The impact of location factors on the attractiveness and optimal space shares of product categories

Abstract

In this paper, we investigate the impact of location characteristics on the relative attractiveness of product categories within a store, and formulate micromarketing implications for the allocation of store space to categories. We present a framework for the impact of store and trading area characteristics on category and store performance, which integrates and extends previous geomarketing research. Building upon this framework, we propose a tractable and flexible procedure for assessing location influences, and derive optimal space allocation rules for different location profiles. Empirical application to national stores of a European retail chain confirms the differential impact of location characteristics on categories' attractiveness. Tailoring the allocation of store space to these location-based differences in category appeal leads to a significant increase in overall chain profitability.

Introduction

The use of geographic information in marketing has many potential applications, and research in the area is rapidly evolving (see, e.g., Longley and Clarke, 1995). Recent papers by Bronnenberg and Mahajan (1999) and Bronnenberg and Sismeiro (2000) emphasize the importance of the ‘location’ dimension, revealing that, even for items in undifferentiated food categories, spatial heterogeneity in market shares may be substantial. Studies by Hoch et al. (1995), Montgomery (1997) and Mulhern et al. (1998) demonstrate that the geo-demographic profiles of a store's trading area may strongly affect consumers' reaction to item prices and promotional offers.

Of growing interest is the impact of location characteristics at the category level and, more specifically, on the appeal of different categories offered by the store. Both academics and practitioners readily acknowledge that, depending on the type of location, some product categories within the store may become more or less appealing to local customers (Grewal et al., 1999). Unanimity also seems to exist on the observation that, in an era of hypercompetition, retailers should attempt to exploit those differences and, through appropriate local strategies, turn them into sources of profit.

There are two main ways in which retailers can exploit local category differences to improve performance at the individual store level. First, these differences may provide a basis for more efficient assortment strategies. Offering distinctive assortments in different stores, tailored to local needs, may be a viable method of developing an advantage against (local) competitors (Grewal et al., 1999), while staying within budgetary limits. Second, retail companies face the problem of allocating scarce resources available at each outlet to the different categories. Examples of such resources are promotional budgets or feature ad positions in the retailer's flyer, local personnel, and store space. Clearly, efficient allocation of these resources will somehow depend on category appeal and, hence, may need to be adjusted on a store-level basis.

However, this is more easily said than done. For one, while the dependence of category appeal on store or trading zone characteristics is intuitively accepted, factual evidence remains scant. Especially the influence of location factors on the relative attractiveness of categories within a store, a key element for resource allocation purposes, is under-researched. Moreover, having identified local differences in (relative) category attractiveness, the question remains how these translate into sales and profit for the retail outlet as a whole. The answer to this question is crucial for a retailer interested in overall store (or even chain) performance, yet, it is not straightforward. One compelling reason is that categories do not appeal to customers in isolation, but as part of a more extensive store assortment. As indicated by Chen et al. (1999), many categories exert a two-stage effect of (i) attracting customers to the store and (ii) influencing their spending patterns. Consequently, changes in local category appeal may have an impact beyond sales of the category itself and, through the store draw mechanism, affect all other categories sold in the retail outlet.

Understanding the full impact of differences in local category appeal is a prerequisite for translating them into appropriate local decision rules which, therefore, remains a very complex task. Previous papers on micromarketing have largely ignored this problem. This is well indicated by Grewal et al. (1999, p. 408), who state that “…regional differences complicate the [assortment] planning process, and the methods used to achieve efficient regional [assortment] decisions are not well defined in the literature”, and call for more research on the issue.

This paper has two main objectives. First, we intend to shed light on the impact of a comprehensive set of location factors (i.e., characteristics of the store and the trading zone) on the relative appeal of particular categories in the assortment and, more importantly, on how it translates into store sales value and store profit. Second, we want to spell out the consequences of such local differences in category attractiveness for the optimal allocation of store resources across categories. In doing so, we concentrate on one of the store's most prominent and scarce resources: that of store space.

We contribute to the existing literature in three ways. From a conceptual viewpoint, we provide insights into the complex impact of local category differences on category performance, store performance, and optimal store space allocation. We thereby account for the two-stage role of categories: attracting business to the store, and altering within-store spending patterns. One finding emerging from our developments is that, as the store draw effect becomes more salient, local space shares are bound to more closely reflect the category's local customer appeal, rather than category retail margins. From a methodological perspective, we show how models of asymmetric competition developed elsewhere in the literature can be meaningfully applied for modelling store assortment interactions. These models offer a flexible and tractable way of capturing the complete impact of category decisions—and, which is central to our purposes, of local differences in category appeal—containing simple classical approaches as special cases. The models also allow to derive operational location-specific store space allocation rules, which can be easily embedded in the retailer's decision support systems. These rules allow to select appropriate category space assignments for any outlet, based on its location profile. Finally, on the empirical side, we provide evidence on how various location features affect relative category appeal and store sales value, as well as on the profit improvement that can be obtained through location-tailored store space allotments.

The discussion is organized as follows. We start with a summary of the relevant literature. Section 3 conceptualizes the impact of location factors on category attractiveness and on overall store performance. Based on this framework, Section 4 presents category share and store sales models, and clarifies how these models translate into location-dependent optimization rules for space allocation across categories. Section 5 introduces the empirical application. It describes the data sets, variables and estimation results of category and store models. Implications for micro-marketing strategies, that is, optimal space assignment tailored to local conditions, are discussed in Section 6. Section 7, finally, provides conclusions and indicates areas for future research.