Store Format Choice
Total Page:16
File Type:pdf, Size:1020Kb
Store Format Choice By Ming-Feng Hsieh A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy (Agricultural and Applied Economics) at the UNIVERSITY OF WISCONSIN-MADISON 2012 Date of final oral examination: 12/15/11 The dissertation is approved by the following members of the Final Oral Committee: Kyle W. Stiegert, Professor, Agricultural and Applied Economics Jean-Paul Chavas, Professor, Agricultural and Applied Economics Brian Gould, Associate Professor, Agricultural and Applied Economics Paul D. Mitchell, Associate Professor, Agricultural and Applied Economics Timothy J. Richards, Professor, Agribusiness and Resource Management, Arizona State University c Copyright by Ming-Feng Hsieh 2012 All Rights Reserved i Dedication To my parents, Chung-Ho Hsieh and Hsiu-Mei Yeh, for their persistent support and encouragement. To my wife, Dr. Hui-chen Wang, whose passion and knowledge in economics provide a constant source of inspiration. To my son, Benjamin W. Hsieh, for his love. ii Acknowledgements The writing of this dissertation has been a long but fruitful journey. I am grateful to many people who have made this work happen. First, I am deeply indebted to my advisor, Dr. Kyle W. Stiegert, for his thoughtful critique and helpful support throughout every stage of my dissertation. He has strongly inspired and influenced me with his great personality, wisdom, and dedication to research. Through his guidance in the dissertation process, I have developed proficiency to conduct rigorous research. I wish to thank my dissertation committee for their careful review. Dr. Jean-Paul Chavas, Dr. Brian Gould, Dr. Paul D. Mitchell and Dr. Timothy J. Richards have provided thoughtful and valuable guidance for my work. Their comments have greatly improved the quality of my dissertation. My graduate studies would not have been the same without the financial support from Food System Research Group and the department of Agricultural and Applied Economics at the University of Wisconsin-Madison. The assistance and experience from numerous other faculty members have also proved valuable for my academic development. While I cannot list all of the names with their contributions here, I am thankful. Finally, and most importantly, I would like to thank my wife Hui-chen. Her support, encouragement, patience and unwavering love were undeniably the bedrock upon which the past important years of my life have been built. Her passion and knowledge in economics have also been a constant source of inspiration and wisdom throughout my graduate study and the writing of this dissertation. I also thank my parents, brothers and sisters for their faith in me and persistent encouragement and support. Also, I thank my son, Benjamin, for his love and enormous energy and joy that he has brought. iii Contents List of Tables v List of Figures vi Abstract vii 1 Introduction 1 1.1 Organic Market and Food Retailing . .1 1.2 Consumer Behavior and Retailer Strategies . .4 1.3 Literature Review . .6 1.4 Objectives and Organization . 10 2 Theoretical Framework 12 2.1 The Basic Model . 12 2.2 SFCs in WTP Space . 17 2.3 Retailer Strategies and Market Shares . 28 2.4 The Role of Income in SFCs . 37 2.5 Concluding Remarks . 41 3 Empirical Analysis 45 3.1 Methodology and Model Specification . 45 3.2 The Data . 54 3.3 Results and Discussion . 61 iv 3.4 Concluding Remarks . 68 4 Conclusion 70 4.1 Summary and Implications . 72 4.2 Limitations and Directions for Future Studies . 73 v List of Tables 1.1 Organic Price Premium by Store Format and Shopper Type of Actual Pur- chase for Milk and Eggs, 2005-2008 . .3 1.2 Determinants of Frequent Organic Shoppers . .5 H M L 1 1 1 2.1 Shopper Preference and SFC for Product 2 (q1 > q1 > q1 & H > M > L ) 27 q1 q1 q1 2.2 [EXAMPLE 2.4] Parameter Values for Numerical Simulation . 33 2.3 Top & Bottom 10 Gini Coefficients (Income Inequality) for U.S. States, 2010 40 3.1 The Base Basket for Format-specific Price Index . 51 3.2 The Consumer Profile, 2005-2008 . 57 3.3 The Retailer Profile by Store Formats, 2005-2008 . 59 3.4 Descriptive Statistics (Mean) of Variables for SFC Estimation, 2005-2008 . 60 3.5 MLE Parameter Estimates of Mixed Multinomial Logit Model for SFC . 62 vi List of Figures 1.1 The U.S. Organic Food Market, 1997-2009 (Organic Trade Association, 2007, 2009) . .2 2.1 Optimal SFC for product 2 among the format L's shoppers for product 1 in L M L M the benchmark example, where v2 > v2 and q2 < q2 ............. 21 2.2 Optimal SFC for product 2 among the format L's shoppers for product 1 in M L M L the reversed example, where v2 > v2 and q2 < q2 .............. 22 M L L M 2.3 Dominant Set of SFCs for Product 2 Purchase when q2 > q2 and v2 > v2 . 23 L M H 2.4 Optimal SFC for Product 1 for type Q shoppers, where v1 > v1 > v1 and H M L q2 > q2 > q2 ................................... 25 L 2.5 Effect of Quality Change on Market Shares for various q1 in EXAMPLE 2.4 34 L 2.6 Effect of Price Change on Market Shares for various v1 in EXAMPLE 2.4 . 34 2.7 Market Shares and Profit Maximizing Quality (top) and Value (bottom) . 36 2.8 Market Shares and Income Distributions with Various Income Inequality . 42 3.1 Structure and Description of A.C. Nielsen Homescan Data Set . 55 3.2 Price Effect on SFC Probability by Income Groups . 67 vii Abstract In this dissertation, I develop a theory of consumer store format choice (SFC) that provides a framework to investigate how retailer strategies impact consumer shopping behavior. Moti- vated by the recent developments in food retailing and organic markets, I use the availability of organic products as a quality measure of a store format to analyze empirically the role of quality in value assessment and price sensitivity when consumers make SFC decisions. The theory chapter characterizes the rationales of consumer SFC. Within this frame- work, I explore consumers' optimal SFCs resulted from the matching between a consumer's willingness to pay (WTP) and retailer strategies. Market shares and the impacts of quality, price and shopping cost on the shares are analyzed and summarized in a set of remarks. In particular, the model suggests two main results. First, value, defined as quality-to-price ratio, is a key to consumer SFC and price sensitivity in SFC vary among consumers and among formats. Second, the shoppers of general formats, i.e. value-oriented stores and su- permarkets, have diversified preferences while the high-end specialty format shoppers have a high WTP and quality perception. In addition, with incorporating income in the model, I show how difference in income inequality can contribute to market share patterns. This is important given the widening of wage differences between the wealthy and the poor in the U.S. I then specify an econometric model based on the theory and use actual purchase data to examine the predictions. The model predictions were addressed by the estimation of random parameters with a mixed multinomial logit model and the results of marginal effect of price provide supporting evidence for these implications. In this empirical investigation, viii I use consumer income to capture the variation in consumer willingness to pay and quality perception. The results verify that price sensitivity varies among consumers of different income levels. The model provides evidence that the higher income consumers are less price sensitive compared to low income consumers. In sum, this dissertation contributes to the literature by constructing a simple but rich theoretical framework for store format choice analysis. The empirical results provide sup- porting evidence on model predictions and establish useful insights for farmers and retailers in their marketing and developing decisions on organic agriculture. 1 Chapter 1: Introduction 1.1 Organic Market and Food Retailing The organic food market has been one of the fastest growing segments in recent years. Aggregate organic food sales in the U.S. have maintained a 15-20% annual growth rate over the past decade. The report by Organic Trade Association (2009) indicates that the US sales of organic foods totaled nearly $23 billion in 2008, which marks a 15.8% increase compared to sales in 2007 and is over 6 times of the sales in 1997. The organic penetration rates, defined as organic food as a percent of total U.S. food sales, have increased from 0.97% in 1997 to 3.59% in 2009 (see figure 1). According to The Hartman Group (2008), over two-third of U.S. consumers buy organic products at least occasionally and about 28 percent of these organic consumers are weekly organic users. Figure 1 shows that the traditional supermarkets and value-oriented retailers have become more important outlets where consumers shop for organic food as their combined market share for organic food have increased from 30% to 46% over the past decade. On the other hand, sales of organic foods through natural food chains, such as Whole Foods Market and Wild Oats, and other independent natural food stores peaked at 68% of total organic sales in 1995. By 2005, the market share of natural food channels had however dropped to 47% of sales. Consumers choose to purchase organic foods for a variety of reasons. Some of the com- monly cited perceptions among consumers are that a) organic foods are grown without pesticides or other toxic chemicals and so they are healthier for them and their families, b) 2 Figure 1.1: The U.S.