300 customers.

Keywords Customer Satisfaction, Loyalty Card Programs, Kano Theory

Eva Walter (corresponding author) Department of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economics and Business, Vienna, Austria (Tel: +43 1 31336 4622; E-mail: [email protected]). Claudia Steyrer Department of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economics and Business, Vienna, Austria. Stefan Wiesel Department of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economics and Business, Vienna, Austria.


December 4, 2009 April 22, 2010 April 26, 2010


Vol. 24, Issue I, 2010, pp. 71-96

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1.


Introduction

Around the world retail competition in consumer markets continues to intensify and retailers as well as marketers are seeking strategies for maintaining both the interest and loyalty of their customers. Therefore, relationship marketing has grown in popularity during the past decades and the implementation of relationship marketing programs is steadily increasing (Noble/ Phillips 2004, p. 290). Today, retailers recognize that satisfying and retaining consumers by using relationship building activities is one of the most promising forms of sustainable competitive advantage. Although loyalty cannot be taken as a direct proxy for profitability, numerous theoretical and empirical studies have found that customers generate increasingly more profits for each year they buy from and continue to trust the company (Meffert 2008, p. 160; Noble/ Philips 2004, p. 290; Reinartz/Kumar 2000, p. 28). In retail practice it is very common to use card-based programs for loyalty enhancement strategies. Such programs involve the issuance of specially coded cards or other special scanner-readable cards, which can then be used at the checkout with the objective of increasing customer propensity. The customer can derive several benefits from the usage of loyalty cards like percentage/price reductions, special offers, gift-packaging-service, their own parking area or additional information (Allaway et al. 2006, p. 1318). After growing by 25 to 30 percent a year during the 1990s, loyalty cards are now commonplace in European retailing. In some markets, the penetration has approached saturation, while in others it is still advancing at a steady pace (Ziliani/Bellini 2004, p. 282f.). In Austria, loyalty card programs are among to the most popular relationship-building activities (Seebacher 2007, p. 78). Nonetheless, a lot of customer loyalty card programs are virtually interchangeable and consumers do not use them (Hoffmann/Naß 2007, p. 6). There are many different reasons why consumers do not want to engage in a relationship with the retailer. Often consumers do not feel that the benefits offered by retailers are sufficient or of interest for them (Noble/Philips 2004, p. 300). Furthermore, there is also a lack of attractiveness and differentiation (Tomczak et al. 2008, p. 325). Consequently, it is important to identify the determinants of customer satisfaction with loyalty programs to offer suitable benefits to the customers. Aiming for customer satisfaction means understanding and anticipating what customers want from a loyalty card program, which performance attributes generate positive response and have the ability to surprise the customer. Which benefits can be offered to obtain a high level of customer satisfaction, which features have a disproportional influence on satisfaction, and which attributes are essential to the customer? Based on the Kano model of customer satisfaction, the purpose of this study is to analyze different performance attributes and to identify the most influencing factors on customer satisfaction.

Walter, E.; Steyrer, C.; Wiesel, S.

73

The remainder of this paper is organized into four parts. The following section (section 2) provides a literature review and the description of the Kano model of customer satisfaction. In the third section the conceptual framework and the derived hypotheses are reported. The fourth presents the construction of the Kano questionnaire, the empirical study and the steps of data analysis. Finally, the results are discussed and we explore limitations and some implications for future research.

2.

Theoretical Background

In modern management theory, customer satisfaction is considered one of the most important drivers of long-term business success. This shift in strategic thinking is based on the assumption that customer satisfaction is one of the most powerful indicators for a company’s future, as a high level of customer satisfaction leads to a high level of customer loyalty. Numerous theoretical and empirical studies discuss the positive effects of customer satisfaction (Bolton 1998; Homburg/Bucerius 2006, p. 93; Mittal/Kamakura 2001). Albeit nonlinear, higher satisfaction nevertheless increases customer loyalty and ensures a lasting cash flow. Satisfied customers are, furthermore, less price sensitive and more inclined to spend more on tried and tested products (Homburg et al. 2005, p. 94; Yu/Dean 2001, p. 247). Stable business relations have other advantages: the positive image reduces the costs of attracting new customers, and the high level of customer loyalty lowers transaction costs for existing customers (Matzler et al. 2009a, p. 9). As a consequence, practitioners need to understand how satisfaction is engendered, how it can be influenced, which features have a more than proportional influence on satisfaction and which attributes are an absolute must in the eyes of the customer. So far, the literature on customer satisfaction is characterized by the predominance of onedimensional models (Anderson/Mittal 2000, p. 108). The best known framework for satisfaction studies is probably the expectation disconfirmation paradigm. It proposes that customers maintain a standard of reference to which they compare perceived performance. Satisfaction results if performance is higher than expected; dissatisfaction results if it is lower (Homburg/ Stock-Homburg 2008, p. 19; Foscht/Swoboda 2005, p. 209). In this case, only the overall customer satisfaction with the total product or service performance is considered (Bartikowski 2002, p. 16). But the identification of the determinants of customer satisfaction is a central concern for both marketing research and practitioners. It is important to know which service attributes add value and increase satisfaction, which of them merely fulfill minimum requirements and minimize dissatisfaction, and which do both. Consider the following examples: a clean restaurant engenders no satisfaction, but a dirty restaurant strongly attracts negative feelings; receiving a free drink in a restaurant is pleasantly surprising, but there is no reason for dissatisfaction if it is not delivered for free. In cases such as these, variant attributes may result in cus-

74


tomer satisfaction or dissatisfaction or evoke no feeling from the consumer (Bartikowski/Llosa 2004, p. 68). This is the core concept of the Kano model. The earliest concept for a two-dimensional model was proposed by Frederick Herzberg (Herzberg et al. 1959). The motivator-hygiene theory or the two-factor theory of work introduces a distinction between satisfaction and dissatisfaction. The theory posits that the factors causing job dissatisfaction are different from the factors causing job satisfaction (Matzler et al. 2004, p. 1182; Tontini 2000, p. 728). Inspired by Herzberg’s theory in behavioural science, Kano et al. (1984) developed the “Theory of Attractive Quality”. The theory of attractive quality is useful to better understand different aspects of how the customer evaluates a product or service (Löfgren/Wittell 2007, p. 56; Nilsson-Witell/Fundin 2005, p. 152). To understand the role of quality attributes, Kano et al. (1984) present a model that evaluates patterns of quality based on customers’ satisfaction with specific quality attributes and their degree of sufficiency. The theory explains how the relationship between the degree of sufficiency and customer satisfaction with a quality attribute is different for different kinds of attributes. For some attributes this relationship is positive asymmetrically, positive linearly, negative asymmetrically, non-existent or negative linearly (Ting/Chen 2002, p. 548). Depending on the nature of this relationship, product and service attributes are distributed amongst five categories of perceived quality: “must-be elements”, “one-dimensional elements”, “attractive elements”, “indifferent elements” and “reverse elements” (Löfgren/Wittell 2005, p. 62). If must-be requirements are not fulfilled, the customer will be dissatisfied, but their fulfillment will not increase satisfaction, as these requirements are taken for granted. So, fulfilling these requirements will only lead to a state where the consumer is not dissatisfied. Contrary to the must-be requirements, a high level of fulfillment of one-dimensional requirements will lead to a high level of consumer satisfaction. Attractive requirements have the most influence on satisfaction. Those requirements are neither explicitly expressed nor expected by the consumer (Sauerwein 1999, p. 416). Kano’s model of customer satisfaction connects the ideas of the theory of attractive quality with the acceptations of the expectation disconfirmation paradigm. According to Kano’s model of attractive quality, satisfaction with a quality attribute is the result of an evaluation of objective and subjective qualities. Transferring this acceptation to the expectation disconfirmation paradigm, customer satisfaction then is the result of an evaluation of the standard of reference to the perceived performance (Hölzing 2008, p. 85). Figure 1 shows the nature of this relationship. Consequently performance attributes are classified into the following five categories (Matzler et al. 2009b, p. 322f.; Homburg/Stock-Homburg 2008, p. 33f.; Matzler et al. 2004, p. 1183f.): - Must-be requirements: are minimum requirements that cause dissatisfaction if not fulfilled but do not lead to customer satisfaction if fulfilled or exceeded. Negative performance on these attributes has a greater impact on overall satisfaction than positive performance. The


75

Figure 1: Kano’s Model of Customer Satisfaction

!

!

#

Source: Berger et al. (1993), p. 4.

fulfillment of basic requirements is a necessary but not a sufficient condition for satisfaction. Basic requirements are entirely expected. The customer regards them as prerequisites, they are taken for granted. - One-Dimensional requirements: lead to satisfaction if performance is high and to dissatisfaction if performance is low. In this case, the attribute performance-overall satisfaction relationship is linear and symmetric. Usually one-dimensional requirements are explicitly demanded by customers. - Attractive requirements: are the requirements that increase customer satisfaction if delivered but do not cause dissatisfaction if they are not delivered. Positive performance on these attrib-

76


utes has a greater impact on overall satisfaction and these requirements are the key to customer satisfaction. Attractive requirements are neither explicitly expressed nor expected by the customer. - Indifferent requirements: these requirements refer to aspects that are neither good nor bad. Consequently they do not result in either customer satisfaction or customer dissatisfaction. Often indifferent requirements are those product or service attributes that are never or rarely used by the customer. - Reserve requirements: these requirements refer to a high degree of achievement resulting in dissatisfaction and to the fact that not all customers are alike. The model implies that basic requirements establish a market entry threshold. If they are delivered to a satisfactory level, an increase in their performance does not lead to an increase in customer satisfaction. One-dimensional requirements are typically directly connected to customers’ explicit needs and desires. Therefore, a company should be competitive with regard to one-dimensional factors. Attractive requirements are unexpected and surprise the customer. As they generate delight, a company should try to stand out from the competition with regard to these attributes. Furthermore, additional advantages exist for classifying customer requirements by means of the Kano method. Attributes requirements are better understood. The criteria that have the greatest influence on customer satisfaction can be identified (Matzler/Bailom 2009, p. 293). Classifying attribute requirements into must-be, one-dimensional and attractive dimensions can be used to focus on priorities for development. It is not very useful to invest in improving must-be requirements which are already at a satisfactorily level, but better to improve unidimensional or attractive requirements as they have a greater influence on the customers’ level of satisfaction (Matzler/Bailom 2009, p. 293; Sauerwein 2000, p. 180). Kano’s method provides valuable help in trade-off situations in the development stage. If two features cannot be met simultaneously due technical or financial reasons, the criterion can be to identify which has the greatest influence on customer satisfaction (Matzler et al. 2004, p. 1184). Kano’s model of customer satisfaction can be used to optimize quality function deployment. A prerequisite is identifying customer needs, their hierarchy and priorities. Kano’s model is used to establish the importance of individual features for the customer’s satisfaction and thus it creates the optimal prerequisite for process-oriented product development activities (Sauerwein 2000, p. 5). The Kano method has been discussed in numerous theoretical articles and empirical studies and the basic idea of this model is widely accepted in current research (Matzler et al. 2009b, p. 324; Hölzing 2008, p. 149f.; Bartikowski/Llosa 2004, p. 70f.; Matzler et al. 2004, p. 1183; Gierl/ Bartikowski 2003, p. 24f.; Anderson/Mittal 2000, p. 108f.; Vavra 1997, p. 380ff.; Tontini 2000, p. 730ff.; Sauerwein 2000, p. 25f.). Furthermore, several researchers have studied Kano’s


77

method in combination with other methods (Tontini 2007, p. 603f.; Chen/Su 2006, p. 595f.). Finally, the Kano method has been used in current empirical studies to classify consumer requirements in, for example, supermarkets (Ting/Chen 2002, p. 548f.), building centers (Sauerwein 2000, p. 154f.), shopping centers (Baier 2001, p. 4), in tourist offers (Lee/Chen 2006, p. 301) and tourist agencies (Kaapke/Hudetz 2001, p. 128).

3.

Research Hypotheses

The literature review does not show a consensus on the minimal characteristics of a loyalty card program. From a retailer’s perspective, the loyalty card is the prime interface between the retailer’s database and the customer. From a customer’s perspective, the card is a tool that generates extra rewards (Wieder 2009, p. 625; Tomczak et al. 2008, p. 335; Schweitzer 2003, p. 21). Typically, loyalty card programs serve four functions (see Figure 2). First, customer cards perform an identification function. Nowadays cards are normally configured with a magnetic strip, barcode or chip, to transfer information to the retailer (Kasavana 2005, p. 31). Second, customer cards serve a memory function and act as an advertising medium. Finally, loyalty card programs have a finance function and a marketing function (Helm/Ludl 2005, p. 1137). Through these functions, loyalty cards provide benefits to the customers. Customers can benefit from participation in loyalty card programs in several ways. Within the finance function, programs offer customer price performance (percentage/price reductions, specials offers) or payment- and credit performance (credit facilities) and bestow economic benefits (Guldin/Ohr 2008, p. 837; Teichmann 2006, p. 57). Together, these can create economic switching barriers, in which case customers loose advantages if they change suppliers (MeyerWaarden 2006, p. 225). In relation to their marketing function, customers can be offered special services. These services endow service benefits (gift packaging, reserved parking, additional information) and psycho-social benefits (preferential treatment sponsored by the retailer like pre-sale campaigns, style counseling) (Guldin/Ohr 2008, p. 837; Teichmann 2006, p. 55). Such service performance attributes can create emotional bonds that enhance customer commitment, which will strengthen the loyalty program’s effects beyond those of the economic aspects. Consumers may appreciate rewards which make them feel like preferred customers and thus will identify more strongly with the company. In this scenario, an interactive, high quality, longterm relationship that leads to greater trust, commitment and loyalty becomes an emotional choice factor and could lead to a high switching cost (Allaway et al. 2006, p. 1319; Helm/Ludl 2005, p. 1139). According to the extant literature, price performance is considered a standard attribute of a loyalty card program (Hari/Meyer 2008, p. 20; Teichmann 2006, p. 56; Lauer 2004, p. 46; Ploss

78


Figure 2: Functions of a Loyalty Card Programm

! "

# $

! " %

Note: Helm/Ludl (2005), p. 1137.

2002, p. 28). For customers price performance is often a basic criteria and a reason to join a loyalty card program. Therefore, we hypothesize as follows: H1.a: The evaluation of price performance is identified as a must-be requirement of loyalty card programs. Service performance has the potential to surprise customers. The fulfillment of these requirements brings high satisfaction and creates emotional solidarity (Hoffmann/Naß 2007, p. 41; Teichmann 2006, p. 55). A retailer can set itself apart from its competitors through service performance. Therefore, we hypothesize as follows: H1.b: The evaluation of service performance is identified as an attractive requirement of loyalty card programs. Besides the fact that Austria has been typically a “cash” country over the past decade, there has been a steady increase in the preference for cashless purchasing. From a consumer’s perspective a credit card or other type of card functions as an alternative payment and financing medium. From a retailer’s perspective it is possible to perform a payment- or credit service in several ways. First, it is possible to create an in-house card or a sales account. Consequently, the cus-


79

tomer has an additional payment card. These non-cash payment facilities are often characterized by high abstraction levels, and loss of subjective control over expenditures (Penz et al. 2004, p. 771; Schweizer 2003, p. 23). Second, it is possible to cooperate with a debit card company (Maestro) or a credit card company (Visa, MasterCard) to create a versatile usable card. These facilities have the benefit that they are easy to handle and increase convenience. Also, control over expenditures could be increased (Teichmann 2006, p. 61). In Austria, such loyalty programs are not very popular. Hence it would be interesting to find out how these services influence customer satisfaction and we hypothesize as follows: H1.c: The evaluation of in-house payment- and credit service is identified as an indifferent requirement of loyalty card programs. H1.d: The evaluation of general payment- and credit functions is identified as an attractive requirement of loyalty card programs. For better customer satisfaction and less customer dissatisfaction, a company has to make the effort to offer attractive product or service elements in new services as well as eliminate possible defects in must-be elements. Because the judgment of an attractive element or a must-be element is highly personal, it is important to designate segments. Segmentation, the notion that nearly any market can be divided up into variety of different behavioural, demographic, or psychographic groups with potentially very different reactions to marketing stimuli, is a central concern for marketing researchers and practitioners (Chen/Su 2006, p. 598f.; Baier 2002, p. 5). Having now established the background that the Kano model demonstrates that performance attributes can be transformed into terms of requirements, one can then take demographic variables such as age, gender, etc. or behavioural variables to create different market segments and develop services with attractive requirements for these respective customer groups (Hölzing 2008, p. 87f.). Therefore, we propose as follows: H2.a: There are no differences between men and women in the evaluation of performance attributes within loyalty card programs. H2.b: There are differences between credit cardholders and customers without any credit card in the evaluation of loyalty cards with payment and/or credit functions. Kano’s theory predicts that product and service attributes are dynamic in that, over time, an attribute will change from being indifferent, to attractive, to one-dimensional, and finally into a must-be (Hölzing 2008, p. 61). According to Kano product and service attributes do follow this lifecycle. When introduced to a market, often an attribute may not be very interesting to customers - they feel indifferent towards the new attribute. In the growth phase of a market, an attribute might gain the ability to make customers feel satisfied, but still neutral if the service does not include this attribute. However, customers who have used the attribute will frequently be strongly dissatisfied if it later disappears. After frequent usage, the perception of the attrib-

80


ute changes to one-dimensional, and over time to must-be (Nilsson-Witell/Fundin 2005, p. 153f., Sauerwein 2000, p. 20). Therefore, we hypothesize as follows: H3:

There is a difference between loyalty cardholders and customers without loyalty cards in the evaluation of performance attributes within loyalty card programs.

The literature review shows that customers in retail fashion are poised for testing new functions in loyalty card programs (Pohlmann 2003, p. 161; Ritter 2002, p. 54). So it is important to find out if there is an acceptance for a payment- or credit function and which factors influence the use of such cards. Actually, little is known about the factors that influence consumers’ use of store cards. According to Lee and Kwon (2002, p. 241) the usage is related to a number of variables, including the use of payment cards, income and education. In Austria, preference for cashless payments increases with higher income and education (Mooslechner et al. 2006, p. 134). Therefore, we propose: H4.a: Education has positive affects on the usage of cards with payment and/or credit functions. H4.b: Income has positive affects on the usage of cards with payment and/or credit functions. H4.c: The more loyalty cards a customer has, the more likely the consumer will want to use loyalty cards with payment and/or credit functions. Nowadays, most customer loyalty card programs are virtually interchangeable. They lack in attractiveness and differentiation. A retailer has to offer an additional incentive to make its card competitive and attractive (Hoffmann/Naß 2007, p. 6). According to Ferguson (2006, p. 374) a payment- and credit service should be an integral part of the loyalty strategy and can effectively differentiate the loyalty card. Finally, an integral payment- and credit service can positively affect customer satisfaction with the loyalty program. In line with these findings we hypothesize as follows: H5:

Loyalty cards with payment and credit functions positively affect consumer satisfaction with the loyalty card.

The hypotheses formulated will be subjected to an empirical review in the following chapter.

4.

Empirical Study and Methodology

4.1.

Kano Questionnaire

The Kano model brings a different perspective to the analysis of product or service attributes because it takes into consideration the asymmetrical and non-linear relationship between performance and satisfaction.


81

The identification of attractive, must-be, one-dimensional and indifferent requirements is based on a “Kano questionnaire”, which is constructed of pairs of customer requirement questions. The first question, or functional question, identifies the reaction of the customer as to whether or not the performance of the requirement is sufficient. The second question, or dysfunctional question, identifies the reaction in case the performance is insufficient. So each question has two parts: “How do you feel if that feature is present in the product or service?” (functional question) and “How do you feel if that feature is not present in the product or service?” (dysfunctional question). In the original version customers had to select one of five alternative answers for each part of the question. These five alternatives are described as “I like it that way”; “It must be that way”; “I am neutral”; “I can live with it that way” and “I dislike it that way”. The wording of the alternatives is a critical choice when using this approach. Depending on the customers’ answers to the functional and dysfunctional questions, the requirement may be classified as an attractive, must-be, one-dimensional, questionable, reserve or indifferent. The five-level Kano evaluation table has 25 possible outcomes (see Table 1). Table 1: Kano Evaluation Table Performance Requirements

Dysfunctional 3. I am 4. I can live neutral. with it that way.

1. I like it that way.

2. It must be that way.

5. I dislike it that way.


Q

A

A

A

O


R

I

I

I

M

3. I am neutral.

R

I

I

I

M

Functional

4. I can live with it that way.

R

I

I

I

M

5. I dislike it that way.

R

R

R

R

Q

Notes: A(ttractive), O(ne-dimensional), M(ust-be), Q(uestionable), R(everse), I(ndifferent) Source: Sauerwein (2000), p. 38.

A lot of studies use simplified versions of the original five-level Kano questionnaire (Löfgren/ Witell 2007, p. 58f.; Corbella/Maturana 2003, p. 73; Gierl/Bartikowski 2003, p. 24; Baier 2001, p. 5; Sauerwein 2000, p. 82f.). The aim of this approach is to reduce complexity. The advantage of simplified response scales lies in the fact that reduced scales represent an option for developing simpler, less extensive questionnaires, which is important for correctly filling out the questionnaires and for attaining a higher response rate in surveys (Hölzing 2008, p. 116; Gierl/Bartikowski 2003, p. 24; Matzler et al. 2009b, p. 334). In this study, the simplified version according to Gierl/Bartikowski is used (Gierl/Bartikowski 2003, p. 24). For each part of the question, the customer selects one of three instead of five alternative answers (see Table 2).

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Table 2: Functional and Dysfunctional Questions in the Kano Questionnaire I like it that way.

It must be that way.

I am neutral.

O

O

O

Functional Question Dysfunctional Question

I can live with it that way.

I dislike it that way.

O

O

O

Source: Gierl/Bartikowski 2003, p. 24.

The three-level classification has the additional benefit of facilitating the completion of the classification of attributes. This scheme thus has 9 possible outcomes (see Table 3). The two classes questionable and reserve do not exist in this evaluation table. The category “questionable” shows that there are contradictions in the responses given by the consumer that may be due to a misinterpretation of the answers or to errors in filling out the questionnaire.

Table 3: Modified Kano Evaluation Table Performance Requirements 3. I am neutral. Functional

Dysfunctional 4. I can live with it that way.

5. I dislike it that way. A


A

O


I

M

I

3. I am neutral.

I

M

I

Notes: A(ttractive), O(ne-dimensional), M(ust-be), Q(uestionable), R(everse), I(ndifferent) Source: Hölzing 2008, p. 18.

The standardized questionnaire is divided into four parts. The questions in the first part are related to store cardholders, their overall satisfaction and usage. The main part of the Kano questionnaire is in the second part. The Kano pair questions are about price performance attributes (percentage/price reductions, specials offers), in-house payment- and credit function attributes (loyalty card with credit card functions, sales account), general payment and credit performances attributes (debit card, credit card), service performance attributes (extra info, special benefits like gift packaging service or reserved parking) and for psycho-social performance attributes (special treatment like pre-sale-campaigns, style counseling). The third part of the questionnaire is about the attitude of the consumer towards payment- and credit services in general. The interviewee has to rank several possible ways to include a payment- or credit function in a loyalty card program and they have to evaluate the usefulness of this combination and its possibility to improve the overall satisfaction. Concluding, personal data like sex, age, educational background, monthly income and ownership of credit/debit cards were surveyed.


4.2.

83

Field Study

Since the business environment of the fashion sector is constantly changing, the development and implementation of effective and successful marketing strategies are particularly important in the retail clothing sector (Moore/Fairhurst 2003, p. 386; Meffert 2008, p. 159; Müller-Hagedorn 2006, p. 35; KMPG 2006, p. 58; Liebmann/Zentes 2008, p. 170). Therefore, the empirical study underlying this research was conducted in the main fashion shopping streets of Vienna using personal interviews based on a standardized questionnaire containing mainly closed questions. The experience has shown that standardized, oral interviews are the most suitable method for Kano surveys. A standardized questionnaire is advantageous in that it reduces the interviewer’s influence and usually increases the return rate (Hölzing 2008, p. 119f.; Sauerwein 2000, p. 39). In selecting the main shopping streets several aspects were taken into consideration. There are many fashion stores located on these streets and, as the interviews were done shortly after a purchase, the customer was still in the shopping situation when they were asked to do the interview. Also, the loyalty card, if available, was used a short while ago at the point of sale. The data was collected within a period of one month. To improve data quality, the survey was carried out on the four main shopping streets of Vienna (Mariahilfer Straße, Kärtner Straße, Landstraße and Favoritenstraße) using a convenience sample of 300 shoppers. 70.3% of the respondents were female, and 29.7% were male. The reason for this relation may be that women are more interested in fashion shopping and are therefore overrepresented on shopping streets (Größe-Bölting 2005, p. 104). The survey distinguishes five age categories (see Table 4). Table 4: Age and income Age

Sample

Income

Sample

20 to 29 years of age

63 (21%)

less than 1,000 Euros

37%


82 (27%)

1,000 to 2,000 Euros

45%


63 (21%)

more than 2,000 Euros

9.3%


61 (20%)

n/a

8.7%

over 60 years of age

31 (10%)

Most respondents have a vocational education or apprenticeship (40.7%), 36.3% have a general qualification for university entrance and 14% have a university degree. 6% have only compulsory education. 98% own a debit card and 37% have a credit card. About 1% of the sample has a co-branded payment card. 192 respondents (64%) have a loyalty card from a fashion retailer.

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4.3.


Results

In the following the Kano questionnaire is analyzed. After combining the answers, results are listed in an evaluation table which shows the overall distribution of the “requirement categories”. Subsequently, multi-group comparisons were drawn and a possible category shift over the course of time was discussed. Finally, the influencing factors on the usage of cards with payment functions were determined. Nine performance attributes were categorized. Each attribute is classified according to the evaluation table as either attractive, one-dimensional, must-be or indifferent. The results of the basic analysis are shown in Kano’s summary table (see Table 5). 49% of the respondents think that a debit card is attractive, 4% are satisfied with this performance attribute, .3% see it as must-be and 46.7% are indifferent. So, the majority sees the debit card as either a one-dimensional attribute or are indifferent to it. Two or more categories are often linked (percentage/price reductions) or almost linked (special offers, debit card, additional information, special benefits). Moreover, this could be an indication that a more exacting analysis is needed. Table 5: Response Distribution by Performance Attributes and Grading of Categories Performance Attribute

A

O

M

I

Total

Category

Percentage/price reductions

25

31

31

Special offers

27

32

34

13

100

O/M

7

100

Debit card

49

4

M

.3

46.7

100

Loyalty credit card

15

A

.7

1

83.3

100

Co-branded credit card

I

25.7

1

.7

72.6

100

I

Sales account

13

.7

1.3

85

100

I

Additional information

15

13.3

31.7

40

100

I

Special benefits

33.3

29.7

23.3

13.7

100

A

Preferential treatment

41

25

6.7

27.3

100

A

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; n = 300

The classification of quality attributes was tested through a t-test. This statistical test was conducted for comparing the proportions of respondents classifying a performance attribute with a specific category. This test was possible since the conditions for approximation of multinomial distribution to the normal distribution were satisfied for this empirical investigation (Löfgren/Witell 2007, p. 63; Nilsson-Witell/Fundin 2005, p. 162). The classification of all attributes is statistically significant (p < .001) (see Table 6). Fong (1996) developed a test for analyzing the statistical significance of the classification. This test can be used if the analysis of frequen-


85

cies does not show satisfactorily results. Therefore a classification is presumed to be non-significant, when [1]

a - b < 1.65a + b(2n - a - b) 2n

a and b are defined as the categories most mentioned and n is the total number of mentions (Fong 1996, 22). Therefore, the classification of the attributes store credit card, co-branded credit card, sales account and preferential treatment are significant (see Table 6). Table 6: Results of t-test and Fong test Performance Attribute

A

O

M

I

Cat.

t-test

Fong test


25

31

31

13

Special offers

27

32

34

7

O/M

40.57*

mixed

M

41.55*

Debit card

49

4

.3

46.7

n.sig.

A

28.78*

n.sig.

Loyalty credit card

15

.7

1

83.3

I

56.56*

sig.


25.7

1

.7

72.6

I

42.21*

sig.

Sales account

13

.7

1.3

85

I

60.86*

sig.


15

13.3

31.7

40

I

48.21*

n.sig.

Special benefits

33.3

29.7

23.3

13.7

A

36.11*

n.sig.


41

25

6.7

27.3

A

30.82*

sig.

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; * p < .001; n = 300

Category and total strength are calculated to classify performance attributes. They show us whether or not the categorization is clear. The higher the category strength the more precise is the classification. Category strength is a result of subtracting the second most frequent answer from the most frequent answer. As a rule of thumb, the requirement is considered clearly classified when category strength is greater than 5% (Sauerwein 1999, p. 421; Löfgren/Witell 2005, p. 13; Lee/Newcomb 1996, p. 16). The classification of the attributes “percentage/price reduction”, “special offers”, “debit card” and “additional information” is significant (Category strength >6%). The category strength of the other four categories is lower than 6% and therefore, they do not have a significant influence on customer satisfaction (Hölzing 2008, p. 126). Total strength is the product of the percentages of attractive, one-dimensional and must-be requirements. It shows whether or not for most of the consumers this attribute is of importance (Löfgren/Witell 2005, p. 13; Lee/Newcomb 1996, p. 16). The total strength (Tot % > 60) of the majority of the attributes is satisfied for this empirical investigation (see Table 7). The customer satisfaction coefficient (CS coefficient) can be applied to classify the attributes in each category (Tontini 2007, p. 604). The coefficient shows whether satisfaction can be increased by meeting a requirement, or whether fulfilling this requirement merely prevents dis-

86


Table 7: Category and Total Strength (Cat., Tot., CS, CS) Performance Attribute

A

O

M

I

Cat.


25

31

31

13

O/M

Special offers

27

32

34

Debit card

49

4

Loyalty credit card

15

.7

Cat > 6

Tot %

CS

CS

0

87

.56

-.62 -.66

7

M

2

93

.59

.3

46.7

A

2.3

53.3

.53

-.04

1

83.3

I

68.3

16.7

.16

-.02


25.7

1

.7

Sales account

13

.7

1.3

72.6

I

46.9

27.4

.27

-.02

85

I

72

15

.14

-.02


15

13.3

31.7

40

I

8.3

60

.28

-.45

Special benefits

33.3

29.7

23.3

13.7

A

3.6

86.3

.63

-.53


41

25

6.7

27.3

A

13.7

72.7

.66

-.32

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; n = 300

satisfaction. Matzler et al. (1996, p. 13f.) provide a rule of classification for the case when a certain quality attribute cannot be clearly assigned to any of the various categories. The evaluation rule “M > O > A > I” is useful and basically conservative in classification. When making decisions about performance attribute development, those features which have the greatest influence on the requirements have to be taken into primary consideration. Those requirements must be fulfilled which cause dissatisfaction if not fulfilled. When deciding which attractive requirements should be fulfilled, the decisive factor is how important they are to the consumer. The CS Coefficient will be calculated as follows (Sauerwein 1999, p. 421): The positive CS (extent of satisfaction) indicates that customer satisfaction will increase by providing an attribute: [2]

A + OA + O + M + I

The negative CS (extent of dissatisfaction) indicates that customer satisfaction will decrease when the attribute is not provided: [3]

O + MA + O + M + I × (-1)

The maximum value of CS and CS is 1 and -1, respectively. The closer the value is to 1 (or -1), the greater the influence on customer satisfaction. A value of about 0 signifies that a certain attribute has little influence on customer satisfaction (Löfgren/Witell 2008, 68). Values from .5 and -.5 are of relevance (Sauerwein 2000, p. 48). The two coefficients are plotted in a diagram divided into halves (see Figure 3), The category “percentage/price reductions” has a negative CS which is higher than the positive CS (CS prime). This indicates that customer satisfaction will decrease if this attribute is not


87

Figure 3: Customer Satisfaction Coefficients

.

.

.

.

.

.

.

.

! "

"

Note: n = 300, 䊐 CS, 䊏 CS

provided. According to the evaluation rule M > O, this attribute is therefore classified as a “must-be” requirement. The “debit card” has a high positive CS indicating that customer satisfaction will increase by providing this attribute; the low negative CS indicates that the customer will not be dissatisfied when this performance attribute is not provided. According to these reasons and the evaluation rule the attribute debit card classifies as an attractive requirement. Based on a comprehensive data analysis using several tests, we can classify the performance attributes as follows: - M(ust-be requirements): percentage/price reductions, special offers - O(ne-Dimensional requirements): special benefits - A(ttractive requirements): preferential treatment, debit card - I(ndifferent requirements): store credit card, co-branded credit card, sales account, additional information

88


This results support hypothesis 1 (H1.a to H1.d). The next step is to make clusters and search for possible category shifts over the course of time. According to Chen/Su (2006, p. 602f.) an ANOVA can be applied to investigate group effects. Customers were divided into groups (male/female, credit cardholder/non-credit cardholder, store cardholder/non-store cardholder). Then the results of the questionnaire items for each group were listed in a separate Kano table, which shows the performance attributes in terms of attractive, one-dimensional, must-be and indifferent requirements. To be able to test the differences between groups, a variable was created where customer perceptions of the performance attributes were gathered and arranged as: indifferent (1), attractive (2), one-dimensional (3) and must-be (4) (Nilsson-Wittell/Fundin 2005, p. 161f.). Consequently, this customer perception variable is the dependent variable and the group variables like gender, credit card and store card ownership are the independent variables. The hypothesis that there are no differences in the evaluation of performance attributes between men and women was tested using ANOVA. There are significant differences in the classification of two performance attributes: “additional information” (F = 11.38, p = .001) and “preferential treatment” (F = 34.98, p = .000). So, hypothesis 2.a is rejected. With hypothesis 2.b we postulate differences between credit cardholders and customers without credit cards in the evaluation of cards with payment and credit functions. This hypothesis was tested by applying ANOVA. We did find significant differences in the classification of the performance attributes “Loyalty card with credit card functions” (F = 4.46; p = .035) and “cobranded credit card” (F = 65.18, p = .000). This result supports hypothesis 2.b. Performance attributes seem to be dynamic over time, which means that an attribute can change from being indifferent, to attractive, to one-dimensional, and finally to a must-be item. The hypothesis is tested by applying an ANOVA. The requirements percentage/price reductions (F = 12.48, p = .001), special offers (F = 31.04, p = .000) and preferential treatment (F = 15.88, p = .000) are significantly different between the groups of respondents with and without loyalty cards. This result supports hypothesis 3. Income (x2 = 46.57, p = .000; r = .27, p = .000; n = 300) correlates with the intention to use a loyalty card with payment and/or credit functions. With higher income the intention to use the card increases. Hence, hypothesis 4.a is confirmed. Education (x2 = 19.39, p = .01; r = .11, p = .08; n = 274) also correlates with the intention to use a loyalty card with payment and/or credit functions but only with a significance level of = .10. Therefore, hypothesis 4.b is rejected. The total amount of loyalty cards owned by a customer (x2 = 31.57, p = .14; r = .05, p = .38; n = 300) does not correlate with the intention to use loyalty cards with payment and/or credit functions. Therefore, hypotheses 4.c is rejected.


89

Loyalty cards with payment and credit functions do have influence on consumer overall satisfaction. With 4% of respondents satisfaction will definitely increase, with 17% it is likely to increase and 24% say that satisfaction may increase. From this it follows that there is potential for a loyalty card with payment and/or credit functions, but the result does not support hypothesis 5. Hence, hypothesis 5 is rejected.

5.

Discussion and Implications

The further development of loyalty card programs is an important and vital part of relationship marketing, especially for the Austrian retail fashion market. But nowadays, a lot of store card programs are virtually interchangeable. They are lacking in attractiveness and differentiation. Only loyalty card programs that distinguish a retailer from its competitors can increase customer retention and lifetime duration. Therefore, loyalty card programs should offer integral systems of marketing actions and economic, psychological and sociological rewards. The results of our study have several important implications for researchers and managers. Furthermore they offer another perspective and identify influencing factors of consumer satisfaction using Kano’s method. Price performance attributes (percentage/price reductions, specials offers) could be classified as “must-be requirements”. Therefore, price performance attributes are important for a loyalty card program. If these requirements are not fulfilled, the customer will be dissatisfied. As the customer takes those requirements for granted, their fulfillment will not increase overall satisfaction. Fulfilling the must-be requirements will only lead to a state of being not dissatisfied. The customer takes them for granted and therefore does not explicitly demand them. From a retailer’s perspective, it is important to know that if price performance attributes are offered at a satisfactory level, an increase in their performance does not lead to an increase in customer satisfaction. But if they are not fulfilled, the customer will not be interested in the card program at all. Service performance attributes (special benefits like a gift packaging service or reserved parking) could be classified as “one-dimensional requirements”. With regard to these requirements customer satisfaction is proportional to the level of fulfillment. The higher the level of fulfillment, the higher the customer’s satisfaction will be, and vice versa. These service performance attributes are usually explicitly demanded by the customer, and consequently it is important to integrate such features into a loyalty card program. From a retailer’s perspective, it is important to be competitive with regard to one-dimensional requirements. Furthermore, service performance attributes can create emotional attachments that enhance a customer’s commitment.

90


Psycho-social performance attributes (preferential treatment like pre-sale campaigns and style counseling) could be classified as “attractive requirements”. These requirements are the criteria, which have the greatest influence on the level of satisfaction for the customer. Psychosocial performance attributes enhance customers’ perceived value. Consumers appreciate rewards and it makes them feel like preferred customers and they will identify more with a store. They are neither explicitly expressed nor expected by the customer. From a retailer’s perspective these performance attributes create a wide range of possibilities for differentiation, in contrast to interchangeable price and service performance attributes. In general, must-be, one-dimensional and attractive requirements differ in the utility expectations of different customer segments. An ANOVA was applied to identify the effect of gender on the performance attributes’ classification. For men the performance attributes “preferential treatment” and “additional information” are classified as indifferent requirements, while women classify these attributes as attractive requirements. These performance attributes appear more important to women because of their higher interest in fashion shopping (Größe-Bölting 2005, p. 104). Furthermore, the difference is strengthened by the fact that “preferential treatment” services are particularly oriented to female needs. By understanding the different effects on customer satisfaction from different types of performance attributes, companies can develop more appropriate marketing strategies to increase customer satisfaction. According to Aßmann et al. (2008, p. 76) increasing their individualization will become more important. Kano’s theory presumes that successful performance attributes follow a specific life cycle and change over time. The present study has shown that for respondents without loyalty cards, price and service attributes are attractive requirements; while for loyalty cardholders they are must-be and/or one-dimensional requirements. Psycho-social performance attributes are classified as attractive requirements from store cardholders, while for the other group these are indifferent requirements. Our results imply that price and service attributes are able to change from being indifferent to attractive, to one-dimensional, and finally to must-be. From this point of view, a loyal card program has to be enhanced continuously. Features need to be contemporary and should satisfy customers’ demands. Furthermore, it is important to create attractive price requirements to acquire new customers for the card program, as for respondents without loyalty cards their features are attractive requirements. With a focus on payment and credit attributes the present study shows that Austrian customers prefer general solutions. Only the performance attribute “debit card” is classified as an attractive requirement. Consequently, this feature can increase customer satisfaction if delivered, but does not cause dissatisfaction if it is not delivered. The result is strengthened by the fact that a co-branded debit card has the benefit that the customers do not need another plastic card what is seen as an increase in handling and convenience. Also, the control over expenditures can be


91

improved. Furthermore, credit cardholders identify co-branded credit card as attractive requirements. According to Aßmann and Werg (2008, p. 75) customers want to have fewer cards and for this reason “all-in-one-solutions” including payment functions will become more important. The disadvantage of this trend is that the store brand disappears from customers’ wallets. Being in the customers’ relevance set should be the aim of the relationship marketing, not only being in the wallet. The usage of such cards is related to a number of variables. The empirical study shows that education positively affects the intention to use cards with payment and credit functions, while income and ownership of a loyalty card does not. It is of important relevance for marketing researchers and practitioners to know which performance attributes add value and increase satisfaction and which of them merely fulfill minimum requirements and minimize dissatisfaction. In this context, Kano’s method can help to explore requirements that must be fulfilled to be competitive, and which are seen as attractive by the customer and so increase satisfaction. Hence, the present study identifies important requirements for loyalty card programs. Although our study leads to some precious insights on the benefits of loyalty cards which include payment and credit functions, there are some limitations that need to be discussed. First, due to the convenience sample, the generalizability of our study is limited. Secondly, we only examined the fashion sector in Austria and it would be worthwhile to investigate whether our findings differ over various other industries and/or countries to enable explicit comparisons. Finally, the model does not enable us to evaluate the importance of the different requirements, which would be important for deriving marketing activities. Future research should try to eliminate these issues to provide more generalizable and useful results.

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Seebacher, R. (2007): Nicht ohne meine Karte, in: Bestseller, No. 4, pp. 78-80. Teichmann, J. (2006): Kundenkarten. Ausweg aus den Preiskämpfen des Einzelhandels, Marburg: Tectum Verlag. Ting, S.-C.; Chen, C.-N. (2002): The asymmetrical and non-linear effects of store quality attributes on customer satisfaction, in: Total Quality Management, Vol. 13, No. 4, pp. 547-569. Tomczak, T.; Reinecke, S.; Dittrich, S. (2008): Kundenbindung durch Kundenkarten und -clubs, in: Bruhn, M. (ed.): Handbuch Kundenbindungsmanagement: Strategien und Instrumente für ein erfolgreiches CRM, 6th ed., Wiesbaden: Gabler, pp. 325-345. Tontini, G. (2007): Integrating the Kano Model and QFD für Designing New Products, in: Total Quality Management, Vol. 18, No. 6, pp. 99-612.. Vavra, T.G. (1997): Improving Your Measurement of customer satisfaction, a guide to creating, conducting, analyzing, and reporting customer satisfaction measurement programs; Milwaukee, Wis.: ASQ Quality Press. Wieder, M. (2009): Kundenbindungsinstrumente im Handel – Erfolgspotentiale und Umsetzungsvoraussetzungen, in: Hinterhuber, H.; Matzler, K. (eds.): Kundenorientierte Unternehmensführung: Kundenorientierung, Kundenzufriedenheit, Kundenbindung, 6. Auflage, Wiesbaden: Gabler, pp. 621-637. Yu, Y.-T.; Dean, A. (2001): The Contribution of emotional satisfaction to consumer loyalty, in: International Journal of Service Industry Management, Vol. 12, No. 3, pp. 234-250. Ziliani, C.; Bellini, S. (2004): From loyalty cards to micro-marketing strategies: Where is Europe’s retail industry heading? in: Journal of Targeting, Measurement and Analysis for Marketing, Vol. 12, No. 3, pp. 281-289.

Clustering Customer Contact Sequences Results of a Customer Survey in Retailing Sascha Steinmann and Günter Silberer

Abstract We used a sequence alignment method to cluster customers (N = 132) of a branch of a German consumer electronics retailer according to the sequence of the customers’ contacts with its different marketing channels (e.g. store, homepage, newspaper advertising) during the whole purchase process. In doing so, we obtained three clusters in a short sequences and a long sequences segment. Results reveal differences in the customers’ behaviour concerning the customer contacts and their functions in the whole purchase process, as well as between the identified customer segments. Customer segmentation based upon demographic or psychographic variables would not have been able to enrich knowledge of the customers in this manner.

Keywords Customer Contact, Contact Sequence, Sequence Analysis, Customer Segmentation

Sascha Steinmann (corresponding author) Institute of Marketing and Retailing, Department of Business Administration, University of Göttingen, Göttingen, Germany (Tel: +49 551 39 7409; E-Mail: [email protected]). Günter Silberer Institute of Marketing and Retailing, Department of Business Administration, University of Göttingen, Göttingen, Germany.


August 31, 2009 March 14, 2010 March 15, 2010


Vol. 24, Issue I, 2010, pp. 97-120

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1.


Introduction

Knowledge of ones customers is a strategic success factor for any retailer or service provider. The fundamental elements for the attainment of customer knowledge are the customer contacts at the different marketing and distribution channels of the retailer’s multi channel marketing (Payne/Frow 2005). Not only are the number, kind and function of the customer contacts relevant to this but also the sequence of those contacts during all phases of the purchase process. Contact sequences have been practically ignored in previous practice-oriented and scientific research projects, especially any to consider the problems of collecting, connecting and analyzing the relevant data from the different marketing and distribution channels to present a single, unified view of customers (Payne/Frow 2004). However, it can be assumed that customer contact sequences are of great relevance to retail marketing. For example, it can be expected that different customer contact sequences are accompanied by different product purchases and that different customers have different contact sequences according to their individual channel behaviour. Knowledge of these connections facilitates the purposeful control of customer contacts by the retailer and thus extends his/her commercial possibilities to communicate and interact with customers within the bounds of retail marketing. Furthermore, such sequences provide important insights into potential cross-channel synergies (Verhoef/Neslin/Vroomen 2007). Therefore, they also facilitate crucial information for monitoring marketing strategy. Hence, analyzing sequences of customer contacts could provide crucial insights to the retailer into customer behaviour in the multi channel marketing and distribution system, as well as their needs and preferences over time, as their use has become routine in the purchase process (Rangaswamy/Bruggen 2005). Therefore, this article contributes to the body of literature by addressing how customer contact sequences can be measured and analyzed. This initial study on customer contacts and contact sequences in retailing is also essential to show that such contact sequences can form the basis for customer segmentation.

2.

Literature Review and Conceptual Background

2.1.

Customer Contact Points and Customer Contacts in Retail

It is increasingly common for firms to employ online distribution channels alongside their offline distribution channels and further marketing channels and to rely on these complex combinations as sources of competitive advantage to better serve their customers’ needs and preferences (Geyskens/Gielens/Dekimpe 2002). In such environments, many customers have become multi-channel users. Contacts between the firm and themselves are realized at different contact points (e.g. store, agency, homepage) in different phases of the purchase process. Therefore, there are many opportunities to establish contacts between a supplier and its customers in the different process stages.

Steinmann, S.; Silberer, G.

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In retailing, we can differentiate pre-purchase, purchase and post-purchase phases. Furthermore, we can distinguish the variety of contact points (personal, semi-personal and impersonal contacts) (Silberer/Steinmann/Mau 2007). Payne and Frow (2004) define these categories of customer contacts as a continuum of forms ranging from the physical to the virtual. According to Daft and Lengel (1984) customer contacts can be distinguished by the relative richness of information they provide, from the leanest to the richest. Richness is determined by the medium’s capacity for immediate feedback, multiple cues and senses involved, language variety, and personalization (Rice 1992). Thus, face-to-face contacts will be the richest contact point, followed by telephone contacts, electronic mail and websites; then to different kinds of traditional marketing measures, like contacts with newspaper or radio advertising. Customers’ price expectations, the product group, and convenience are regarded as determinants for channel choice (Fox/Montgomery/Lodish 2004). Balasubramian et al. (2005) state that the goals a customer tries to achieve (e.g. economic goals, self-affirmation, socialization etc.) during his or her shopping experience affect channel choice. Other factors are the distance a customer lives from a store (Thomas/Sullivan 2005) or other situational variables, e.g. time of day and presence or absence of others (Belk 1974; Nicholson/Clarke/Blakemore 2002), switching costs and risk aversion (Dholakia/Zhao/Dholakia 2005), as well as customer demographics (Kumar/Venkatesan 2005). Goff, Bellenger and Stojack (1997) as well as van Dolen et al. (2002) show that contacts between a customer and the sales staff could enhance customer satisfaction with the retailer. The results of Bove and Robertson (2005) show the impact of such contacts on customer complaints. Raghubir (2004) demonstrates that in the pre-purchase phase a customer contact with coupons could have positive effects on the evaluation of product quality and purchase intention. Further research shows that contacts with retailer advertising has an impact on store traffic and sales volume (Gijsbrechts/Campo/Goossens 2003), and on patronage intention as well (Day/ Stafford 1997). The findings of Silberer and Mau (2006) show that customer contacts after the purchase, the advice given, and the price level of the retailer also affect customer satisfaction. This is only a brief overview regarding past and current research, but the studies mentioned above are representative of many others published on the effects of customer contacts. The results show that a single contact between a customer and a retailer can affect customer satisfaction and purchase behaviour.

2.2.

Functions and Importance of Customer Contacts

Every customer contact fulfills different functions in the various process phases. Consequently speech, sales, and service functions can be distinguished (Simons/Bouwman 2004). Therefore, the functions of customer contacts in different channels range from accessing general and selective information regarding the desired product or service, price comparisons and purchasing; up

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to using different kinds of customer services, to advisory and complaint activities as well. Hence, during the contact, not only is purchasing a product of relevance to the customer, but so are information and communication prior to, during and after the purchase (Wallace/Giese/ Johnson 2004). In the process, according to the media-richness theory (Daft/Lengel 1984), customers will subsequently find it easier to establish contact with a supplier in a way that best fits their needs. This requires the respective channels and their combination to be capable of fulfilling customer needs and preferences concerning the desired functionality in these different process phases. According to Payne, Bettman and Johnson’s (1993) concept of adaptive decision making, a customer shifts between the pre-purchase to the purchase phase, and from an attribute-based search to an alternatives-based search, as she/he progresses in the decision making process. Thus, customers become less focused on information gathering and more focused on comparing the alternatives they have decided to consider. In the case of technically advanced products like notebook computers, these alternatives are complex bundles of attributes and benefits that a customer will need to process. In cases where many relevant aspects of the decision cannot be controlled, customers seek some kind of help in their decision making, and hence customers are more likely to realize personal contacts with the sales staff. Furthermore, they will use the desired benefit as the basis to evaluate the characteristics of the different contact points in the purchase process (Frambach/Roest/Krishnan 2007). However, there are channel related differences in fulfilling customers’ needs and preferences across the purchase process, including richness of information presented (Daft/Lengel 1984) and accessibility or convenience (Ward 2001). For example, on the internet products cannot be physically examined, which leads to less product information than in the case of brick-and-mortar stores (Venkatesan/Kumar/Ravishankar 2007). Therefore, the internet is often considered to be risky for purchasing (Alba et al. 1997). Conversely, offline channels are characterized by, among other things, richer information on the product (Venkatesan/Kumar/Ravishankar 2007). The results of Verhoef, Neslin and Vroomen (2007) show that customers can benefit from channel related differences within the purchase process by using channels according to their individual channel characteristics (see also Silberer/Steinmann/Mau 2007) because channels differ not only in their functionality but also in their inability to fulfill individual customer needs to the same extent across the different process phases (Balasubramian/Raghunathan/Mahajan 2005). Hence, the initiation and handling of purchasing processes can occur in different channels according to the individual channel’s behaviour. Concerning the purchase of a notebook, we can expect personal contacts in offline channels to be more likely than semi-personal or impersonal contacts because personal advisors are in the best position to help the customer identify and explain important aspects in the pre-purchase and purchase phases. Because of the limited functionality of the mainly impersonal contacts in online channels compared to the face-to-face contacts of offline channels, many customers commonly use the internet only as an information source in the purchase process. In the case of


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complex products or services especially, customers have come to categorize it in their minds as an important information source, not as just a shopping resource (Balasubramian/Raghunathan/ Mahajan 2005; Verhoef/Neslin/Vroomen 2007).

2.3.

Customer Segmentation

For our study, research regarding different approaches to customer segmentation is of particular interest. Ruiz, Chebat and Hansen (2004); Sinha and Uniyal (2005); and Ganesh, Reynolds and Luckett (2007) provide an overview of a large number of empirical studies on this topic. The procedure for the formation of customer segments can thus be divided into two different approaches; with demographic variables (e.g. age and gender) on the one hand, and on the other psychographic variables (e.g. motives or attitudes) are drawn upon for the segmentation. By doing so, the constituted customer groups reveal who is buying in the stores investigated and why. The customer’s actual buying behaviour during and after the purchase, however, is hardly taken into account; i.e. how the customers inform themselves prior to purchase, how the purchase is carried out in the store, and how the relationship between the retailer and the customer is organized after the purchase. Only a few studies take behaviour of the customers into account. Kim and Park (1997) classified the customers of food stores by the frequency of their visits; i.e. related to a certain period, not to a particular product purchase. They found “random shoppers” and “routine shoppers”. Bloch, Ridgway and Davidson (1994); Ruiz, Chebat and Hansen (2004), and Sinha and Uniyal (2005) as well, used behaviour during a shopping trip, i.e. related to a visit in one store or shopping mall; as a basis to form customer segments. When Bloch, Ridgway and Davidson (1994); and Ruiz, Chebat, and Hansen (2004) asked shoppers about their behaviours, each identified four different segments in this way - Bloch/Ridgway/Davidson 1994: “Mall Enthusiasts”, “Traditionalists”, “Grazers” and “Minimalists”; Ruiz/Chebat/Hansen 2004: “Recreational shoppers”, “Full experience shoppers”, “Browsers” and “Mission shoppers”. Sinha and Uniyal (2005) observed behaviour and derived six customer segments: “Choice optimiser”, “Pre-Mediated”, “Economising”, “Seeking support”, “Low information seekers” and “Recreational”. Although they had partially different results in the end, these studies show the usefulness of customer segmentation based on customer behaviour. There are, however, two essential aspects not taken into account. First, the specified studies only inspect behaviour in the store or mall. It should be expected that different behaviour in the store also reflects different behaviour prior the purchase and after the purchase. The results of Sinha and Uniyal (2000) speak well for this assumption. According to this study experienced customers act more systematically in the store and are in less need of information, which had to be a reflection of their behaviour prior to purchase. The second aspect deals with the variables used in the segmentation analysis. To consider only the behaviour in one specific channel leads to neglect of other contacts between shoppers and the retailer. But, as was shown by the studies mentioned before, such contacts are important influencing factors in customer behaviour.

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2.4.


Customer Contact Sequences

According to Hägerstrand (1970) customer behaviour can be viewed as a sequence of interdependent actions over time. However, customer behaviour in the studies mentioned is mostly treated as a chain of independent activities. Thus, the sequential order and obvious relations of the activities are often neglected. Therefore, Abbott’s (1995, p. 94) statement that, in social science “we assume intercase independence even while our theories focus on interaction” is also largely true for marketing research concerning the segmentation of customers with regard to their individual behaviour across the purchase process. Therefore, in the aforementioned approaches important aspects reflecting the customer’s behaviour are not addressed. By tracking behaviour across channels, firms can improve their understanding of their customers’ decision-making and develop a basis for creating strong relationships and improving retention (Dholakia/Zhao/Dholakia 2005). The actual behaviour of the customers over a period of time is taken into account in the customer segmentation process through the use of customer contact sequences. This facilitates a differentiation of the customers which is not possible on the basis of demographic or psychographic variables. Such insights are an important confirmation as to the usefulness of customer segmentation regarding the customer contact sequence. The sequential behaviour of the customers throughout the purchase process and through different channels has barely been taken into account in the formation of segments. For marketing purposes, Larson/Bradlow/Fader (2005) for example used a sequence-analytical clustering approach to evaluate the shopping behaviour in a supermarket for the foundation of customer segments. Bargemann/Joh/Timmermans (2002) analysed the vacation histories of tourists to develop a typology of vacation behaviour of Dutch customers with a specific sequence alignment method. Hay/Wets/Vanhoof (2003) used a sequence analytical approach to mining web usage to cluster website visitors according to their navigation patterns. Segmentation of this kind can give a retailer or service provider important insights into the requirements, preferences and behaviour of the customers over a period of time.

3.

Empirical Study: Customer Segmentation Based upon Customer Contact Sequences

3.1.

Measures

The aim of our segmentation process is to identify powerful customer clusters which are very similar with regard to their individual behaviour. We investigated customer contacts (e.g. advertising, retailers’ homepage, store etc.) their functions (general and selective information, price comparison, purchase, advisory and complaining) and importance to the customers as well as


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the sequence of the customer contact regarding three different phases of the purchase process - pre-purchase, purchase, and post-purchase - with a branch of a German consumer electronics retailer. The importance of the customer contacts was ranked on a six-point rating scale ranging from 1 = entirely unimportant to 6 = very important. To ensure the accurate recording of customer contacts and their function and importance in all process phases, only those customers who had actually purchased a product in one store in the 6 months prior to the study that they could remember well were recruited. Customer contacts and contact sequences were recorded in personal interviews based upon a structured questionnaire. To support the recollection of events dated far back in time a process was chosen patterend from cognitive psychology (Ericsson/Simon 1980; Anderson 1995). The questionnaire leads the customer through her/his memories step by step - starting with events that are most accessible because they are the closest in time to the interview (the post-purchase phase) - up to those situations that are initially difficult to remember without any support because they date further back (the purchase and pre-purchase phases). If instead the customer had been asked first for contacts made prior to the purchase, he/she would have had to recall those events dated furthest away - an attempt in which he/she might not succeed. In contrast the events and contacts after the purchase are most clearly recalled - they date back the shortest period. The first questions were therefore directed to events in the post-purchase phase. Closely connected with events after purchase are those situations in memory that lie temporally prior, i.e. during the purchase. If the customer remembers the post-purchase phase, events during the purchase will be more present. In the second place therefore the customer contacts during the purchase phase were surveyed. Pursuing the same strategy, customer contacts of the pre-purchase phase were recorded in a third step. The final questionnaire also covered possible determinants (previous customer experience with the retailer, price category, product category, internet usage, and demographic variables) as well as final variables (customer satisfaction, intention of recommendation, intention of repeat purchase, trust, and perceived risk) and the sequence of customer contacts, their functions and importance across the whole purchase process.

3.2.

Procedure

A total of N = 132 customers of the retailer took part in the survey. The customers were approached at the central entrance and exit of the store while they were leaving. In cases where they were interested in participating in the interview, it was clarified as to whether they could remember a purchase within the last six months. Every participant obtained non-alcoholic drinks, chocolates, and other incentives. In the sample, women had a representation of 49.2%. The average age of those interviewed was M = 31.3 (SD = 12.2) years. About one third (32.3%) of the customers bought PC hardware and software as well as IT-accessories, electrical appliances and accessories were purchased by 22% of the people in our sample. Other frequently purchased product categories were sound carriers and DVDs (13.6%), office supplies and

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telecommunication (11.4%), consumer electronics (10.6%) as well as digital cameras (6%). With regard to the price category of the products bought, 53% of the customers in our sample spent no more than 50 Euros. Slightly over one third (34.1%) in our sample spent up to 500 Euros and 12.9% of the customers paid more than 500 Euros.

4.

Results: Customer Contacts, Contact Sequences and Sequence Clusters

4.1.

Customer Contacts

Considering all three phases every customer in our sample visited the store at least once in the purchase process for purchasing. The store was also the most important contact point according to the customers (M = 5.17; SD = 1.02) and was, besides the purchase function, frequently used for obtaining general information concerning the different supplies of the retailer (42.4%) and select information on the products in the evoked set (23.5%) as well as for price comparison (15.2%). In general, taking all phases of the purchase process into consideration the customer contacts at different contact points mostly had the function of providing general information (86.4%) and for price comparison (86.4%). Other often used functions were for selective information (76.6%) and advisory functions (94.4%). Besides this, other frequently realized customer contacts in the whole purchase process are the personal contacts with the sales staff (64.4%), especially in the purchase phase which were mostly realized for selective information (63.5%) and general information (18.8%). Surprisingly, these contacts were of significantly lower importance to the customers (M = 5.00; SD = 1.06) compared to those with the store (t = -2.53; p < .05). Concerning contacts with different kinds of the retailers’ advertising in all phases of the purchase process, the customers mostly realized contacts with newspaper advertising (59.1%), TV-advertising (42.4%) and advertising at the point-of-sale (39.4%). Regarding the advertising contacts, newspaper advertising was most important to the customers (M = 4.61; SD = 1.15) and was mainly used for general information (42.3%) as well as for price comparison (28.2%). The realized contacts with the retailer’s homepage (22%) mostly had the function of providing general information (35.7%) and for price comparison (28.6%). These contacts were of significantly lower importance compared to the realized contacts (15.2%) with other websites (Homepage: M = 2.75, SD = .97; other websites: M = 4.73, SD = .98; t = 3.14; p < .05). The contacts with other websites mostly had the function of providing selective information concerning the products in the evoked set (47.6%) as well as for price comparisons (23.8%). One could therefore assume that the perceived functionality of the retailer’s homepage is much lower as compared to that of other websites. Slightly more than one fourth (25.4%) of the customers realized contacts with the service staff of the retailer. The service staff was mostly contacted in the post-purchase phase for advise and complaints (97.1%). As expected, these contacts were of high importance to the customer (M = 1.59; SD = .86).


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Table 1 summarizes the frequency of realized customer contacts with all examined contact points throughout the three process phases. As expected, there are differences in the proportion of the realized customer contacts across the successive process phases. In the pre-purchase phase the customers mostly realized a contact with different kinds of the retailer’s advertising (62.1%). Concerning these contacts, freebie inserts (36.4%) and newspaper advertising (28%) were used most often. Surprisingly, the store website was visited by only 28.6% of the customers and just 16.7% of our sample realized a contact with the retailer’s website in the pre-purchase phase. Table 1: Frequency of Customer Contacts

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106


During the purchase phase 65.9% of the customers contacted the sales staff for general and selective information on the desired product as well as for price comparison and consulting. But nearly three fourths of them (74.2%) also compared the products by themselves. Stated contact with different kinds of marketing measures at the point-of-sale is surprisingly high (53.8%). Contacts in the post-purchase phase were considerably low (11.4%). The contacts in this phase were mostly realized for complaints as well as for advice after the purchase.

4.2.

Contact Sequences

In addition to the analysis of individual customer contacts in the various phases of the purchasing process, we can also determine the sequence of the customer contacts using the available data, namely the sequence of the customer contacts with the different contact points regarding all phases of the purchase process. First, it is noticeable that the number of customer contacts with the retailer is very heterogeneous amongst the customers (a min. of 1 contact to a max. of 20 contacts). In all, it appears that contact with the sales staff was sought most frequently following contact with the store (76 times). The sequence newspaper advertising and store was entered 50 times. Other contact sequences which appeared frequently were store and PoS marketing measures, as well as sales staff and service staff (22 times each). As expected, in consideration of three successive customer contacts, the combination of store, sales staff and service staff (17 times) and the combination of newspaper advertising, store and sales staff (14 times) were named the most frequently. To get deeper insights of the customers’ behaviour across all phases of the purchase process we calculated the proportion of a realized customer contact as a relative size (basis = sequence length) in relation to all realized contacts of a customer contact sequence. As expected, the results show that the contacts with the store had the highest proportion in a customer contact sequence when realized (39.9%), followed by contacts with newspaper advertising and freebie inserts (38.4%). In this context, contacts with the sales staff had a proportion of 22.7% and the retailer’s homepage was used in only 13.9% of customer contact sequences realized.

4.3.

Sequence Alignment and Sequence Clustering

The Sequence Alignment Method (SAM) was originally developed in molecular biology to compare DNA or protein sequences (Sankoff/Kruskal 1983; Abbott 1995). The idea of the SAM is to equalize two different sequences with regard to the operations of insertion, deletion and substitution. Mostly the weight of 1.0 is assigned to the operations of insertion and deletion, and for substitutions the sum of the consecutive operations of deletion and insertion (Gusfield 1997; Joh et al. 2002). Usually there are different ways to transfer one sequence to another with


107

the aforementioned operations, therefore the minimal sum of the weighted operations - the Levenshtein distance (Levenshtein 1966) - is commonly used as a similarity measure for the sequences considered. Within the scope of this study, the customer contact sequence clusters are identified using the aforementioned Levenshtein distance and the Ward-Method. The advantage of being able to compare customer contact sequences which are different in length can be, under certain conditions, a disadvantage of the Levenshtein distance. If the distance between two sequences which differ greatly in length is determined, the result is essentially influenced by the different number of contacts and the associated operations. The information contained in the sequences is ignored to a large extent. To avoid such distortions in the segmentation, the whole sample (N = 132), which is very heterogeneous with regard to the length of the customer contact sequences (min(length) = 1 to max (length) = 20), was dichotomized with a median split (MD = 5). Consequently, we obtained a segment with “short sequences” ( 5 contacts; n1 = 72) and a segment with “long sequences” (> 5 contacts; n2 = 60). The customer clusters were then investigated with the customer contact sequences as constituent variables within both segments by way of a cluster analysis (Ward-Method) and using the Levenshtein distance. The results of our cluster analysis show that the differentiation into three clusters in the “short sequences” segment and four clusters in the “long sequences” segment proved to be the optimal cluster solution. A glance at the results of the cluster analyses in both segments shows that only 6 people comprise a cluster in the “long sequences” segment. A further cluster analysis using the singlelinkage-method supports the assumption that the members of this cluster are possible outliers. Consequently, these customers are not considered for further analyses.

4.3.1. Description of the Identified Clusters Using Constituent Variables In order to describe the clusters, the active variables that have entered the cluster analysis are cited. The clusters identified in both segments are therefore described using the customer contact sequences (centroids) typical for them (see Table 2). For each cluster in both segments the cited centroid corresponds to a surveyed customer contact sequence. The typical representative of the first cluster from the “short sequences” segment realized only one contact, i.e. with the “store”. The people in cluster 2 are more likely to have had their first contact with the “store”, where their interest was aroused by an item (the offer) and they decided to make a purchase following consultation with the “sales staff ”. The customer’s attention in cluster 3 is drawn to the retailer and a particular product through “newspaper advertising”, and then they go into the store and purchase the desired product after consultation with the “sales staff ”.

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The customers in cluster 1 of the “long sequences” segment sought further information on the internet after the initial contact with “newspaper advertising”, went into the “store” and spoke to the “sales staff ” to find out more about the short-listed products. A purchase had not occurred at this stage. Only after an additional visit to the “store”, combined with a consultation with the “sales staff ”, was the decision made to buy. The centroids of clusters 2 and 3 differ less significantly. Both were attracted to the retailer or a particular product by “TV advertising” and “newspaper advertising” and then found their way into the “store”. While the customers in cluster 2 may have sought consultation with the “sales staff ” and then decided their purchase intent, the representatives from cluster 3 returned to the “store”, found out more through consultation with the “sales staff ” and eventually decided to make a purchase. We may assume from the contacts with the “service staff ” in both clusters that the purchased product may have been defective or support was necessary after purchase due to operational problems. The initial contact between retailer and customer is particularly significant for the development of their relationship in the purchasing process. Consequently, we also examined the distribution of the initial customer contacts over the customer contact points in addition to the centroids: the majority of the customers from cluster 1 (86.2%) in the “short sequences” segment had the initial contact with the “store” or “PoS advertising”. None of the customers from this cluster indicated “newspaper advertising” or “PoS advertising” as their initial contact. While the majority of the customers (83.3%) from cluster 2 entered the “store” as the initial contact, “newspaper advertising” is the first contact for most customers in cluster 3 (72.0%). None of the customers from this cluster indicated “newspaper advertising” or “PoS advertising” as their initial contact. All differences are significant during a chi-square test (p < .05). In the “long sequences” segment, the most common initial contacts in cluster 1 proved to be “newspaper advertising” (33.3%) and the “store” (25.0%). In cluster 2, the initial contact above all took place with “TV advertising” (50.0%) or “newspaper advertising” (33.3%). The same initial contacts, “TV advertising” and “newspaper advertising”, can also be identified in cluster


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3. However, the share of the initial contacts with “TV advertising” was 70.6% in this case and 29.4% for that of “newspaper advertising”.

4.3.2. Description of the Clusters Using Descriptive Variables For the description of the cluster solutions within the different segments, selected descriptive variables, such as the overall number of contacts and individual contacts at various customer contact points (e.g. newspaper advertising, store, sales staff, service staff etc.) are also referred to here in the different phases of the purchase intent process which differentiate the clusters. In order to gain an impression of the quantitive meaning of a contact point within a contact sequence, the contact frequency for every contact point for every person was calculated as a relative size (basis = sequence length). The medium proportions of the contact frequency per contact point were then formed in relation to the sequence clusters. The comparison for the clusters in the “short sequences” segment shows extremely significant differences in the case of contacts with the “store” (cluster 1: 76.7%; cluster 2: 46.7%; cluster 3: 31.1%; p < .001) and “sales staff ” (cluster 1: 33.3%; cluster 2: 42.7%; cluster 3: 25.0%; p < .001), and a tendency towards significant differences in the contacts with the “service staff ” (cluster 1: .0%; cluster 2: 28.6%; cluster 3: 21.0%; p < .1). In the clusters in the “long sequences” segment, significant differences in the contacts with the “store” (cluster 1: 27.6%; cluster 2: 20.7%; cluster 3: 22.4%; p < .05) and “sales staff ” (cluster 1: 20.8%; cluster 2: 16.4%; cluster 3: 12.3%; p < .05), and a tendency towards significant differences with the “service staff ” (cluster 1: .0%; cluster 2: 24.8%; cluster 3: 12.3%; p < .1) were also observed. However, these were also observed in the case of “posters in town” (cluster 1: 17.2%; cluster 2: 13.1%; cluster 3: 11.6%; p < .1). The functions of the different customer contacts provide important findings regarding the intention for the contacts during the overall purchase intent process. For the clusters in the “short sequences” segment, the results did not show any significant differences between them with regard to the functions “general information”, “price comparison” and “possibility of purchase”. A tendency of significant differences was observed for the function “overview of shortlisted products” (cluster 1: 12.5%; cluster 2: 17.1%; cluster 3: 24.4%; p < .1) and significant differences for “advice after purchase” (cluster 1: .0%; cluster 2: 5.3%; cluster 1: 3.7%; p < .05). With regard to the functions of the customer contacts, the cluster solution of the “long sequences” segment demonstrated an extremely significant difference in the function “support after purchase” (cluster 1: .5%; cluster 2: 5.3%; cluster 3: 8.7%; p < .001). The results in Table 3 describe the clusters of the “short sequences” segment by way of contactrelated variables in the different phases of the purchasing process. The customers in cluster 3 had considerably more contact with the retailer’s advertising in the pre-purchase phase, espe-

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cially advertisements in newspapers and advertisers, compared to the customers in clusters 2 and 1. Table 3: Cluster Description with Contact-Related Variables (“Short Sequences” Segment) # $%

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However, visits to the retail store were of moderate importance to cluster 3 in this phase compared to the other two clusters. Customers from cluster 2 had the most frequent contact with the retailer via this contact point, while cluster 1 only displays an extremely small share of such contacts in the pre-purchase phase. In the purchase phase, customers from cluster 2 sought contacts and/or consultation with the sales staff the most frequently, although the customers from the first cluster also have a large proportion of contacts with the sales staff. Customers from the third cluster had hardly any contact with this contact point. In the post-purchase phase, cluster 3 shows the most frequent contact with the after sales service. The contacts in this phase served primarily to take advantage of support after the purchase. The customers in cluster 2 also had contact with the after sales service, the proportions distributed equally across the stated contact points here. Cluster 1 did not have any contacts in this phase. In the “long sequences” segment, the customers in all three clusters had a high proportion of contacts in the pre-purchase phase (see Table 4). The customers in clusters 1 and 3 demonstrate similar behaviour. Above all, freebie inserts and visits to the store are used frequently as contact points. Finally, Table 5 characterizes the clusters of the different segments by their size and essential demographic reference numbers.


111

Table 4: Cluster Description with Contact-Related Variables (“Long Sequences” Segment) # $% $- &

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4.3.3. Determinants of the Contact Sequence and Cluster Membership As we have already illustrated, different factors can determine contact sequences. In this context, the duration of the purchase consideration, the price of the product and the product category are conceivable. Furthermore, the time of day, day of the week, the occasion for the purchase consideration (e.g. an old appliance is defective, interest in the product etc.) and the reason for the purchase (e.g. personal use or gift) can be regarded as determinants for customer contacts.

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However, only the most important differences between the cluster solutions of both segments are considered more closely here (see Table 6).

4.3.4. Effects of the Contact Sequences and Cluster Membership In addition to the determinants of the contact sequence and cluster membership, their effects were also examined within the scope of this study. Consequently, we considered the customers’ satisfaction with the products and prices in the store. The “short sequences” segment displays a tendency towards a significant difference between the three clusters (Cluster 1: M = 1.8, Table 6: Cluster Description Using Possible Determinants # $%

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SD = .6; Cluster 2: M = 2.4, SD = 1.4; Cluster 3: M = 1.9, SD = .7; p < .1). The customers from the second cluster were less satisfied than those of the other clusters. No significant differences could be detected for the “long sequences” segment (Cluster 1: M = 1.7, SD = .8; Cluster 2: M = 2.0, SD = 1.2; Cluster 3: M = 2.0, SD = .7; n.s.).

4.3.5. Characterization of the Sequence Clusters In observing the differences of all results, each cluster of both segments can be classed with a name - even though that is, admittedly simplified: customers of the first cluster of the “short sequences” segment could be characterized as “spontaneous purchasers” in view of their very low number of contacts (see Table 3), preferred product category and high proportion of product purchases at a low price (see Table 6); the second cluster as “browsers”, as the customers of this cluster already sought contact in the shop in the pre-purchase phase and also stayed in the store the longest during the purchase phase (see Table 3). In view of their high proportion of contacts with offers in newspaper advertising in the prepurchase phase, the customers in the third cluster can be referred to as “offer purchasers” (see Table 3). The first cluster of the “long sequences” segment could be named “young technophiles”, these customers distinguish themselves above all through their interest in the various products of the electronics market. In this cluster, “interest in the product” was stated the most frequently as the occasion for the purchase consideration (see Table 6). The customers in cluster 2 stated “old appliance defective” as the most frequent occasion for the purchase consideration and are therefore classified as “repeat purchasers” (see Table 6). The customers in the third cluster can be classed as “fastidious purchasers”. They have the highest proportion of purchases from the upper price segments. Furthermore, a higher proportion of contacts with the service staff and complaints service in the post-purchase phase is also characteristic of these customers (see Table 4).

4.4.

Discriminatory Power of Contact Sequences

We used binary logistic regression on the segment level and discriminant analysis on the cluster level in each segment to test our proposition that the segment (short sequences vs. long sequences segment) and cluster membership can be satisfactorily explained and predicted by the sequencing of customer contacts. With regard to the differences in the number of realized contacts as well as of the realized customer contact point on the segment and on the cluster level, we used the number of the ten most frequently realized substrings consisting of two consecutive customer contacts as independent variables in the first binary logistic regression model with the segment membership as depend-

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ent variable. In the second logistic regression model we control for further variables which could be associated with segment membership. Therefore, the second model includes product related as well as demographic variables. As model 1 in Table 7 indicates, the sequence information are strongly associated with segment membership and provide a correct classification of 84.1% of the customers in our sample. The statistical association between the substrings and segment membership remains robust in general, even though the significance level of parameters decreases, when the control variables are included in model 2. Especially, substrings including contacts with the store and different kinds of advertising as well as the price of the product are contributing factors in explaining segment membership. The results of the Hosmer and Lemeshow chi-square test show an overall good fit for both models (model 1: 2 (8) = 7.364, p = .498; model 2: 2 (8) = 4.858, p = .773) as well as the statistics provided in Table 7 (Hosmer/Lemeshow 2000).

Table 7: Segment Membership: Binary Logistic Regression Estimates (Long Sequences Segment = 1) )* &

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Furthermore, we conducted a discriminant analysis to check the prediction accuracy of contact sequence information for the three cluster solutions in each segment (Klecka 1980). First of all, we conducted a stepwise discriminant analysis in the different segments, again using the ten most frequently consecutive customer contacts of all sequences as well as age, income and price of the product bought as control variables. As a result, we obtained coinciding substrings in the discriminant functions of both segments. The control variables were excluded in the stepwise procedure in both segments supporting our proposition. To test the individual discriminant ability of the variables included in both segments, an F-Test was performed. In the short-sequences segment, the store sales staff, newspaper advertising store, store store, and newspaper advertising TV advertising were included in the model. The discriminant functions of the long-sequences segment comprises the substrings store PoS-advertising, sales staff service staff, and like the short-sequences segment store sales staff as well as store store. Therefore, to gain better comparability between the results of both segments, we included the frequencies of these remaining six substrings for calculating the discriminant functions in both segments. By doing so, we obtained a hit ratio of 91.7% of the customers in the short sequences segment (see Table 8). The results also show that the substrings store sales staff and newspaper advertising store contribute with high significance to the differentiation of customers in this segment.

Table 8: Standardized Canonical Discriminant Function Coefficients Short-Sequences Segment ,-1

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116


In the long-sequences segment 83.3% of the customers were correctly classified (see Table 9). As in the short sequences segment, store sales staff contributes significantly to the differentiation of the customers. Other substrings with crucial discriminating power are store PoSadvertising and sales staff service staff. In contrast to the solution of the short-sequences segment newspaper advertising store did not account to the discrimination of the participants. Table 9: Standardized Canonical Discriminant Function Coefficients Long Sequences Segment ,-1

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5.

Discussion and Conclusions

The results of our study demonstrate that customers can be classified into different customer segments with regard to their contact sequences. These indicate differences in the purchasing process as, for example, our results on differences in the prices or product category between the individual clusters suggest. Differences regarding the number of contacts with the various contact points and the intention of their use were obtained between the contact sequence segments identified. Customer segmentation based upon demographic variables would not have been able to enrich the knowledge of the customers in this manner. Furthermore, the results of the logistic regression and discriminant analysis show that information of the sequence of all customer contacts can provide a highly satisfactory classification of the customers.


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This information puts the retailer in a position to adapt the established individual customer contact points to the different customer segments and to guide customers via contacts in the purchase process. Knowledge of these segments lets the retailer anticipate further contacts and offer suitable measures. If the retailer pursues a particular strategy with regard to the sequence of contacts, these results provide information on the proportion of customers who behave accordingly. By tracking customer behaviour across channels, firms can improve their understanding of their customers’ decision making and improve retention. This customer-centric approach (Reinartz/Krafft/Hoyer 2004) will also contribute to systematic and proactive coordination of the relationship in the whole purchase process. Furthermore, the contact sequences could also provide crucial insights into potential existing cross-channel synergies. Regarding the significance of individual contacts, a carefully directed reflection of individual contact points is also advisable, which includes its functionality and importance to the customers (Simons/Bouwman 2004; Steinmann/Silberer 2009). In doing so, the supplier would among other things have to investigate which contacts exert which influence on the customers and how the customer contacts, as well as their functions, can be controlled by retailers as well as service providers. Furthermore, the results show how the contact points differ in their function and importance to the customers across the purchase process. This knowledge as well as the knowledge of the effects of customer contacts will in any case contribute to an approach towards the optimal multi-channel mix and also to an effective and efficient CRM. Hereby the retailer could increase customer satisfaction as well as gain profitable and long-term customer relationships. There are also important implications for marketing science as individual customer contacts or parts of the purchasing process have been explained primarily through partial theories in previous research (e.g. Schoenbachler/Gordon 2002; Steinfield/Bouwman/Adelaar 2002; Balasubramian/Raghunathan/Mahajan 2005; Kumar/Venkatesan 2005). However, the differences identified in the sequences of customer contacts cannot be explained with such approaches. A comprehensive theory is necessary which ideally integrates all the individual phenomena from the three purchasing phases and can explain differences between the customers by their contact sequences. Besides this, our results also imply the application of methods, e.g. Markov-Models, for predicting customer behaviour based on contact sequences. Concerning our clustering approach the usage of other cluster algorithms is conceivable. In this context the application of a medoid clustering method (e.g. k-medoid) would be a suitable alternative to the approach used, especially when the centroid sequences identified are not observed in the survey (Kaufman/Rousseeuw 1987; Larson/Bradlow/Fader 2005). In addition, with regard to the relatively small sample size the application of nonparametric statistics would be a suitable alternative for testing the significance of group differences, since they are more robust for smaller sample sizes (Horowitz 2009). Furthermore, we only analyzed customer contacts and contact sequences in one branch with one retailer, so there is a lot of research in other branches with other retailers or service providers necessary to generalize our findings.

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The In-Store Antecedents and Consequences of Perceived Shopping Value for Regularly Purchased Products Wolfgang Weitzl and Robert Zniva

Abstract The study contributes to the knowledge of the complex relationships between store image, shopping value, and key retail outcomes. For the first time, a holistic approach is presented to identify key in-store image characteristics and their influences on both hedonic and utilitarian shopping value, as well as to investigate the consequences of perceived shopping value on customer satisfaction and store loyalty. A quantitative survey was conducted and 342 grocery store customers of a major Austrian retail chain were interviewed. Results show that the two shopping value dimensions (hedonic and utilitarian) are influenced by various store image characteristics. Moreover, the study provides evidence that a positive relationship between shopping value and store loyalty exists. This link, however, is fully mediated by customer satisfaction. The impact of the utilitarian shopping value on customer satisfaction was found to be stronger than the impact of its hedonic counterpart.

Keywords Store Image, Store Environment, Shopping Value, Customer Satisfaction, Store Loyalty

Mag. Wolfgang Weitzl (corresponding author) Department of Marketing, University of Vienna, Vienna, Austria (Tel: ++43 1 4277 38018; E-mail: [email protected]). Mag. Robert Zniva Department of Marketing, University of Vienna, Vienna, Austria.


January 31, 2010 March 29, 2010 April 10, 2010


Vol. 24, Issue I, 2010, pp. 121-148

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1.


Introduction

Recently, modern retailing faces several dynamic trends that influence a firm’s success substantially and that furthermore affect the ways of doing business in the 21st century. Modern food retailing is effected by developments in the retailing environment characterized by increasingly competitive markets. As a result grocery stores are all regarded as similar in the eye of the consumer (Wakefield/Baker 1998). Product offers and also prices assimilate all across the marketplace with the result that neither can be seen as a source of competitive advantage (Groeppel/Bloch 1990). Contemporary retailers, however, still focus on traditional marketing tools, although recent research shows that consumers’ store loyalty and time spent shopping has decreased over the years (Reynolds/Ganesh/Luckett 2002). Grocery retailers are therefore forced to find a new basis for generating an advantageous market position (Zineldin 2006). The shopping experience itself has become a fertile opportunity for market differentiation. The aim is to generate an inimitable image which is deeply rooted in the mind of the consumer and has the ability to distinguish the retail offering from the competitors’ (Baker/Levy/Grewal 1992). Among the advantages offered by a preferably perceived shopping experience is the store’s capability to elude direct price comparisons, especially in the context of routinely purchased products (e.g. groceries) (Groeppel 1997). Referring to the practical relevance of the shopping experience, in the center of academic discourse (e.g. Pine/Gilmore 1999; Annamma/Sherry 2003; Prahalad/Ramaswamy 2004; Bäckström/Johansson 2006) a growing body of literature is reflecting the importance of the consumption experience at the POS where shopping preferences lie. Therefore, a considerable proportion of this research string focuses on the emotional side of the shopping experience, following on the early contributions of Kotler (1973) as well as Donovan and Rossiter (1982, 1994). Numerous approaches were successful in directly relating various in-store characteristics to the individual shopper’s emotional responses to them during the shopping activity (see Turley and Milliman (2000) for a comprehensive review). This may be an interesting but perhaps insufficient approach to gain insight into shopping behaviors emphasizing routinely purchased products like groceries. Recent research provides evidence that shoppers are not only influenced by emotions, but can also be assumed to be more rational when making patronage decisions, especially in the long run (e.g. O’Curry/Strahilevitz 2001). Therefore, cognitive reactions must also be considered when evaluating consumer behavior in this context. In order to respect both of these psychological aspects of shopping, other research attempts took a different route and succeeded in applying marketing’s central concept of value to the shopping experience (e.g. Babin/Darden/Griffin 1994; Babin/Darden 1995; Carpenter/Moore 2005). Nevertheless, in the shopping experience evaluation the role of value perceptions is still

Weitzl, W.; Zniva, R.

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obscure. Existing literature reveals a twofold research gap: (1) in previous research less effort is dedicated to analyzing the unique store characteristics that affect value evaluations in specific shopping contexts like regular purchasing of consumer goods (Aubert-Gamet/Cova 1999; Cottet/Lichtlé/Plichon 2006); and (2) only a few studies attempt to link different dimensions of shopping value to a comprehensive group of retail outcomes like customer satisfaction and store loyalty, leaving an insufficient empirical basis (see Jones et al. (2006) and Carpenter (2008) for exceptions). The present study addresses these research gaps by extending our knowledge of the relationship between store image, shopping value, customer satisfaction and store loyalty to the highly competitive grocery sector. For the first time, a holistic approach is presented to identify key instore image characteristics and their influence on both hedonic (emotional) and utilitarian (rational) shopping value. Furthermore, we investigate consequences of the perceived shopping value upon customer satisfaction and loyalty intentions and behavior. In line with this research purpose, the following research question is proposed: RQ: Which store image characteristics can be regarded as antecedents of perceived shopping value and how does this value perception impact customer satisfaction and store loyalty? The subsequent sections of this article are structured as follows: First, we discuss the shopping value concept and its dimensions. Secondly, we briefly outline store environment as an integral component of store image and an antecedent of perceived shopping value. Thirdly, customer satisfaction and store loyalty are introduced as consequences of perceived shopping value. Thereafter, we describe the research design, methodology, and the approach that we adopted. After presenting our results and evaluating our framework, we conclude with a discussion.

2.

Literature Review and Hypotheses

Figure 1 shows the proposed conceptual framework. The model focuses on the shopping experience and its relationship to its in-store antecedents and consequences. To be more precise, it is proposed that two different forms of shopping value are inherent in the overall shopping experience. Both of these value dimensions serve as the key constructs of the model. The following section sheds light on these latent variables before the paper further discusses their relationship with the store environment as an integral part of the store image. The framework furthermore proposes that both shopping values have an impact on customer satisfaction and store loyalty as key shopping outcomes.

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Figure 1: In-Store Antecedents and Consequences of Shopping Value

2.1.

Utilitarian and Hedonic Shopping Value

In retailing the notion of value has been widely used as a theoretical framework (e.g. Holbrook 1994). Since the 1990s the marketing world has seen the development of a comprehensive research field which emphasizes the assumption that consumer behavior is better understood when analyzing human behavior from a perspective of perceived value (e.g. Heskett et al. 1994; Ostrom/Iacobucci 1995). Value is defined as an overall assessment of subjective worth considering all relevant evaluative criteria (Babin/Darden/Griffin 1994). Consumers are assumed to be value-maximizers who evaluate a situation as good, etc. in regard to its underlying benefits and costs. Therefore, value represents a trade-off of salient “give” and “get” components relevant to the consumer decision making process (Zeithaml 1988, p. 14). According to contemporary research, the shopping experience provides consumers with a combination of utilitarian and hedonic shopping value which together compose the overall worth of the shopping activity (e.g. Chandron/Wansink/Gilles 2000; Klein/Ford 2003). The concept of utilitarian shopping value is based on the assumption that consumers are rational problem solvers (Bettman 1979) or rational “value calculators” understood in the perspective of the “Homo Economicus” (Rintamäki et al. 2006). Consumers seek utilitarian value in a taskoriented, rational manner (Blackwell et al. 2001). Therefore utilitarian aspects of shopping are often equated to rational motives like time, place and possession needs (Chandron/Wanskin/ Gilles 2000). In the case that these functional needs are fulfilled, the shopper in this manner experiences utilitarian shopping value (Holbrook/Hirschman 1982; Holbrook 1999). Therefore,


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in line with this argumentation, utilitarian shopping value can be defined as an overall assessment (i.e. judgment) of functional benefits and sacrifices of a consumer’s shopping experience (Overby/Lee 2006). In contrast, hedonic shopping value represents a shopping experience’s emotional and psychological worth (e.g. Babin/Darden/Griffin 1994; Roy 1994; Wakefield/Baker 1998). Hereby, hedonic shopping is often regarded as a positive experience in which consumers receive emotional gratification during their shopping experience along with feelings of satisfaction. Sources of hedonic shopping value include the joy and/or excitement of shopping, and the escape from everyday activities provided by the shopping experience itself (e.g. Bloch/Richins 1983; Fischer/Arnold 1990; Sherry 1990; Carpenter/Moore 2005). Hedonic value is therefore defined as an overall assessment (i.e. judgment) of the experiential benefits and sacrifices of the shopping experience (Overby/Lee 2006). A shopping activity is evaluated on success factors which are essentially aesthetic in nature. Therefore, hedonic shopping value is regarded as being more abstract, personal and subjective than utilitarian shopping value (Holbrook/Hirschman 1982). Several researchers have demonstrated that both utilitarian and hedonic value can be provided by the retailer during the shopping experience (e.g. Belk 1979; Fischer/Arnold 1990; Sherry 1990). For example, a shopper might be successful at finding the commodity that stimulated the shopping trip by consulting friendly store personnel. Utilitarian value would then be derived from the consumer’s success at quickly finding the product needed, and hedonic value would be created by the social interaction with the friendly store personnel. Thompson et al. (1990) propose that utilitarian and hedonic shopping values coexist among shoppers, but one motivational dimension often tends to dominate the other. The authors suggest that the shopper’s personal characteristics and the shopping situation itself primarily determine the relative influence of the motives for the consumer’s internal responses and overt behavior.

2.2.

Store Image as an Antecedent of Shopping Value

2.2.1. Store Image Since Martineau’s (1958) classic article emphasizing the idea that stores project a “personality” to their shoppers, store image is seen as a valuable predictor of consumer behavior and store performance (e.g. Arons 1961; Lessig 1973; Doyle/Fenwick 1974-75; Bellenger et al. 1976; Stanley/Sewall 1976; Nevin/Houston 1980; Malhotra 1983; Sirgy/Samli 1985; Osman 1993; Bloemer/DeRuyter 1998; Grewal/Monroe/Krishnan 1998). In literature, the dominant attitudinal perspective treats store image as the result of a multi-attribute model (e.g. Bloemer/OederkerSchröder 2002). The diversity and multi-dimensionality of store image is impressively shown by the work of Kunkel and Berry (1968) who reveal that the image of a store is composed of

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43 individual image dimensions. Jones (1999) distinguishes two dimensions of store image: (1) customer factors - store attributes that cannot be controlled by the retailer and are more closely related to the personal characteristics of the consumer, and (2) retailer factors - variables that are directly related to the “four Ps of Marketing” (Raajpoot et al. 2008) which can be controlled by the retailer. Since only the latter provides a potential basis for direct managerial implications, this article focuses on the retail environment as a key element of retailer-controllable factors. Based on previous research (e.g. Baker 1986; Sullivan/Savitt 1997; Wakefield/Baker 1998; Bäckström/Johansson 2006) in-store environmental elements can be classified as follows: (1) atmospheric (physical) cues; (2) social cues; and (3) merchandise (assortment) cues. (Ad 1) Atmospheric cues: Hoffmann and Turley (2002) argue that atmospheric cues are composed of both tangible and intangible elements. Literature (e.g. Baker 1986; Sullivan/Savitt 1997; Baker et al. 2002) suggests that three dimensions of atmospheric cues exist: (1a) Store design - This includes all sensually perceivable aspects of the physical store environment (Scheuch 2001). Design factors cover the overall style that is largely expressed through the interior architecture of the store as well as other factors like interior decoration (e.g. flooring, carpeting, wall composition, paint, wall paper, ceiling composition, furniture, racks and cases) (Turley/Milliman 2000). (1b) Store layout - This atmospheric element describes the way in which furnishings and equipment are arranged within the store, the size and shape of these items, and the relationships that exist between them. Layout factors include elements like the width of aisles, space design and allocation, placement of merchandise, grouping of merchandise, work station placement, placement of equipment and department locations (Turley/ Milliman 2000). (1c) Store ambience - This dimension is commonly used to describe the more intangible aspects of a retail environment. Ambient factors include elements such as music (Milliman 1982; Areni/Kim 1993; Hui/Dubé/Chebat 1997; Yalch/Spangenberg 2000), odor (Spangenberg/Crowley/Henderson 1996), colour (Bellizzini et al. 1983; Bellizzini/Hite 1992; Baker et al. 2002) and lighting (Butler/Biner 1987). (Ad 2) Social cues: The social dimension of a store is composed of all interactions (i.e. physical and emotional) that shoppers have with other members of society (Sullivan/Adcock 2002). According to Baker (1986) social factors include the number, type and behavior of sales personnel and other customers within the store. (2a) Store personnel - Malhotra (1983) identified service provided by store personnel as one of several salient characteristics of a store. The quality of interaction between a store’s personnel and its customers is seen as an important aspect of shopping (Baker et al. 2002). Shoppers evaluate this store characteristic by assessing their perceptions of how well they are being treated and how well they are receiving prompt and personal attention (Huddleston/Whipple/VanAuken 2004). (2b) Clientele - Tauber (1972) notes that the marketplace has traditionally been a center of social activity. Rubenstein and Shaver (1980)


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as well as Westbrook and Black (1985) posit that some shoppers require social support while shopping to reduce feelings of boredom and loneliness. (Ad 3) Merchandise cues: A third category of crucial importance for the perception of store image is a retail store’s merchandise (Lindquist 1974-75; Niven/Houston 1980). Product assortment is defined as the number of different items in a purchase category (Levy/Weitz 1995). A strong merchandise mix provides shoppers with a wider choice of goods and therefore enhances a store’s ability to fulfill the shoppers’ needs and wants (Golledge et al. 1966; Hanson 1980).

2.2.2. Relationship Between Store Image and Utilitarian Shopping Value Prior research suggests that shoppers’ perceptions of monetary as well as non-monetary (psychological) shopping costs can be influenced by the physical retail environment, and therefore these elements of the store image are seen as being capable of improving utilitarian shopping value (e.g. Ingene 1984; May 1989; Sherman/Mathur/Smith 1997). For example, store characteristics like prestigious and appealing physical store attributes can compensate for the sacrifice of time and effort (May 1989). Research on individual store design elements has shown that, for example, product displays can facilitate the efficiency of the shopping activity by enhancing utilitarian value through ease of information attainment, price comparison and shopping convenience (e.g. Chevalier 1975; Wilkinson/Mason/Paksoy 1982; Gagnon/Osterhaus 1985). Cottet et al. (2006) provides additional evidence that utilitarian shopping value can be derived from an easy access to information and products. Smith and Burns (1996) found an impact of store layout on the perception of merchandise and value-for-money. Yalch and Spangenberg (1990) demonstrate that the kind of music played can influence the time perceptions of the consumer. In a similar way, music that is perceived favorably by the consumer may influence shopper evaluations of the time spent shopping (Baker et al. 2002) and therefore should reduce consumers’ perceptions of the non-monetary shopping costs (Chebat/Filiatrault 1993; Hui et al. 1997). Similar results were presented for other ambience factors such as in-store colour which has been found to impact feelings, store and merchandise images (e.g. product quality), as well as time spent in store (Bellizzini et al. 1983; Bellizzini/Hite 1992). Based on the previous research we propose: H 1.1:

Store design cues will positively influence utilitarian shopping value.

H 1.2:

Store layout cues will positively influence utilitarian shopping value.

H 1.3:

Store ambience cues will positively influence utilitarian shopping value.

Like physical cues, the presence and appearance of store personnel in a retail setting can be regarded as tangible signals (i.e. cues) of in-store service quality (Parasuraman et al. 1988).

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Research provides evidence that the interaction between employees and customers affects consumers’ assessments of the shopping experience (Hartline/Ferrell 1996). Store personnel affect customer attitudes as well as satisfaction with a store’s offering (Grewal/Sharma 1991; Sharma 1997). Furthermore, store personnel have an important role for customized services because they represent cues for the assessment of overall service quality (Ang/Leong/Lim 1997). Utilitarian shoppers, especially may regard service offerings that improve the efficiency of their shopping activity as beneficial. Following previous research, we consequently suppose that: H 1.4:

Store personnel cues will positively influence utilitarian shopping value.

The importance of merchandise assortment for utilitarian value perceptions of the shopping experience is recognized by Eastwick and Feinberg (1999) who state that the utilitarian value of assortment seeking refers to the value a shopper derives from being exposed to a variety of merchandise. A large variety of merchandise provides the shopper with a large number of complementary and/or substitutable goods and services. This offers the consumer the opportunity to optimize his/her time, place and possession needs which are elementary utilitarian motives for shopping. A large product variety minimizes the perceived costs (e.g. effort) associated with the shopping experience (Huff 1962; Golledge et al. 1966; Hanson 1980). Because of this reasoning the following hypothesis is proposed: H 1.5:

Merchandise assortment will positively influence utilitarian shopping value.

2.2.3. Relationship Between Store Image and Hedonic Shopping Value Consumers often shop for the appreciation of an experience. Hedonic shopping value is more subjective and personal because it reflects the emotional worth of a shopping activity (Babin/Darden/Griffin 1994). This perspective regards shopping as “fun” (Griffin et al. 2000), rather than as a “task” (e.g. Batra/Ahtola 1991; Babin/Darden/Griffin 1994). Prior research suggests that hedonic shopping value can be achieved, at least partly, through the store’s environmental characteristics (e.g. Cottet/Lichtlé/Plichon 2006). Environmental psychologists (e.g. Mehrabian/Russell 1974) and their marketing followers demonstrate that spatial environments can evoke pleasurable emotions and that these psychological reactions influence store shoppers’ approach and/or avoidance behaviour (e.g. Donovan/Rossiter 1982, 1994; Babin/Darden 1995; Wakefield and Baker 1998; Baker, Levy et al. 1992). Various researchers have emphasized that some shoppers may derive pleasure and arousal from the sensory aspects of the retail environment, such as sights, sounds, and smells (e.g. Hirsch 1995; Mitchell et al. 1995; Bone/Ellen 1999; Eroglu/Machleit/Davis 2005). For example, Wakefield and Baker (1998) argue that one of the most important roles of the shopping environment is to stimulate excitement by its design and atmospherics. On the basis of this evidence, the following hypotheses are proposed:


H 2.1:

Store design cues will positively influence hedonic shopping value.

H 2.2:

Store layout cues will positively influence hedonic shopping value.

H 2.3:

Store ambience cues will positively influence hedonic shopping value.

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Tauber (1972) states that many shoppers visit a store to gain social experiences outside the home. People like to shop in environments which they perceive as socially pleasant. Nevertheless, there are also negative effects of the presence of other customers within the store. For example, if shoppers perceive a crowded layout, feelings of stress are experienced leading to mental discomfort (Harrell et al. 1980; Hui/Bateson 1990, 1991). In crowded conditions, individuals experience higher levels of hostility and increased anxiety (Zeedyk-Ryan/Smith 1983) and other negative emotions (Machleit/Eroglu/Mantel 2000; Eroglu/Machleit/Davis 2005). Research provides evidence that crowding has a negative impact on shopping pleasure (Hui/ Bateson 1991). Therefore it is hypothesized that: H 2.4:

Store personnel cues will positively influence hedonic shopping value.

H 2.5:

Clientele cues will positively influence hedonic shopping value.

An early study by Rich and Portins (1964) demonstrate that a large proportion of shoppers derive their pleasure from shopping by seeing new items and getting new ideas. Strolling through the store and browsing the merchandise offered provides shoppers with gratification and pleasure as consumers can vicariously buy desirable products (Hirschman 1981). Additionally, a great product selection provides the shopper with valuable information about the latest products, fashions and trends. All these aspects can be regarded as central hedonic shopping motives (Tauber 1972). Therefore, we expect assortment to be a vital aspect in the creation of shopping enjoyment and hedonic value. We assert that: H 2.6:

2.3.

Merchandise assortment will positively influence hedonic shopping value.

Consequences of Shopping Value

2.3.1. Customer Satisfaction and its Relationship to Perceived Shopping Value Customer satisfaction can be regarded as one of the central concepts in the marketing literature (e.g. Erevelles/Clark 1992; Oliver 1997). Nevertheless, a lack of consensus regarding an adequate definition of consumer satisfaction is notable. In literature different types of satisfaction conceptualizations can be identified. Generally, two approaches can be distinguished: One stream of literature describes customer satisfaction as a process (Hunt 1977; Oliver 1981; Fornell 1992), whereas the other perceives the construct as an outcome resulting from consumption

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(shopping) experience. The first position underlines the importance of an evaluation process which emphasizes the confirmation-disconfirmation paradigm (Oliver/DeSarbo 1988). Therefore customer satisfaction can be defined as “the consumer’s response to the evaluation of the perceived discrepancy between prior expectations (or some other norm of performance) and the actual performance of the product as perceived after its consumption” (Tse/Wilton 1988, p. 204). According to the second position, customer satisfaction can be seen as a state of fulfillment which is directly connected with reinforcement as well as arousal (Bloemer/OdekerkenSchröder 2002). Furthermore, definitions of customer satisfaction are widely influenced by context and differ depending on whether scholars evaluate consumers’ satisfaction against a product (Churchill/Surprenant 1982; Swan et al. 1981), a consumption experience (Bearden/ Teel 1983; Fisk/Young 1985; Oliver 1980), or a purchase decision experience (Westbrook 1978). In line with Bloemer and De Ruyter (1998) the authors define customer satisfaction as the outcome of a subjective evaluation in which the chosen alternative (the store) meets or exceeds expectations. Early research on the influence of shopping value on customer satisfaction shows a positive impact of hedonic and utilitarian shopping value on satisfaction (Babin/Darden/Griffin 1994). Patterson and Spreng (1997) stressed that the effect of perceived value on repurchase intentions is completely mediated through customer satisfaction. Following Mano and Oliver (1993) customer satisfaction can stem from the performance of a useful function or from intrinsically pleasing properties, providing evidence for a direct relationship between perceived utilitarian shopping value, hedonic shopping value, and customer satisfaction. Furthermore, those shopping decisions or shopping situations which foster justification and rationality of choices especially are more likely to see their utilitarian aspects emphasized (Tversky/Sattah/Slovic 1988). Thus grocery shopping can be regarded as a facet of a functional (and less hedonic) consumption experience which especially demands a justification of store choice from the shopper. On the basis of this evidence, the following hypotheses are proposed: H 3.1:

Utilitarian shopping value will positively influence customer satisfaction.

H 3.2:

Hedonic shopping value will positively influence customer satisfaction.

H 3.3:

Utilitarian shopping value will have a stronger influence on customer satisfaction than hedonic shopping value.

2.3.2. Store Loyalty and its Relationship to Customer Satisfaction Today, the retention of loyal customers is regarded as the key to profitability (Christopher/ Payne/Ballantyne 1991) and as a valuable asset in highly competitive markets (Srivastava/Shervani/Fahey 1998). Oliver (1999) declares that store loyalty can be regarded as the most relevant


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determinant of retail marketing success and store longevity. Recent grocery retailing studies have shown that loyal shoppers allocate proportionally more of their budget to their “first choice store” compared to other customers, and they also spend more on groceries per se than their fellow shoppers (Knox/Denison 2000). According to East et al. (1995) loyal supermarket customers spend on average 32% more than other customers. Therefore, loyal shoppers represent the most profitable core of grocery store customers (East et al. 1994). Investments in the establishment of long-term customer relationships find favor across many industries, particularly in industries where customers face low switching costs because they are not locked in by a contract (Shapiro/Vivian 2000). This is especially true for the retailing industry. According to Huddleston et al. (2004) food retailers have to create and maintain a loyal customer base in order to survive in today’s competitive markets. Research on store loyalty has emphasized different approaches to conceptualize and measure loyalty. The majority of studies prefer the behavioural approach, which defines loyalty as a tendency of consumers to purchase repetitively in a certain period of time. Store loyalty is hereby measured by purchase ratios, repetitive purchase behaviour or purchase frequency (BustosReyes/Gaonzález-Benito 2008). However, an important distinction involves the difference between attitudinal loyalty and repeat purchase behaviour (Jacoby/Kyner 1973). The key referent of distinction is that attitudinal store loyalty involves a psychological commitment and constitutes a personal preference to the retailer, whereas repeat purchase behaviour does not necessarily involve a psychological commitment (Carpenter 2008). Various authors have therefore accented the importance of considering both behavioural and attitudinal aspects of loyalty and describe store loyalty as the favorable attitude and repetitive purchase behaviour of consumers (e.g. Pritchard et al. 1992; Dick/Basu 1994). In line with Bloemer and De Ruyter (1998, p. 500) the study at hand defines store loyalty as “… the biased (i.e. non-random) behavioural response (i.e. revisit or repurchase), expressed over time by some decision making unit with respect to one store out of a set of [stores], which is a function of psychological (decision making and evaluative) processes resulting in brand [or store] commitment”. Store loyalty is therefore expressed as an attitude and overt behaviour. “Customer commitment”, understood as “the pledging or binding of an individual to his/her store choice” (Bloemer/De Ruyter 1998, p. 500), is in this context a necessity of “true” store loyalty. Research demonstrates a positive link between satisfaction and loyalty (e.g. Oliver 1980; Cronin/Taylor 1992; Fornell 1992; Macintosh/Lockshin 1997; Reynolds/Beatty 1999; Reynolds/ Arnold 2000; Jones et al. 2006; Carpenter 2008). For example, Fornell et al. (1996) as well as Anderson et al. (2004) point out that customer loyalty is determined to a large extent by customer satisfaction. Satisfaction influences purchase intentions and positive word-of-mouth which are both regarded as indicators of store loyalty (Boulding et al. 1993; Taylor/Baker 1994; Zins 2001). In line with these findings, Cronin et al. (2000) state that a satisfied consumer tends

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to become a loyal customer who exhibits repeat patronage behaviour and intention. Therefore, it is hypothesized that: H 4:

Customer satisfaction will positively influence store loyalty.

To summarize the proposed relationships, the theoretical framework is shown in Figure 2. Figure 2: Conceptual Model

3.

Methodology

3.1.

Measures

To test the proposed relationships, an empirical study was conducted. Measures were developed on the basis of an extensive literature review and additional interviews with experts from the shop fitting industry [1]. A major proportion of the measures used were adopted from established scales. English measures were translated to German using a “Forward-Backward Method”. Nevertheless, additional items seemed to us to be necessary for the grocery store con-


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text. Therefore, additional measures were incorporated which resulted from a rigid and iterative scale development process (Churchill/Iacobucci 2005). The research instrument was pre-tested before undertaking a full-scale quantitative survey. Measurement of store image. The store environment was conceptualized by the following dimensions: (1) store design; (2) store layout; (3) store ambience; (4) store personnel; (5) clientele; and (6) merchandise assortment. After scale purification 37 items were used to assess the store environment. Store design items originated from Wakefield and Baker (1998) and Schnessl (2005). Items representing store layout, store ambience, store personnel, clientele and merchandise assortment were taken from Bost (1987), Hightower et al. (2002), Gruber (2004) and Schnessl (2005). Additional items originated from a series of expert interviews with store design experts which served as basis for scale development. All items were measured by using a seven-point Likert scale (from 0-I totally disagree, to 6-I totally agree). In order to assess validity of the constructs an exploratory factor analysis (PCA, varimax rotation, eigenvalue criterion) was performed. Validity of the six factors was supported as all indicators showed high correlation with their corresponding store environment component and low correlations with all other store dimensions. In total, the extracted factors explained 65% of the variance. Reliability analysis was conducted for each construct based on the Cronbach’s alpha test of internal consistency. All reliabilities (except for store ambience with .61) were between .81 and .90 - above the required cut-off level (Nunnually 1978). Item-to-total correlations were above the cut-off level of .40 and therefore acceptable. Measurement of utilitarian and hedonic shopping value. Items measuring the utilitarian and hedonic shopping value were taken from Babin et al. (1994) and Schnessl (2005). Additional items were derived from interviews with retailing experts. Respondents used a seven-point Likert scale (from 0-I totally disagree, to 6-I totally agree) to indicate perceived value derived from the shopping experience. Validity was assessed by an exploratory factor analysis (PCA, varimax rotation, eigenvalue criterion) on the 12 scale items. Two factors emerged with eigenvalues greater than one which together accounted for 67% of the variance in the data. As expected, all scale items loaded highly on their respective factors and had low loadings on the other factor. Cronbach’s alpha values above the .70 cut-off level and adequate item-to-total correlations support reliability of the two scales. Measurement of customer satisfaction and store loyalty. Three items were used to evaluate a shopper’s degree of satisfaction. In line with prior research (Groeppel-Klein 1997; Spieß, Hesse et al. 1997; Mattila/Wirtz 2001) customer satisfaction was assessed through the evaluation of a shopper’s satisfaction with (1) the purchase itself; (2) the shopping experience; and (3) the store. Respondents indicated their degree of satisfaction on a seven-point rating scale (from 0 - very dissatisfied, to 6 - very satisfied). Three items were used to assess story loyalty: (1) the

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time the shopper was loyal to the store in the past; (2) the intention to visit the store again; and (3) the intention to make future purchases. This satisfaction measure was adopted from Bost (1987) and Spangenberg et al. (1996). Respondents rated prior patronage on a six-point rating scale (0 - first time visit, 5 - over five years) and future shopping intentions on a seven-point rating scale ranging from 0 - very unlikely, to 6 - very likely. To confirm reported validity of both shopping outcomes’ dimensions, an exploratory factor analysis was implemented. As expected, two factors emerged with eigenvalues greater than one and together accounted for 72% of the variance. Cronbach’s alpha values (above .71) and item-to-total correlation (above .42) provide evidence for both measures.

3.2.

Sample

Data collection was done by personal interviews using a standardized questionnaire as the research instrument. The study was conducted in a major Austrian city with a population of more than one million citizens. As for research location, two different grocery stores of the same retail chain were selected. These supermarkets were similar with regard to their general store layout, size (between 400 and 600 square meters) and merchandise offering (about 4,000 different grocery articles), reflecting a typical grocery store. Significance tests for differences of means in the evaluation of the store environment between the two stores did not show major differences; nevertheless, store design of one store was evaluated more positively (Store 1: M = 4.07, SD = 1.06; Store 2: M = 3.52; SD = 1.07; p < .05). This result can be explained by a recent architectural make-over of the better rated store. The location of both stores was downtown and both supermarkets were within one kilometer apart. Both stores served the needs of an upper-level clientele with a demand on high quality groceries and fancy food. The study respondents were taken from a convenient sample of supermarket shoppers. The data collection was part of an undergraduate extra credit exercise in marketing research. Twelve students trained and instructed in data collection procedures were used as interviewers. Customers were intercepted in the store after checking out, close to the exit where the respondents had no direct possibility of examining the interior of the store. Every third shopper was approached and asked to participate in a ten-minute interview. A screening question was used to evaluate that potential respondents who were just “passing through” the store were omitted. Approximately 800 respondents who met the criteria for inclusion were intercepted. Of these, 342 agreed to participate and provided data for the analysis. The relative low response rate (43%) is a result of a time-constrained shopping situation, especially during rush hour, which is typical for supermarkets. Shoppers were approached in the second and third week of December, 2009. Data collection took place on five days of the week (MondayFriday), from 8 a.m. till 6 p.m. The demographic characteristics of the respondents are summarized in Table 1.


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Table 1: Demographics of the Respondents (N = 342)

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Of the total number of usable responses, 64% were female, and 36% were male. Hardly any grocery shopper was above the age of 70. The respondents in the sample were quite well educated and had an income level that is above the average. The composition of the sample therefore reflects the demographic situation of an inner-city research site.

3.3.

Results

Hypotheses 1 and 2. The hypotheses were tested using a multiple regression analysis with the shopping value dimensions serving as dependent variables and store environment components as independent variables. All constructs were formed by averaging the measurement items. Tests for linearity, heteroscedasticity, multicollinearity and normal distribution indicated no violation of assumptions of regression analysis.

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Hypothesis 1 predicted a significant positive impact of store design (H1.1), store layout (H1.2), store ambience (H1.3), store personnel (H1.4) and merchandise assortment (H1.5) on utilitarian shopping value. Empirical results are displayed in Table 2 and support hypotheses H1.2, H1.3, H1.4, and H1.5. Store design, however, showed no significant impact on utilitarian shopping value. Hypothesis H1.1 was therefore not supported. Overall, merchandise assortment had the strongest impact on perceived value, followed by store layout. Results show that the store environment can evoke utilitarian value with several of its components. Nevertheless, the impact of the individual in-store elements varied substantially. Atmospheric as well as social cues had a positive impact on the functional evaluation of the store. Primarily, however, these results provide evidence that merchandise assortment can be regarded as a key determinant of utilitarian shopping value. Table 2: Multiple Regressions of Shopping Values on Store Environment Components

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Hypothesis 2 proposed a significant positive effect of store design (H2.1), store layout (H2.2), store ambience (H2.3), store personnel (H2.4), clientele (H2.5) and merchandise assortment (H2.6) on hedonic shopping value. Results are also presented in Table 2. H2.1, H2.2 and H2.6


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were supported by empirical evidence. The strongest impact was found for store design followed by store layout. However, store ambience as well as both social dimensions had no significant influence. Therefore, hypotheses H2.3, H2.4 and H2.5 are not supported. Results show that the aesthetic elements of the store environment seem to play a crucial role for perceived hedonic shopping value. In contrast, social aspects of supermarket shopping are of secondary importance and do not seem to be adequate value antecedents in this shopping context. Hypothesis 3. The hypothesized relationships between both shopping value dimensions and customer satisfaction were tested using a multiple regression analysis. Hypotheses H3.1 and H3.2 were supported as both utilitarian shopping value (s = .502; t = 11.585; p < .001) and hedonic shopping value (s = .303, t = 6.985; p < .001) exhibited a highly significant positive impact on customer satisfaction: the higher the hedonic value of shopping, the more satisfied the individual consumer; and the greater the utilitarian value, the higher the consumer satisfaction. Therefore, one can say that both value dimensions evoke the satisfaction of the supermarket customer; however, the influence of the utilitarian value is more important. This result shows that the functional aspects of the store are of critical importance for food shopping. Utilitarian shopping value was hypothesized to have a stronger impact on customer satisfaction when compared to the influence of hedonic shopping value (H3.3). A general F test supported a stronger relationship (F = 127.354; p < .001; Adj. R2 = .432). Hypothesis H3.3 is therefore supported. Hypothesis 4. A regression analysis was carried out to test the relationship between customer satisfaction and store loyalty (Adj. R2 = .106; F = 40.740; p < .001). A significant positive relaTable 3: Review of Hypotheses $ 8 " ! - 9 !! ((- % 4.6

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tionship was observed (s = .330; t = 6.383). The more satisfied shoppers were, the higher was their loyalty towards the stores. Therefore, hypothesis H4 is supported. Table 3 summarizes the results of the hypotheses tests.

4.

Discussion and Implications

This study provides insights into the complex relationship between store image characteristics with customer satisfaction as well as store loyalty as key shopping outcomes. By doing this, the mediating role of shopping value has been accentuated. Results show that various store image characteristics affect both shopping value dimensions. All three shopping dimensions - (1) environmental cues; (2) social cues; and (3) merchandise cues - were found to influence value perceptions of the shopping experience to varying degrees. Merchandise assortment showed the strongest impact on utilitarian shopping value: the better the shopper perceives the variety of merchandise offerings, the higher her/his perceived utilitarian shopping value will be. This means that product availability plays a central role for the evaluation of the successful fulfillment of the shopping task in the grocery context. This perspective is supported by earlier research by Cottet et al. (2006). This study, in contrast, was able to identify additional, store image components contributing to the functional value of shopping: store layout, ambience and store personnel. Each have been found to impact this value dimension; however, their influence seemed to be weaker compared to the product-related factor. Regarding the hedonic side of shopping, the study at hand presents a different picture. Here, store design contributes foremost to the hedonic shopping experience, emphasizing the importance of the aesthetics of the shopping environment. Furthermore, layout factors and merchandise assortment can also be considered important drivers of hedonic shopping value. Surprisingly, a positive relationship with ambient conditions was not indicated. Generally, the study provides some evidence that the social dimension of shopping in general plays a relatively minor role in grocery shopping. This is especially true of the presence of other customers who in this context do not seem to have an influence on either shopping value dimension. These results punctuate the findings of Cox et al. (2005) who noted that relatively few consumers visit a store to mingle with other shoppers. An explanation for this finding may be the nature of the shopping activity itself. Especially in the grocery context, the majority of shoppers are task-oriented and want to do their shopping in an effective and efficient manner. The study furthermore extends previous research contributions on the main effects of value on satisfaction (e.g. Cronin/Brady/Hult 2000). The grocery shopping experience is capable of evoking not only utilitarian value but to also stimulate the hedonic side of consumption. Both value dimensions were shown to be important for feelings of satisfaction; however, in the con-


139

text of frequently purchased products the emerging assumption that both shopping values play nearly equal roles in predicting shopping outcomes (e.g. Batra/Ahtola 1991; Babin/Attaway 2000) can be questioned. This reinforces other authors who propose differential effects of utilitarian versus hedonic shopping value on satisfaction (Patterson/Spreng 1997; Woodruff 1997; Cottet/Lichtlé/Plichon 2006; Jones/Reynolds/Mark 2006). Utilitarian value seems to be a better predictor of customer satisfaction than the hedonic counterpart. It appears that shoppers turn to the grocery market in order to fulfill primarily functional, product-related shopping goals. In addition, results demonstrate that a positive relationship between shopping value and store loyalty exists, but this effect is to a large degree mediated by customer satisfaction with the shopping experience. This finding gives empirical support to the relevance of the satisfactionbuilds-loyalty framework in the grocery shopping context. It is likely that shoppers who have been successful in fulfilling their shopping task remember the shopping experience positively and are likely to visit the retailer again in the case of similar shopping needs. From the managerial perspective it is worth noting that the store image characteristics are capable of influencing perceived in-store value which has a further impact on customer satisfaction and store loyalty. Especially in grocery retailing, where the utilitarian side of shopping is the key determinant of a positive perception of the shopping experience. Even so, store aesthetics are also able to influence shopping experience and major shopping outcomes, and retailers are well advised to enhance their stores’ functional aspects. Grocery shoppers seem to prefer a great variety of different products and brands. However, only a store that grants a quick orientation, rapid access to the products and fast checkout enhances the quality of the shopping activity.

5.

Limitations and Future Research

The study concentrates its efforts on the evaluation of grocery shopping and is therefore not in the position to translate the findings to other retailing sectors. It is very likely that shopping motivations and values differ in other retail formats like apparel and electronics. There, the impact of hedonic shopping value on customer satisfaction might be stronger. That proposition needs to be tested empirically in future studies. The results of the study at hand may have been influenced by the distinct demographics of the sample, which was drawn from downtown supermarket shoppers. Nevertheless, there exists some heterogeneity among the sample - most participants showed typical inner-city demographic profiles (i.e. high level of education, etc.). Further research should overcome this restriction and should investigate the effects of demographics in further detail. Future research should also investigate additional types of shopping values. The authors assume that a dichotomy of shopping values exists. More recent bus-limited research provides some evidence that other dimensions like the social aspects of shopping

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should be taken into consideration when evaluating shopping activities and their value (Diep/ Sweeney 2008). Research emphasizing the dimensionality of shopping value would be beneficial for a better understanding of shopping outcomes. Some results of the study at hand demand further analysis. It might be considered surprising that ambience factors had a significant positive impact on utilitarian shopping value but no effect on hedonic shopping value. A qualitative study could provide a deeper understanding of this observation. From a methodological perspective, all constructs were measured with reflective items in line with prior research. Some store environment components (like, for example, store ambience) might also be viewed as being formed by different characteristics (such as temperature, scent, etc.) suggesting a formative measurement model. Future research might take a closer look at this distinction. Finally, all relationships in the model were tested with a series of regression analyses. Future research should use advanced methodologies (such as structural equation modeling) to comprehensively examine the proposed framework. Such an approach would allow researchers to test mediation effects, too.

Notes [1] Measurement items are available upon request from the authors.

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Strategic Differentiation in the Japanese Convenience Store Business. The Example of Lawson’s Format Variation Ari Huuhka, Nobutoshi Shimizu and Martti Laaksonen

Abstract In the Japanese convenience store business Lawson has applied format variation (the creation and development of branded sub-formats) most intensively and is now implementing multi-format strategy. Until the change of governance in 2001 Lawson’s strategy focused on store locations and market expansion. Since then Lawson has introduced format variation and sought the strategic fit between the offering of the store format and new customer segments. Lawson’s strategy differs from its competitors in many ways. Lawson has differentiated the offering of the store formats in terms of location, price, product and service mixes, and has created novel customer value propositions and responses to emerging customer needs. Lawson’s strategy has also involved the creation of active business alliances and networks. In this paper we show how Lawson’s strategy has been conditioned by competition, market conditions and the company’s search for new strategic direction. We show also how Lawson uses store format as a strategic innovation.

Keywords Strategy, Differentiation, Store Format, Format Variation, Japanese Convenience Store Business

Ari Huuhka (corresponding author) Department of Marketing, University of Vaasa, Vaasa, Finland (Tel: +35863248555; E-mail: [email protected]). Nobutoshi Shimizu University of Marketing and Distribution Sciences, Kobe, Japan. Martti Laaksonen Department of Marketing, University of Vaasa, Vaasa, Finland.


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Convenience stores, the concept of which originates from the United States, have become part of the retail structures in Europe and in many international markets (Kotler 1988, p. 165; Ahlert/Blut/Evanschitzky 2006). In Japan the convenience store (CVS) format emerged as a retail institutional innovation in the early 1970s. Since then the CVS format has evolved to have many distinctive features. In Japan convenience stores have come to epitomize the lifestyle of young urban people. They are popular especially among the young male consumer segment. The typical Japanese CVS, or “konbini”, has about 100 square meter sales space with about 3,000 items. The majority of CVSs in Japan are open 24 hours. They are located - often many stores close to each other - in densely populated urban areas in easy-to-get to, high-traffic locations where they supply consumers within walking distance of the stores (CCRRCA 2007, p. 28). The sales mainly consist of fast food and processed food products, also non-food items and several services (Seiders/Berry/Gresham 2000, p. 82; Rapp/Islam 2006). Japanese CVSs are known for their frequent introduction of new product innovations and their ability to quickly alter the product mix in standardized stores according to local demand patterns (Stalk/Webber 1993, p. 98; Reinmoeller 2002, p. 41). The market leader is Seven-Eleven Japan (SEJ), the pioneer and innovator of the archetypal Japanese CVS format. Its store format together with its efficient business model based on a franchising system is regarded as the retail industry’s benchmark and the standard for efficient and profitable CVS operations (Reinmoeller 2002, p. 41). Many of SEJ’s innovations in store format, merchandising, logistics and systems development have been copied by the other major chains, including the second largest chain, Lawson, the third largest chain, FamilyMart, and the many mid- and small-size regional chains. As a result, the Japanese CVS chains have become famous for their know-how in the strategic application of retail technologies to enhance the store format’s competitiveness in the marketplace (CCRRCA 2007, p. 28; see also Rapp/Islam 2006, p. 187). Besides, the chains (especially through the model and standards set by SEJ) are renowned of their high operational efficiency that comes from the effectiveness of the total system, including the integration of supply management (e.g. the physical distribution, supply chain design, etc.), demand management (e.g. the item-by-item control) and information technology systems (Larke 1994, p. 149; Takeda/Matsuo 2002). For a long time the Japanese CVS chains benefited from continuous market growth. That led to the proliferation of stores, saturation, and heavy competition for the best store locations in mature markets. The major chains have nearly identical store formats and compete with each other in the same market segment. They carry similar strategic product categories with relatively high, non-discounted prices and offer similar kind of services. Lawson, the second largest chain, is the rare exception in this sense. It was first company in the Japanese CVS business that

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introduced format variation. It is also the only company that operates CVSs nationwide in every prefecture in Japan. Lawson began to employ its current strategy that emphasizes format variation in 2001. At present Lawson operates and develops four types of CVSs targeted to different customer segments. In addition to the standard, mainstream “Lawson” CVS format that is targeted to the young male segment, Lawson operates the following format variations or sub-formats: The “Natural Lawson” store format for the young female with a healthy lifestyle segment, the low-price “Lawson Store 100” store format for the price-conscious consumer segment, and the “Lawson Plus” store format for the housewives and aged persons segment. With this strategy Lawson has been able to create new markets and to operate stores in such geographic regions and locations where SEJ and other competitors could not run their stores profitably. Although Lawson’s current strategy is still in progress, it is, however, the first clear divergence from both the dominant mode of intra-format competition and the SEJ’s or other Japanese CVS companies’ more conventional store development strategies. The fragmentation of the format landscape and the emergence of more specialised store formats has been recognized as an emergent trend in food retailing in Asia, especially in the mature and low-growth markets such as Japan (CCRACA 2007, p. 16). In the Japanese CVS business, Lawson’s format variation is an example of this phenomenon. Also Lawson’s competitors, SEJ and FamilyMart, have experimented, piloted and are currently running a small number of stores that are variants of their major store formats. Lawson, however, has developed and applied format variation the most intensively and progressed the farthest in its pursuit of a long-term multi-format strategy. In this paper we aim to contribute to the discussion of how retail companies use store formats as strategic innovations to differentiate their store offerings from competitors in the highly competitive and mature markets. Lawson’s use of store format variation in the Japanese market is an illustrative empirical example of retailers’ strategic differentiation. We propose, by referring to the concept of strategic innovation (Reynolds et al. 2007; Markides 1997; Govindarajan/Trimble 2004), that, in the context of Japanese CVS business, Lawson’s new store formats can be regarded as strategic innovations with which Lawson is seeking to change, in the long run, the dominant mode of competition. The paper focuses on examining Lawson’s format variation in the Japanese market. The purpose of the paper is twofold, first to describe how Lawson’s began to employ its current strategy emphasising format variation, and second, to analyse how Lawson’s store development activities have been conditioned by competition, market conditions and the company’s search for new strategic direction. The paper has three objectives. The first objective is to provide a conceptual framework for understanding the use of store formats in strategic differentiation.

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The second objective is to describe the competitive setting and the development of the Japanese CVS business. The third objective is to identify the major events and changes in Lawson’s store development activities and to analyse how Lawson’s current strategy and its store formats differ from those of its closest competitors, SEJ and FamilyMart. The structure of the paper is as follows. This introduction is followed by the conceptual framework part of the paper focusing on the conceptual foundations of the strategic use of store formats. It provides the literature review and discussion on the concept of store format, format strategies and format variation, strategic positioning with store formats, and store formats as strategic innovations. The third part presents the outline of the Japanese CVS business in its competitive setting. The fourth part describes the central elements of the market-leader SEJ’s business model with its archetypal Japanese CVS format. The fifth part focuses on describing Lawson’s store development activities and format variation. The description is based on secondary data such as annual reports, articles in business magazines, newspapers and other such documentation. The paper ends with conclusions.

2.

Strategic Use of Store Formats

2.1.

Defining the Concept of Store Format

As pointed out by González-Benito (2005, p. 458) and Reynolds et al. (2007, p. 648) there is in the retailing literature no commonly agreed definition of the term retail format. However, retail formats have been the central concept in the broad array of theoretizations concerning retail institutional change (Brown 1987). At the highest level of analysis and abstraction, a particular retail format such as a convenience store could be regarded as a retail institution that is subject to retail institutional change in the context of a given retail structure. However, in this paper we are especially interested in strategic use of the store formats and store formats as strategic innovations. We regard a store format as a strategic concept and build our view of the concept of a store format on the ideas and definitions put forward by Dawson (2004, 2006), Goldman (2001), and Reynolds et al. (2007). Dawson (2004, p. 121-126) analysed the trends and structural changes in the UK food retailing sector and pointed out the strategic move by food retailers to develop the concepts of format and formulae. These two concepts are closely related, yet distinct. According to Dawson (2004, p. 121-126) a sales format is a sales outlet that has been standardized to meet the needs of a particular consumer segment (Dawson 2004, p. 121; compare Coopers/Lybrand 1996, p. 113). Formula is a format that it adjusted and branded by an individual firm to represent their own brand; formula is the retail company’s operational interpretation of a format (Dawson 2004, p. 123; 2006, p. 55). Dawson (2004, p. 123) maintains that the idea of format requires the iden-


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tification of customer segments, each of which can be targeted by a particular combination of marketing mix factors. Goldman (2001, p. 223) in his study of the strategy of the international retail format transfer has made the distinction between the offering part of the format and the know-how part of the format (see also González-Benito 2005, p. 458). The offering part of the format consists of the external elements of the store format (e.g. the aforementioned combination of marketing mix factors) that according to Goldman (2001, p. 223) deliver the functional, social, psychological, aesthetic and entertainment benefits that attract consumers to stores. The know-how part of the format refers to the know-how needed to operate the format: it determines a retailer’s operational strength and strategic direction, and consists of the retail technology dimension and the retail culture dimension (Goldman 2001, p. 233). According to Goldman (2001, p. 233) the retail technology dimension contains the systems, methods, procedures and techniques that the retailer uses, whereas the retail culture dimension contains the repertoire of concepts, norms, rules, practices and experiences. The retail culture dimension enhances retailers’ ability to evaluate situations, identify trends and opportunities, and deal with problems (Goldman 2001, p. 233). In their recent research on the retail format innovations in UK retailing, Reynolds et al. (2007, p. 648) found that retail practitioners’ conceptions of retail formats were concerned more often with the current specific offer of the format to consumers than the underlying strategy and operation of the format. However, for Reynolds et al. (2007) the retail format is more than merely the retail offering that retailers seek to differentiate. They define a retail format “as the physical embodiment of a retail business model: the framework that relates the firm’s activities to its business context and strategy” (Reynolds et al. 2007, p. 648). According to this view the format differences (or similarities) are attributable to different (or similar) business models. They maintain that “the business model sets out how a retailer defines and differentiates its products and range, promotes itself, finds and keeps its customers, uses its resources, arrives at key processes and obtains a profit or return on investment” (Reynolds et al. 2007, p. 648). According to our view the central aspects of store formats from the strategic differentiation point of view are the offering being recognized as differentiated by the targeted customer segment and as providing benefits and value for them; and the know-how and the business model that is needed to develop, operate and replicate the store format and its brand. The strategic differentiation involves decisions about the overall format strategy of the company, the degree of format variation needed for the competitive positioning of the format in the existing retail structure and in the minds of potential customers. Besides, the strategic differentiation concerns the search and creation of the strategic fit between the offering of the store format and the targeted customer segment. The strategic fit is relative to other customer segments and competitors’ positions in the market structure.

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2.2.


Retailers’ Store Format Strategies and Format Variation

The increase of the variety of store formats especially in food retailing has been noted in many studies (Ahlert/Blut/Evanschitzky 2006, p. 289; Colla 2004; González-Benito 2005, p. 458; CCRRCA 2007). Store format decisions belong to the critical long-term strategic decisions of retailers (Gauri/Trivedi/Grewal 2008, p. 256). The store format decisions have an important role in retailers’ growth and market coverage strategies (González-Benito 2005, p. 60) and in internationalization strategies (Burt et al. 2008, p. 90). Basically, a retail company can choose to employ a single-format strategy (operations with one core format only) or a multi-format strategy (operations with multiple formats). International grocery retailers, for instance, have employed internationalization strategies involving multi-format operations (Burt et al. 2008, p. 87). From that point of view, and in that context, the multi-format strategy can be understood as a retailer’s strategy to develop and operate two or more distinct store formats (e.g. hypermarkets, supermarkets and convenience stores). Besides, as shown next, the creation of format variation can also be viewed as a multi-format strategy. Retailers’ strategic use of store format also involves decisions about the possible introduction of format variation, the development of branded formats (formulae) as the response to changes in the retail environment. In his analysis of the structural changes in European retailing, Dawson (2006, p. 49) pointed out that many of the retailers’ managerial decisions are a response to both the local culture of consumers and the local culture of consumption in Europe. He argues that the dynamic local cultural environment requires responses from retailers, or “the close matching of their operations to consumer requirements” (Dawson 2006, p. 49). Retailers’ strategies - the aforementioned responses - are executed through the formats and formulae that the retailer creates (Dawson 2006, p. 49). The creation of format variation (i.e. formulae development and the introduction of sub-formats) can take place in many ways and (at least in theory) with infinite variation. The offering of the existing store format can be adjusted to have a new combination of marketing mix factors for the targeted customer segment. The existing or adjusted store format can be re-branded or re-formatted and operated under a new store brand name or fascia, with or without the retailer’s brand. According to Dawson (2004, p. 126.), in European retailing the branding of the format emerged during the 1990’s as a major strategy of large retailers such as Tesco and Sainsbury which developed multiple formats each carrying the corporate brand name and a formula name (e.g. Tesco Extra and Sainsbury Local; compare the store brand names of Lawson’s sub-formats, e.g. Natural Lawson and Lawson Plus). Dawson (2004, p. 126) maintains that “the logic behind this branding exercise is the belief that in respect of marketing activity the ‘store’ is the ‘product’ of the retailer”. Burt et al. (2008, p. 90) have pointed out that new retail formulae have emerged also as a result of international retailers’ “renewal” programmes that have involved the segmentation of existing formats to include new formulae (for a strategic segmentation see Cravens/Piercy/Baldauf 2009, pp. 42-44).


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In particular market conditions, the creation of format variation by retailers can lead to the blurring of the boundaries of competing store formats (Fox/Sethuraman 2006, p. 200; Reynolds et al. 2007, p. 648). The blurring can take place, for instance, when some key aspects of store formats (such as strategic product categories) overlap between different store formats (Fox/Sethuraman 2006, p. 200). Besides, the introduction of unique format variations, twists, and hybrids due to retailers’ increasing efforts to differentiate their offering to satisfy the particular dimensions of customer needs can lead to format fragmentation (Coopers/Lybrand 1996, p. 113; Dawson 2004, pp. 120-122). As a result, retailers seek novel ways to respond to customers’ diverse needs and emerging customer values. Studies on customers’ store choice behavior have shown that customers patronize multiple formats and that customers’ needs and wants vary depending upon a range of factors such as time, shopping occasions and shopping experience (Colla 2004, pp. 48-49; Reutterer/Teller 2009, pp. 695-696; Messinger/Narasimhan 1997, p. 2). This is reflected in the introduction of different formats and format variation. Thus, as pointed out by Dawson (2006, p. 54), “the formula design has moved beyond the traditional variables associated with the marketing mix factors”. Examples of this kind of new sources of customer value are formula designs in which customer value is co-created by the customer and the retailer (Dawson 2006, pp. 54-55).

2.3.

Strategic Positioning with Store Formats

The strategic use of store formats also involves decisions about the competitive positioning of the store format as a part of the retail market structure, consisting of similar and different store formats. By creating format variation, store formats and formulae with differentiated offering and customer value propositions, retailers can seek to better reach the targeted consumer segments, and to avoid competing on the same dimension with competitors (Porter 2008, p. 86). As pointed out in many studies on the competitive interaction among store formats, the competitive dynamics of a given retail market structure results from the competition between stores of the same store format (intra-format competition) and from the competition between different store formats (inter-format competition) (Miller/Reardon/McCorkle 1999, pp. 107-108; GonzálezBenito 2001, pp. 64; 2005, pp. 457-459; González-Benito/Muñoz-Gallego/Kopalle 2005, pp. 59-60; Fox/Sethuraman 2006, p. 193-194). Besides, depending on market conditions, the competitive dynamics can arise also from inter-category competition (competition between retailers carrying similar merchandising) (Miller/Reardon/McCorkle 1999, pp. 108) or from the intensive rivalry between retailers (Furrer/Thomas 2000, p. 629; Porter 2008). In addition to competitive positioning in relation to intra-format and inter-format competition, the strategic positioning with store format can also take place due to the company’s needs to seek a new strategic direction or for the renewal of its existing strategy (for renewal strategies

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see Chakravarthy/Lorange 2007, p. 4). In their study on the new strategic alternatives available to retailers that operate in highly saturated markets in the United States, Werner/McDermott/ Rotz (2004, p. 10-11) argued that retailers should abandon strategies involving “the geographic expansionism, that ironically, created their original success”. As an alternative they propose management strategies based on profit-driven product selection and customer targeting, the application of which requires not only changes in the company’s culture, operations, strategy and finance but also the development of capabilities to successfully execute the change of strategic direction (Werner/McDermott/Rotz 2004, p. 10-11). Among the central aspects of Werner/McDermott/Rotz’s (2004, p. 10-11) view of strategic change is “the increasing customer value” as the company’s strategic aim. It calls for the understanding of customer profitability, the targeting of desired customers, and the management of customer value (Werner/ McDermott/Rotz 2004, p. 11). The implementation of any major strategic change, the divergence from a retailer’s existing strategy to create new markets and to seek long-term growth, requires changes both in the offering part and the know-how part of the store format. The offering part of the store format must be adjusted to fit the targeted customer segment, whereas improvement of the operational strength might demand capabilities (Werner/McDermott/Rotz 2004, p. 10) or distinctive competencies (Chakravarthy/Lorange 2007, p. 4) that are new to the company. Besides, the strategic positioning with store formats, as in all strategic decision-making, concerns risk-taking and the efficient and effective use of a company’s resources. Thus retailers’ strategic decision-making is above all conditioned by the interlinked efficiency and effectiveness of business operations. As pointed out by Achabal/Heineke/McIntyre (1984, p. 114), “efficiency by itself never assures effectiveness” since “being ‘efficient’ relates only to using resources in the best possible way for a given organizational strategy. But whether a given strategy is the ‘best’ one is a different manner”. They maintain that “efficiency is a necessary but not sufficient condition for effectiveness” (Achabal/Heineke/McIntyre 1984, p. 114). Effectiveness concerns the company’s long-term goal achievement (Goodman 1985, p. 77; Achabal/Heineke/McIntyre 1984, p. 114). In the context of the strategic use of store formats, effectiveness can be viewed as the company’s long-term goal to achieve the strategic fit between the offering of the store format and the targeted customer segment. Thus effectiveness concerns the elaboration of the offering part of the store format whereas efficiency concerns the internal operational efficiency related to the know-how or the retail technology part of the store format. The Japanese CVS companies are especially renown for the efficiency of their business operations.

2.4.

Store Formats as Strategic Innovations

It is an imperative for any retailer to develop and improve the both the offering part of the store format and the retail technologies and underlying systems needed in retail operations. While


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some of these often incremental operational improvements can be regarded as “operational innovations”, some of them belong to the realm of “good business development practice” (Reynolds et al. 2007, p. 652). “Operational innovations” are typically continuous and incremental and characterised among other things by their short innovation cycles (ibid.). Retailers’ store development activities can also include the development and introduction of “strategic innovations” (e.g. incremental improvements of the business model by introducing new subbrands) which are more clearly guided by the company’s long-term goals and/or strategic planning processes, and which have more strategic importance to the company (Reynolds et al. 2007, p. 651-652). In certain conditions strategic innovations can change the conventional ways in which companies in a given industry define the business, markets and the dominant logic of competition. Thus in certain conditions strategic innovation can result in a major divergence from the mainstream. According to Markides (1997, p. 12), “strategic innovation occurs when a company identifies the gaps in the industry’s positioning map, decides to fill them, and gaps grow to become the new mass market”. In Markides’ (1997, p. 12) view the gaps are related to strategic level who-what-how questions. The Markides idea of strategic innovation can also be applied to conceptualize the idea of store formats as strategic innovations. According to Markides (1997, p. 9), “the trick is not to play the game better than the competition but to develop and play an altogether different game”. In the context of the strategic use of store formats this would mean that (1) the offering of the store format is targeted for emerging customer segments or existing customer segments that the other competitors have neglected, (2) the offering of the store format is able to serve emerging customer needs or existing customer needs not well served by other competitors, and (3) that the business model, or the know-how part of the store format, provides new ways of producing, delivering or distributing existing or new products or services to existing or new customer segments (Markides 1997, p. 12-13). A similar kind of idea of strategic innovation was put forward by Govindarajan/Trimble (2004, p. 69) who maintain that strategic innovation is a creative and significant departure from historical practice in at least one of the following areas: (1) value-chain design, (2) conceptualization of delivered customer value, and (3) identification of potential customers. According to our view both Markides’ (1997) and Govindarajan/Trimble’s (2004) ideas of strategic innovation are applicable to elucidate retailers’ strategic use of store formats to create new markets and to seek new strategic direction for their business.

3.

Outline of the Japanese Convenience Store Business

The convenience store business has grown vitally in the Japanese retailing sector in the last quarter of a century. At the beginning of the 1970s, several companies started to introduce CVSs as a new business by cooperating with or imitating CVSs in the United States. However,

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because of the differences of market conditions, Japanese CVS companies were confronted with lots of difficulties in tracing the American way. Some CVS headquarters decided to create original systems by themselves and they have innovated lots of efficient and effective methods of CVS operation. At present, the CVS business is one of the major sectors in the Japanese retail industry (see Figure 1). Its scale of sales is nearly ahead of department stores which have a more than 100 year history in Japan, having sold many expensive items in big buildings. However, it should be pointed out that the Japanese CVS market is already getting saturated as the very low current growth rate of this sector shows.

Figure 1: The Sales Value of Japanese Large-Scale Retail Stores and CVS (trillions of Yen) 12.0%

14.00 12.00

10.0%

10.00 8.0% 8.00 6.0% 6.00 4.0%

4.00

2.0%

2.00 .00

1998

.0% 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

(a) sales of department stores

(b) sales of supermarkets

(c) sales of convenience stores

the share of (a) in whole retail sales

the share of (b) in whole retail sales

the share of (c) in whole retail sales

Source: METI (1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008), [1].

Generally each CVS has around 100 square meters of sales space which deals in about 3,000 items, and the majority of stores are open 24 hours all the year round. Sales mainly consist of food products which appeal to lots of young males, the main customers of Japanese CVS, who do not cook and prefer fast foods or ready-to-eat dishes. Additionally, non-food items and service products are strategic assortments because many consumers would visit CVS whenever they want to buy necessities or need to pay bills (see Figure 2). As a general rule, Japanese CVS do not discount items. The advantage is that they can provide consumers with lots of conveniences without price slashing.


159

Figure 2: The Itemized Sales Value of all Japanese CVS Stores in 1998-2008 (trillions of Yen) 9.00 8.00 7.00

.22

6.00

5.00

.25

.32

.29

.31

.29

.33

.35

.32

y

z

{

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2.00 1.00

x

4.00 3.00

.32

.34

.00

x y z {

sales of services (e.g. photocopies, home delivery service, ticket services, DPE) Non-Foods (e.g. sundries, cosmetics, magagines, stationary items) Processed Foods (e.g. snacks, instant noodles, bevarages, liquor, seasoning items, frozen foods) Fast Foods & Daily foods (e.g. rice balls, sandwiches, box lunches, deli foods, dairy goods, fresh sweets)

Source: METI (1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008), [2].

4.

Seven-Eleven Japan as the Pioneer, Innovator, and the Model for the Archetypal Japanese CVS Format

Seven-Eleven Japan (SEJ) is the leading CVS company in Japan. At the beginning, Ito-Yokado Co. Ltd (the parent company of SEJ at the time) made an agreement of business activity with Southland Corporation which had operated Seven-Eleven stores originally in the USA. SEJ opened their first store in Tokyo in 1974. In those days several retailers and wholesalers also launched their own new CVS businesses. However, they all struggled to establish profitable store formats in the Japanese market because retail business conditions and consumer behaviour are very different than in the USA. Some companies then realized that it was important they should create the Japanese-style CVS themselves. In this respect, SEJ has been a pioneer of the Japanese CVS format from the start. They built up sophisticated operational systems by pursuing lots of incremental operational innovations in all aspects of the CVS business. This is reflected in the market position of SEJ as a leading company in Japan (see Figure 3). SEJ also adapted their systems successfully to revive Seven-Eleven

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stores in the USA, which had been operated by Southland Corporation and were facing a bankruptcy crisis (Bernstein 1994, 1996; Kotabe 1995; Ogawa 2002; Yahagi 1997).

Figure 3: The Value of Sales and Stores of the 3 Largest Japanese CVS Chains (trillions of Yen)

(stores)

3 12,000 2.5 10,000 2 8,000 1.5

6,000

1

4,000

.5

0

2,000

2002

2003

2004

2005

2006

2007

2008

2009

sales amount of SEJ stores

sales amount of LAWSON stores

sales amount of F-Mart stores

total number of SEJ stores

total number of LAWSON stores

total number of F-Mart stores

0

Source: Annual reports of each company. All values are based on the data of each fiscal year for domestic business only. ‘F-Mart’ is FamilyMart, the 3rd largest CVS chain in Japan.

The strengths of SEJ are described in many research studies. Yahagi (1997) emphasized that the key strategy of SEJ is ‘economies of speed’ to realize a unique product assortment in a small sales floor space. Each store’s staff sends out orders everyday considering the daily circumstances of their trading areas, and several types of small-sized trucks deliver ordered items to each store just in time. Stores can stock only good sellers on shelves and they do not need to maintain a large space for storage. Accurate ordering and delivery is supported by sophisticated information systems, including point-of-sale (POS) data collection systems, replenishment-ordering systems and so on with up-to-date devices and communications networks (Ogawa 1998, 2000). SEJ has continued to upgrade their information systems frequently, and have used the 6th-Generation Integrated Information System since May, 2006.


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Demand is varying and changeable depending on the characteristics of each trading area and daily circumstances. This means that all store staff should deeply consider which items will be preferred by their near-future customers. Ogawa (2002) describes the ‘Hypothesis-Testing-Ordering System’ executed at Japanese CVSs, an especially thoroughgoing policy of SEJ. It differs from simple replenishment ordering and automated ordering systems. Each store person in charge of ordering should formulate hypotheses about demand and test them through an actual assortment of items on the selling shelves. The accumulation of such efforts leads to appropriate stocks which avoid sold-out risk and elevates the attractiveness of stores. This operation is supported by POS data analysis and advice provided by headquarters, but it also requires the experience and skill of each person to exploit local (analog) information and their own intuition. Matsuo/Ogawa (2007) analyzed SEJ’s product innovation method. SEJ provides customers with lots of attractive items which are derived from the innovation of content itself, innovative supply chain management, and the innovation of sales processes at stores. SEJ has tight relationships with material suppliers and manufactures and they collaborate to introduce differentiated new products at appropriate opportunities based on such ‘Holistic Innovation’.

5.

Lawson’s Store Development Activities and Format Variation

These factors of CVS operation have been exhaustively benchmarked and imitated by other followers, and as a result, the format of the Japanese CVS has been formed. This fact has several consequences. From the consumers’ point of view, they can find lots of similar CVS stores everywhere in Japan. They understand what the CVS is, how they behave inside stores and what kind of benefits they could gain by visiting a CVS. On the other hand, many consumers may have considered that every CVS chain is almost the same and not differentiated. From a business perspective, it seems that the market position of SEJ is absolutely secure. Many CEOs and executive officers of competitors consider that it would be difficult to catch up with SEJ if they continue to operate their business in a similar way to SEJ. It might be the advantage of the first-mover into the innovation frontier. SEJ always challenges itself to improve its own systems, so it can establish partnerships with excellent suppliers and manufacturers (Matsuo/Ogawa 2007) and can apply the most advanced information technologies to their ordering and communications networks (Ogawa 1998). Lawson has basically followed in a similar way as have other CVS chains, but there is one different side of their strategy. Lawson has developed their stores in accordance with unique policies. The history of Lawson concerning store development, described in Figure 4, is divided into two strategic phases. The first phase is the period before 2001. At the beginning of 2001, the Mit-

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subishi Corporation, one of Japanese major trading companies (Sogo-shosha), became the largest stockholder of Lawson, Inc. The former parent company was Daiei Inc., which had once been the largest retailer in Japan for over a quarter of a century. Figure 4: The History of Lawson Concerning Store Development Activities !!"#

!"#$ "%&% '%( #% )* " + !"#$ + ( ',- " +. )/ # 0& !"#$ " 0 0 1 '% + 2 ) 3 + 0 " 0 . + 4 # ( 5 . .0 0 0 0 0 !"#$6 7+0 5 / $. + - 1"+ 5 2 + - 0 #% 5 +%0 +6 8 9 ( 4*** + ( 0 3 + 0 % '% "% :80 #% " :80 $ $ %$ !!" &# 4** ; 3 + 0 % !"#$ $ " . !"#$ 0 00 $. + . 8 4** !"#$ 5 + 3 !"#$ $ ( 5 0 A( < !"#$ 0 0 0 +++ " + !"#$ 4**) !"#$ " 0+ . + + 0 0 + . 0 0 + 0+ + . 0 0 0. 0 0 8 00 . 4** 3 . . + " ," +% ; ( + . + 80 ,"

Lawson’s multi-format strategy is now in progress, so it is difficult to find out the results on their financial statements. However, some magazine articles report that the sales of new format stores have been improved dramatically and they seem to obtain the targeted customers successfully. And so far, Lawson could accumulate lots of valuable experiences and skills to launch the chain operations of every format [9].

6.

Conclusions

In this paper we have described and analysed Lawson’s format variation in the Japanese market. We have described how Lawson began to employ its current strategy and analysed how Lawson’s store development activities have been conditioned by competition, market conditions and the company’s search for new strategic direction. In the Japanese CVS business, Lawson has developed and applied format variation (the creation and development of branded sub-formats) most intensively and is now also most advanced in implementing its explicit multi-format strategy. Besides, there are several aspects in Lawson’s employment of format variation that make us propose that Lawson’s store formats can be viewed as strategic innovations in the context of the Japanese CVS business. Strategic differentiation in retailing is always context dependent. It is conditioned by numerous contextual and retail decision-maker related factors. In the case of Lawson, saturation and intensive intra-format competition both restricted and gave possibilities for Lawson to deviate from the dominant and conventional modes of competition. In the Japanese CVS business the young male segment was the main target for all major chains. For Lawson such a dominant condition was a strategic opportunity to introduce sub-formats for other distinct customer segments. Besides, for Lawson the change of governance in 2001 was the main event that led to and facilitated Lawson’s “strategic renewal” (Chakravarthy/Lorange 2007, p. 4).

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Until the change of governance in 2001 Lawson’s store development activities and strategy were characterised by intensive market expansion (Werner/McDermott/Rotz 2004, pp. 10-11), increasing the number of standard-format stores. At that time the strategy emphasized store location. The second strategic phase began in 2001. Ever since then, the main emphasis in Lawson’s strategy has been on the creation of format variations and in seeking the strategic fit between the offering of the store format and the targeted customer segment. As a result, Lawson’s current strategy differs in many ways from its competitors’ more conventional strategies and store development activities. According to our view those points of divergence show also how Lawson is using its store formats as strategic innovation. The first major difference is that Lawson has differentiated the offering part of its sub-formats in terms of store locations, price levels, and product and service mixes. By adjusting these primary marketing mix variables, Lawson has been able to serve new customer segments (Markides 1997, p. 12: the emerging customer segments). The second major difference is that Lawson has served the needs of new customer segments with novel customer value propositions (e.g. healthy lifestyle, reasonable price, hybrid) (Govindarajan/Trimble 2004, p. 69: the conceptualization of delivered customer value). The third major difference is that Lawson’s subformats seek also to respond to emerging trends in society and in local conditions (e.g. serving the needs of aged persons) (Markides 1997, p. 12: the emerging customer needs). It was argued in this paper that strategic differentiation also concerns, above all, the search and the creation of the strategic fit between the offering of the store format and the targeted customer segment. Unlike SEJ or other companies in the Japanese CVS business, Lawson seemed to have placed more emphasis on effectiveness than on operational efficiencies. Effectiveness is, according to our view, central from the strategic fit point of view, since it is more clearly related to the company’s long-term goal achievement (compare Goodman 1985, p. 77). The creation of the strategic fit calls for changes not only in the offering part of the store format but also in the know-how part of the store format. It was shown in the paper how Lawson’s current strategy has also involved the creation of active business alliances and networks, and the development of new delivery and distribution methods and systems to support the operation of the sub-formats (Werner/McDermott/Rotz 2004, p. 10: the development of key capabilities; Chakravarthy/Lorange 2007, p. 4: the development of distinctive competencies). Also the aforementioned aspects of Lawson’s strategy are inherent in Markides’ (1997, p. 12) and Govindarajan/ Trimble’s (2004, p. 49) conceptualization of strategic innovation. Lawson’s multi-format strategy is in progress. The creation of format variation has not been predestined by the strategic planning process but involved trial and error, piloting and experimenting with store format variants (cf. Reynolds et al.’s 2007, p. 652-653) notion concerning “emergent strategy” approach to format innovation process; see also Mitzberg/Waters 1985). Will Lawson’s multi-format strategy some day become the dominant mode of competition in the Japanese CVS business? At least the main competitors have awakened and begun to imitate.


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Notes [1] This survey was conducted by the Industrial Statistics Office, Research and Statistics Department, METI (Ministry of Economy, Trade and Industry). In this survey, METI sent out questionnaires to the headquarters of major CVS chains which operate more than 500 stores in Japan. According to another survey conducted by the editorial department of Konbini (a major CVS magazine in Japan), 12 companies fulfil this condition in 2008. [2] In 2008 the sales value is estimated to be pushed up by special procurement for cigarette products. A new regulation which prohibits buying cigarettes without certificate cards at vending machines went into force from this year, since then many smokers visited CVSs because they do not need to show the cards at person-to-person selling counters. They would purchase cigarettes and simultaneously buy additional items together at the CVS. [3] SEJ still has not advanced into 10 prefectures (as of July 31, 2009). FamilyMart established stores in all prefectures in 2006. The latest numbers and distribution of stores are announced at their websites. (Cf. http://www.sej.co.jp/english/company/n_stores.html, [3] Lawson: http://www.lawson.co.jp/company/e/corporate/store.html, FamilyMart: http://www.family.co.jp/english/investor_relations/stores.html) [4] cf. Nikkei Business, December 8, 1986, pp. 46-50; Nikkei Business, June 23, 1997, p44; Ekonomisuto, February 29, 2000, pp. 59-62; Gekiryu, May, 2001, pp. 76-80; Nikkei Business, September 25, 2006, pp. 70-73. [5] Setagaya ward is one of 23 in the Tokyo metropolitan area and the population is around 800,000. This ward mainly consists of well-known residential areas for families and popular commercial regions for young people. There are lots of schools and universities. These 7 types of store merchandising and 5 types of locational characteristics are classified by applying factor analysis and cluster analysis with the data of GIS and the author’s original survey in the spring of 1994. [6] In the current phase, Lawson actively made contracts of business alliance or for absorbing existing stores with several companies such as Japan Post Holdings, Shinsengumi Honbu Corporation and MatsumotoKiyoshi Holdings. Shinsengumi Honbu had operated CVSs equipped with kitchens. MatsumotoKiyoshi is Japan’s largest drugstore chain. It is thought that Lawson would be aiming at obtaining partner’s experiences in different retail businesses and for gaining opportunities to establish new store formats, not aiming to have the largest store networks. (cf. Keizaikai, April 3, 2007, pp. 56-57; Gekiryu, January, 2009, pp. 20-22.) [7] cf. Ekonomisuto, February 29, 2000, pp. 56-58; Nikkei Business, August 8, 2005, p. 42; Nikkei Business, September 4, 2006, pp. 46-48. [8] Actually SEJ has recently started to operate a new type of store which has a small sales space in buildings, gas stations and so on. But the store brand name and the design of its façade is the same as standard SEJ stores. FamilyMart has another store brand, “Famima!!”, which targets urban residents and they have a different image colour, façade or item assortment, but there are only 17 stores (FamilyMart Annual Report 2009, p. 27). They started this business in 2003. [9] cf. Gekiryu, October, 2006, pp. 23-28; Keizaikai, November 28, 2006, pp. 42-45; Weekly Toyo Keizai, May 26, 2007, pp. 72-76; PRESIDENT, July 2, 2007, pp. 146-151; Weekly Diamond, October 27, 2007, pp. 142-145; Weekly Toyo Keizai, December 6, 2008, pp. 106-108; Gekiryu, January, 2009, pp. 20-22.

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References Achabal, D.D.; Heineke, J.M.; McIntyre, S.H. (1984): Issues and perspectives on retail productivity, in: Journal of Retailing, Vol. 60, No. 3, pp. 107-126. Ahlert, D.; Blut, M.; Evanschitzky, H. (2006): Current Status and Future Evolution of Retail Formats, in: Krafft, M.; Mantrala, M.K. (eds.): Retailing in the 21st Century: Current and Future Trends, Berlin. Bernstein, J. (1994): Convenience-store retailing in two countries: Southland and Seven-Eleven Japan, Harvard Business School, Case N9-795-051. Bernstein, J. (1996): 7-Eleven in America and Japan, Harvard Business School, Case N9-797-030. Brown, S. (1987): Institutional change in retailing: a review and synthesis, in: European Journal of Marketing, Vol. 21, No. 6, pp. 5-36. Burt, S.; Davies, K.; Dawson, J.; Sparks, L. (2008): Categorizing patterns and processes in retail grocery internationalisation, in: Journal of Retailing and Consumer Services, Vol. 15, No. 2, pp. 78-92. CCRRCA (2007): Food retail formats in Asia: understanding format success, Coca-Cola Retailing Research Council Asia (CCRRCA). Chakravarthy, B.; Lorange, P. (2007): Continuous renewal, and how Best Buy did it, in: Strategy & Leadership, Vol. 35, No. 6, pp. 4-11. Colla, E. (2004): The outlook for European grocery retailing: competition and format development, in: International Review of Retail, Distribution and Consumer Research, Vol. 14, No. 1, pp. 47-69. Coopers; Lybrand (1996): The future for the food store, Coca-Cola Research Group Europe. Cravens, D.W.; Piercy, N.F.; Baldauf, A. (2009): Management framework guiding strategic thinking in rapidly changing markets, in: Journal of Marketing Management, Vol. 25, No. 1-2, pp. 31-49. Dawson, J. (2004): Food retailing, wholesaling and catering, in: Bourlakis, M.A.; Weightman, P.W.H. (eds.): Food Supply Chain Management, pp. 117-135. Dawson, J. (2006): Retail Trends in Europe, in: Krafft, M.; Mantrala, M.K. (eds.): Retailing in the 21st Century: Current and Future Trends, Berlin. Fox, E.J.; Sethuraman, R. (2006): Retail competition, in: Krafft, M.; Mantrala, M.K. (eds.): Retailing in the 21st Century: Current and Future Trends, Berlin. Furrer, O.; Thomas, H. (2000): The rivalry matrix: understanding rivalry and competitive dynamics, in: European Management Journal, Vol. 18, No. 6, pp. 619-637. Gauri, D.K.; Trivedi, M.; Grewal, D. (2008): Understanding the determinants of retail strategy: an empirical analysis, in: Journal of Retailing, Vol. 84, No. 3, pp. 256-267. Goldman, A. (2001): The transfer of retail formats into developing countries: the example of China, in: Journal of Retailing, Vol. 77, No. 2, pp. 221-242. González-Benito, Ó. (2001): Inter-format spatial competition of Spanish hypermarkets, in: International Review of Retail, Distribution and Consumer Research, Vol. 11, No. 1, pp. 63-81. González-Benito, Ó. (2005): Spatial competitive interaction of retail store format: modeling proposal and empirical results, in: Journal of Business Research, Vol. 58, No. 4, pp. 457-466.


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Reutterer, T.; Teller, C. (2009): Store format choice and shopping trip types, in: International Journal of Retail & Distribution Management, Vol. 37, No. 8, pp. 695-710. Reynolds, J.; Howard, E.; Cuthbertson, C.; Hristov, L. (2007): Perspectives on retail format innovation: relating theory and practice, in: International Journal of Retail & Distribution Management, Vol. 35, No. 8, pp. 647-660. Seiders, K.; Berry, L.; Gresham, L.G. (2000): Attention, retailers! How convenient is your convenience strategy?, in: Sloan Management Review, Vol. 41, No. 3, pp. 79-89. Stalk, G.; Webber, A.M. (1993): Japan’s dark side of time, in: Harvard Business Review, Vol. 71, No. 4, pp. 93-102. Takeda, Y.; Matsuo, H. (2002): ECR: a “fresh” look from Japan, in: ECR Journal, Vol. 2, No. 2, pp. 17-27. Werner, U.; McDermott, J.; Rotz, G. (2004): Retailers at the crossroads: how to develop profitable new growth strategies, in: Journal of Business Strategy, Vol. 25, No. 2, pp. 10-17. Yahagi, T. (1997): The convenience store system - “Made in Japan”, in: European Retail Digest, No. 13, Winter, pp. 18-28.

Retailing in the United Kingdom - a Synopsis Steve Burt, Leigh Sparks and Christoph Teller

Abstract This paper illustrates the structure of, and trends in, the retail market of the United Kingdom (UK). This industry analysis describes the retail environment compared to continental Europe and considers the regulatory issues which have helped form this retail environment. By using secondary data we describe concentration and consolidation tendencies and explain specific features of the UK retail market. Major trends are identified and discussed, concluding with an outlook on future developments.

Keywords United Kingdom, Retail Structure, Industry Analysis

Steve Burt Institute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland, United Kingdom. Leigh Sparks Institute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland, United Kingdom. Christoph Teller (corresponding author) Institute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland, United Kingdom (Tel: ++44 1786 46 6454; E-mail: [email protected]).


January 1, 2010 April 22, 2010 April 22, 2010


Vol. 24, Issue I, 2010, pp. 173-194

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1.

Introduction

1.1.

Retailing in the United Kingdom and Europe

In a number of ways retailing in the United Kingdom of Great Britain and Northern Ireland [in the following United Kingdom (UK)] appears to operate differently from the general pattern in continental Europe. Some may see this as yet another example of UK’s unwillingness to embrace the European Union, but as with all retailing, the sector merely reflects the context within which it operates and the norms of behaviour that have developed in the domestic market. In this brief paper we highlight the distinctive features of the UK’s retail market and illustrate how these have shaped the nature of competition in the sector. Any attempt to understand the UK retail scene should start by recognising the distinctive features of this market (Mintel 2010). The United Kingdom is a compact island market of more than 60 m people living in circa 25 m households and with the third highest density of population in Europe after Belgium and the Netherlands. It is the sixth largest economy (Gross domestic product 1,808 bn EUR) worldwide and third largest in Europe after Germany and France. The total consumer expenditures are the second highest in Europe (1,096 bn EUR) after Germany (1,367 EUR) and 7th highest per capita in Europe (17,851 EUR in 2008). The UK is ranked 4th in terms of total retail sales (318 bn EUR) and 12th in terms of retail sales per capita (5,184 EUR). Urban centres are relatively close together and although decentralisation of large retail stores to the urban periphery has occurred, planning policy has attempted to maintain a strong retail presence in the urban core of most major towns and cities (BCSC 2006; Guy 2007). As occupants of mainland Europe know all too well, Britain can perhaps best be described as “in Europe, but not European”! General attitudes towards the European Union amongst the majority of the population can be described as ambivalent, as illustrated in the strong desire to retain the national currency. Despite this somewhat ethnocentric view, the UK market is an open economy, and a large number of non-national retailers operate in the market. At the same time, UK retailers are increasing their presence outside the domestic market.

1.2.

The Retail Environment in UK

Government intervention in retailing has generally been directed at de-regulation and the pursuit of a free market economy. For example most restrictions on opening hours were removed in 1994; resale price maintenance in the book trade disappeared in 1995; and rules on pharmacy licensing were amended in 2004. Where intervention has been restrictive, like elsewhere, it has primarily been in response to fears about the growing power of large operators. Store location in Britain is managed through zoning procedures in general land use planning policy i.e. it is the land use itself that receives the permission and not the user per se. From the mid 1990s there has

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been a clear emphasis on protecting and reviving town centres, rather than allowing further expansion on the periphery i.e. the so-called town centres first’ policy. Guy (2007) summarises retail land-use planning and regulation in the United Kingdom into four phases. Whilst the policy framework differs in timescale and to some degree in approach between the constituent countries/parts of the United Kingdom (Scotland, Wales, Northern Ireland and England), the broad dimensions of these four phases holds true across the constituent countries: - 1960s/1970s - early days of retail regulation with initial resistance to new retail forms e.g. out of town shopping centres, hypermarkets; - 1980s - a loosening up of regulation to more approach a market led system allowing an expansion of new forms e.g. superstores, retail warehouses, regional shopping centres, outlet centres; - 1990s - the gradual tightening up of policy as cumulative effects from retail decentralisation on town centres became more noticeable e.g. the development of the ‘town centres first’ policy; - 2000s - the continuation of the ‘town centres first’ policy which has redirected off-centre developments to, and focus attention back on, town and city centres. As can be noted from the brief policy descriptions of these phases, policy has tended to switch between restrictions on new forms of development to encouragement of such developments (as in the ‘planning-free’ Enterprise Zone experiment of the 1980s - see Dawson and Sparks 1982; Sparks 1987), and then back to more restriction. This switching of land-use policy has been driven essentially by the outcome of debates at particular times over the social versus economic requirements from retailing and the question of the degree of impact on existing retailers and existing centres (e.g. Guy 1998b; Guy/Bennison 2002). More recently these issues have been overlain with debates about the environmental impact and sustainability of various forms of retailing as for example in terms of productivity (e.g. Sparks 2005). At the same time as there has been this policy regulation over land-use, there has also been periodic concerns about the continued growth of large retailers. These concerns have generally been couched in terms of competitive impacts of large retailers on smaller independent retailer operations and ‘small shops’ and on impacts on suppliers and producers of products, particularly in the food arena (e.g. Clarke 2000; Clarke et al. 2002). In the early 1980s, the decline of the small shop/independent retailer and the relationships between large retailers and suppliers were investigated by the Monopolies and Mergers Commission (MMC 1981). They found that whilst such concerns were justified, the evidence suggested that consumers were benefiting overall in terms of lower prices and as such there was no need to intervene in the market. This finding was confirmed in a follow-up study by the Office of Fair Trading (OFT 1985). With the relaxation of restrictions on new retail forms in the 1980s, large retailers began to exploit a cycle of growth which saw considerable increases in scale and concentration. Existing large retailers continued to get bigger and concentration ratios continued to grow. In the early

176


1990s, academic concerns about abuses of market power began to be raised (e.g. Wrigley 1991, 1992a, 1992b, 1993) particularly in food retailing, and were picked up by the media especially in terms of price comparisons with overseas markets. This price comparison issue was taken up by politicians, notably by the Labour Party, before and after its election success in 1997 (Sparks 2002). The basic claim was that the market had ceased to operate fairly and that large (food) retailers were making excess profits and abusing their market positions. Some of this perceived abuse was put down to individual ‘greedy’ firms, but there was also a concern over the operation of the market as a whole and the potential for collusion amongst companies. As power in food retailing continued to concentrate in the hands of a smaller number of retailers, so these concerns grew louder (e.g. Marsden et al. 1998; Dobson/Waterson 1999; Dobson et al. 2003), eventually focusing on the dominant position of Tesco (Burt/Sparks 2003). Whilst impact on town centres and small independent retailers has remained a topic of concern, the scale of the largest retailers, especially in food, has been seen as causing a competitive problem for the market as a whole. The UK had in many ways in the 1980s had a more laissez-faire approach to retail development than elsewhere in Europe (Davies 1995; Guy 1998a). This came to an end in the early to mid 1990s when regulation was tightened primarily on the basis of competitive impact on town centres, the continuing growth of large retailers and the stirrings of environmental concern (e.g. BDP et al. 1992; CB Hillier Parker et al. 1998). Decentralisation of retailing as a consequence began to alter in form and to slow (Schiller 1986, Hallsworth 1994; Wrigley 1994; Fernie 1998). The tightening of land-use regulation constrained development and altered the trajectory of retail development in the UK (Wrigley 1994, 1998a, 1998b; Pal et al. 2001; Guy 2002). This is not to say that the concerns over scale and impact have gone away. Indeed large retailers have proved adept at reacting to the new situations (e.g. Wood et al. 2006; Thomas 2006; Guy/Bennison 2007). The continuing increases in concentration and corporate scale, and the ability of some retailers to continue to expand floorspace, have brought retailing, and especially food retailing, much closer attention from regulatory authorities. In particular there has been a sequence of investigations by the Competition Commission into the grocery market and its supplier relationships and competition (Sparks 2008a): The culmination of the media and political campaign in the mid-1990s over retail prices was an investigation into supermarkets in 1999/2000 (Competition Commission 2000). The bid for Safeway by Morrisons in 2003 led to another investigation as competing bids for Safeway were all examined together (Competition Commission 2003). When Morrisons were permitted to buy Safeway (the other leading food retailers were not, on the basis of subsequent concentration levels), some stores had to be sold off due to concerns over local market shares, which produced a further report (Competition Commission 2005). Then in 2006 another full investigation into the market position in food retailing was announced as a consequence of continuing concerns

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(Competition Commission 2006, 2007a). Most recently, the Competition Commission has even begun to investigate the proposed purchase of a single store by Tesco (Competition Commission 2007b). These investigations have generally found that the market is competitive but that some practices towards suppliers are not as good as they might be. As a consequence there are now proposals for a Grocery Ombudsman to regulate such relationships. The context within which retailing in UK has developed is therefore as a relatively large and compact market, with close proximity of major urban centres; a traditional “inward looking” focus on developing the domestic market; and a relatively un-regulated legislative system allowing for operational flexibility. Whilst it is true that the restrictions have been greater in recent years, large firms have not really felt too constrained and new formats and developments have occurred in many towns and cities (e.g. Guy 2010).

2.

Characteristics of the UK Retail Market

Within this context, there are a number of distinctive features of the UK market which have influenced the evolution of the retail sector over the past twenty years. These provide an important contrast with the general pattern observed in mainland Europe.

Figure 1: Development of Number of Businesses, Outlets and Employment (2003-2007)

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Source: based on Mintel (2009, 2010).

178


Figure 2: Sales of Leading Retailers

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European Retail Research: 2010 I Volume 24 Issue I

European Retail Research 2010: Volume 24 Issue II

European Retail Research: 2011 Volume 25 Issue I

European Retail Research - 2008 Volume 22

I, Robot - Retail Pressbook

Volume I

Volume I

Volume I

Volume I

Research in Finance, Volume 24

Algebra: Volume I

Riesz Spaces, Volume I

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Microneurosurgery I (volume. 1)

Activation Analysis, Volume I

Ethicus Volume-I

Commutative Algebra Volume I

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Inside Macintosh, Volume I

Queechy, Volume I

Dreamsongs- Volume I

Projective Geometry - Volume I

Analysis I (Volume 1)

OECD Economic Outlook, Volume 2010 Issue 2

European Retail Research: 2010 I Volume 24 Issue I

European Retail Research 2010: Volume 24 Issue II

European Retail Research: 2011 Volume 25 Issue I

European Retail Research - 2008 Volume 22

I, Robot - Retail Pressbook

Volume I

Volume I

Volume I

Volume I

Research in Finance, Volume 24

Algebra: Volume I

Riesz Spaces, Volume I

Algebra: Volume I

Microneurosurgery I (volume. 1)

Activation Analysis, Volume I

Ethicus Volume-I

Commutative Algebra Volume I

Chess Tactics Volume I

Velvet Glove Volume I

Dreamsongs, Volume I

Distributist Perspectives: Volume I

Dreamsongs- Volume I

Dreamsongs: Volume I

Algebra: Volume I

Inside Macintosh, Volume I

Queechy, Volume I

Dreamsongs- Volume I

Projective Geometry - Volume I

Analysis I (Volume 1)

OECD Economic Outlook, Volume 2010 Issue 2

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