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CHAPTER 1

INTRODUCTION

1.1 History of Modern Grocery Stores in U.S.A. and Indonesia

1.1.1. The History of Modern Grocery Stores in U.S.

As modern concept of grocery shopping, a self-service grocery store is the prototype of today gigantic hypermarkets, using the same principal of the self-serving experiences and organized products according to its categories, supported with sanitary of the facility and products hygiene. A self-service grocery store has evolved through decades by adding not only dry-goods (daily products with long expiration period), but also daily farm products, such as: meats, milk, fruits, vegetables, and breads to the varieties of the goods. According to the U.S. Patent #1242872

(http://patft.uspto.gov/netacgi/nph-Parser?patentnumber=1242872) Piggly Wiggly is the first grocery store which implements the concept of self-serving from customers and the use of bar-code (Patent #2612994) in United States of America. The first acknowledged grocery store that operates professionally to serve customers was patented by Clarence

Saunders in 1917. In the early start, one Piggly Wiggly store serves customers, majority of housewives, located in Memphis, Tennessee, U.S.A. Soon after the public found that the new way of shopping their daily needs turns out to be easier, faster, and offer wider options of dry-goods with tagged price in each item, at the end of 1930s there were over

2,600 stores across the US as the prove of stores’ success story.

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Promising growth of Piggly Wiggly is noted as the start of the chain store explosion, especially in 1920s. Small regional chain of self-serving grocery stores such as Kroger,

American Stores, National Tea, A&P, and others began covering more territory and operating over 10,000 of its “economy stores” by the end of the decade

(http://www.groceteria.com/about/history.html).

The supermarket was a phenomenon of independents and small regional grocery chains. The first supermarket in U.S.A. was established by Michael Cullen, a former executive of both Kroger and A&P, opened his first King Kullen store in 1930. Based on the situation, larger volume of a store creates enough possible space for the owner to provide many different product categories in one establishment resulted in considerably lower prices because the early stage of grocery stores often put additions to certain product to attract customers coming to their stores (in supermarket, the need of giving add-on is eliminated because without granting it, customers still come). Eventually, the large chains improved the concept, adding a level of sophistication that had been lacking from the simple stores of the early 1930s. In the late 1930s, A&P began consolidating its thousands of small service stores into larger supermarkets, often replacing as many as five or six stores with one large, new one.

In 1962, Meijer Thrifty Acres as the first hypermarket was established also for the same reason as the beginning of supermarket era; the growing demands, higher standards, and convenience reason. As the solutions, Meijer Thrifty Acres provide products from larger grocery divisions and general household merchandises and/or appliances, sectors that supermarkets could not cater for the space limitation.

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In Europe, the notable name in the industry is Carrefour, which was established its first store in 1963 at Sainte-Geneviève-des-Bois (France), despite the fact that records illustrate large-sized supermarkets cannot be implemented ideally, like in the U.S., because of the geographical conditions in which many European cities are already high populated and packed with buildings. Traditional grocery stores and supermarkets chains are more common to these areas. As the designed solution, Carrefour began to operate globally, started in 1972, with the focus of reaching more strategic areas, such as: few

European countries (Spain (1972), Greece and Italy in 1990s), Southern America (Brazil

(1977), Argentina (1982)) North America (Mexico and U.S.A.) many more in Asian nations (Taiwan (1989), Malaysia, China Thailand, Korea, Hong Kong in 1990s (in

Indonesia since 1998)) (http://www.carrefour.com/cdc/group/history/).

1.1.2. The Development of Modern Grocery Stores in Indonesia

Supermarkets are common for Indonesian customers as the place to do their frequent shopping since 1970s. Started in 1970s, Hero chains as one of the oldest names in the history of modern grocery stores in Indonesia. Hero Group originally runs the business in supermarket only. After the acquiring of Daily Farm International Holdings

(a retail company in Asia, established in Hong Kong with a Headquarter in Bermuda.) in

2005(http://www.hukmas.depkeu.go.id/kliping/NRC200500096.asp?kdprg=9&kdmedia

=NR C&nourut=200500096In), they also began to expand the business in hypermarket sector. Under the name of “GIANT”, Daily Farm International Holdings manage to open

4 hypermarkets and 15 supermarkets in Jakarta (until January 2008).

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Another big name in the industry is PT Alfa Retailindo Terbuka, which was established in 1989. The group’s principal activities are supermarket operation and general trading including distribution (wholesale), dealership and grocers. The Group operated 32 supermarkets under the name of Alfa Supermarket and 29 outlets of 'Alfa

Toko Gudang Rabat' – for hypermarkets. These supermarkets and hypermarkets operate across the island of Java, Bali, Sumatra and Sulawesi. Carrefour Indonesia consolidates its position as a leading food retailer in the country through their acquisition for Alfa

Group stakes ownership. Carrefour Group has signed a Share Purchase Agreement on 21

January 2008 with PT Sigmantara Alfindo and Prime Horizon Pte. Limited to acquire a

75% majority stake in PT Alfa Retailindo Tbk, (“Alfa Retailindo”) for a total equity consideration of IDR 674 Billion (€49.3m) - (http://www.indonesiaretail.com/?p=53).

This acquisition forms part of Carrefour’s strategy to reinforce its presence in key growth markets through a locally adapted multi format approach.

As one of the oldest supermarket in Jakarta, Tip Top still survives through decades. Tip Top was established in the business form of mini-mart in Rawamangun,

East Jakarta in 1979. Along with Hero as one of the oldest names in the history of moden grocery stores in Indonesia, Tip Top expanded its concept of a self-service grocery store to supermarket and department store in 1985 by adding not only dry- goods, but also daily farm products, such as: fruits and vegetables to the varieties of the goods. Caught in fire accident in June 1991, the store quickly regained and re-opened for business few months later. The steady growth of its company was noted as the installment of the second store, located in Ciputat, Tangerang. Until last year (2007), Tip

Top has managed to increase the number of stores to six stores 5

(http://tiptop.co.id/profil.php). The diversity of products range caters categories of foods, household appliances, clothes, electronics, fitness attributes, and furniture.

The promising growth of retail industry in Indonesia attracted Wal-Mart once to open the first hypermarket in Sarinah, Jakarta. Reported by New York Times

(http://query.nytimes.com/gst/fullpage.html?res=9C04E3D81F3DF93BA25752C1A96F

958260&sec=&spon=&pagewanted=all), the company and Lippo Group signed an agreement to open Indonesia's first Wal-Mart store in early 1996. Suffering a year loss,

Wal-Mart failed to survive and closed the only store in 1997. One of the reasons for

Wal-Mart’s failure in Indonesia was its failure in adapting its merchandising mix and practices to local tastes and customs.

This condition did not hold Carrefour and another French chain, Promodes, which have been successful in Indonesia despite the country's severe economic crisis, started in late 1997. Carrefour Indonesia delayed the plans to open as riots began in

Jakarta in May 1998 and began its history in October 1998 by opening the first store in

Cempaka Putih, Jakarta. At the end of 1999, Carrefour International and Continent

(Holder Company of Promodes) agreed to merge their businesses globally for $16.6 billion. The integration of both names generated the world’s 2nd largest retail commerce under the name of Carrefour. Carrefour offer shoppers a greater variety of products at prices lower than those at traditional markets. In the end of 2007, Carrefour has 31 hypermarkets in Jakarta, Bandung, Surabaya, Denpasar, Yogyakarta, Semarang, Medan,

Palembang and Makasar. Carrefour’s operations in Indonesia consist of 37 hypermarkets

(29 in 2006). Carrefour in Indonesia recorded €627m sales in 2006, up 14.4% over the first nine months of 2007. Few other names of the business are considered excessively 6 undersized and have fewer impacts to the existence and the development of grocery stores in Indonesia.

1.1.3. The Development of Store Brand in Indonesia

As one of the early provider of store brands in Indonesia, HERO sell private label products, from foods (snacks, rice, breads, spices, mix spices (for rendang, gulai, kari), jam, noodle, dried foods) to household daily goods under single brand of

HEROSave (tissues, cotton buds, mopping cleaner, hand cleaner, detergent, naphthalene). After acquired by Daily Farm International Holdings, GIANT hypermarket also produce private label under the name, “GIANT”. Based on the observations, the suppliers of products for HERO and GIANT store brand products are the same, for example: the most noticeable supplier in food, especially in most of the types of snacks and some types of spices of both groceries’ private labels are produced using single supplier. In varieties of products, GIANT hypermarkets have wider selection of store brands products that HERO supermarkets do not provide, such as: photocopy paper, syrup, and soy sauce.

Carrefour and Alfa have their own store brands (Carrefour use the logo or the name itself for all of the store products, including electronics, while Alfa have three store brands; Alfa (mainly for foods, such as: rice, breads, snacks, sugar and spices, and other dried foods), Rp V (for detergent, floor disinfectant), and Pasti (for tissues, diaper, cottons). Gradually, all Alfa hypermarkets will be changed into Carrefour as the result of the shift in ownership.

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1.2 Background of the Problem

Current situation of growing class of wealthy Indonesians attracted big-name foreign retailers to Indonesia in the first place. In a nation of 220 million people, there are roughly 20 million people in households that spend at least $1,200 a year on routine expenses like rent and food, according to A. C. Nielsen. The financial crisis that started in Thailand in mid-1997 and spread to Indonesia changed everything. The crisis was apparently devastating supermarkets and hypermarkets potential customers. To overcome the diminishing buying power from the society, retailers introduced store branded products as part of their strategy because the shift in market demand giving them new opportunity to cater price-sensitive customers’ needs by offering more affordable daily products compared to national brands.

However, the store brands are often perceived as inferior products sold at very cheap price, making it difficult to compete with the stable brands in the market. This situation leads us to ask whether the CPV and buying behavior of store brands have changed or not.

1.3 Motivation in Choosing The Problem

Understanding Consumer’s Perceived Values place important part in winning customers over a product/service and became the major motive in choosing the problem.

Companies, represented by the managers often see the product differently from the customers, creating two perspectives which may cause conflicts over the product. The better way to explain it is by showing an example of any of products. For one example, let’s say brand A of cola. The company which manufactures the cola changes the 8 formula to create new flavor with less sugar, then sell it into the market as the new

(brand of) cola A. Customers think the new cola as a inferior product because of the different taste and as a result, they reject it. This situation actually happened in real life, as the illustration of. According to Zaltman (2003, p. 14) the way on how both parties cite the same data to prove their respective points is often neglected. This often causes managers to ignore customers because they believe that customers don’t know what they want. To develop and improve a product, companies must know what are the factors that consumers think as important to dig up information on how they think and perceive variables over a product before considering in purchasing it. CPV and buying behavior also reflect the performance of provider of the goods deliver their products.

1.3.1 Behavioral learning theories

Behavioral learning theories also referred as stimulus-response theories because they are based on the premise that observable responses to specific external stimuli signal that learning has taken place. In a predictable way to a known stimulus, he or she is said to have “learned.” Two behavioral theories with great relevance to marketing are classical conditioning and instrumental or operant conditioning.

The principles of classical conditioning that provide theoretical underpinnings for many marketing applications include repetition, stimulus generalization, and stimulus discrimination (Schiffman and Kanuk, 2004, pg. 219). Neo-Pavlovian theories view traditional classical conditioning as cognitive associative learning rather than as reflexive action. 9

In private branding, the learning can be categorized into classical conditioning because it capitalizes on the consumers’ ability to generalize favorable brand associations from one product to others. Combined weight of its brands has always provided these hypermarkets great power in negotiating and luring diverse choices from consumers. It also enables the company to effectively fight competitors, especially the new ones who may try to introduce products in market because of another advantage in price level.

Instrumental learning theorists believe that learning occurs through a trial-and- error process in which positive outcomes (i.e., rewards) result in repeat behavior. For marketers, the major reasons for understanding how consumers learn are to teach them that their brand is best and to develop brand loyalty. Utilizing the gained information from the research, furthermore, this study will examine the store brand buying behaviors by using data from the multidimensional model which covers various factors, as we mention above (consumer’s involvement, brand loyalty, price perception, quality perception, familiarity, and perceived risks) as well as psychographic and demographic factors that assumed to influence the store brand buying/purchase behaviors.

1.4 Problem Identification - Store Brands Consumer’s Perceived Value and

Buying Behaviors

The low price might not be the definite reason Indonesian customers choosing store brands because they also have several considerations before purchasing products they bought. Overall satisfaction from store brands consumers, such as: Involvement, quality perception, brand loyalty, risk perception, and familiarity, aside to the price 10 perception itself will be investigated in this paper. The general assumption of “you get what you paid for” as the actual condition of store brands phenomenon because many of customers believe the only possible reason why store brands are very cheap because the quality is so inferior. The instruments that will be investigated in the paper cover the relationships among dimensions of CPV and buying behavior, and their final decisions based on the variables in the measurement constructs (consist of recommendations to relatives, willingness to buy store brands items over national brands, and the possibility in future purchasing). Although this paper is the replication of a journal, further works are designed to enhance the results of the analysis. The improvements cover more method of analyses to give better view on the actual consumer’s perceived value and their buying behavior toward store brands (for example: in the research, demographic factor will be investigated to find out whether it is significantly related toward the problem or not, etc.) and supported with an open-ended question of suggestion and/or critics towards the groceries in the concern of store brands.

Consumer learning can be thought of as “the process by which individuals acquire the purchase and consumption knowledge and experience that they apply to future related behavior.” (Schiffman and Kanuk, 2004, pg. 219), the definition meaning that consumer learning is a process; that is continually evolves and changes as a result of newly acquired knowledge (gained from thinking, observation, reading) or from actual experience. Both newly acquired experiences and knowledge serve as feedback to the individual and provide the basis for future behavior in similar situations.

Establishing a positive CPV also require strong brand image, which is crucial for any retailer, especially since more shoppers become more selective in making buying 11 decisions when they are inside a store staring at a shelf full of items. The same applies to its approach to store brands. In Indonesia, the observed hypermarkets (Carrefour and

Giant) and supermarket (Hero) have its selection of in-store brands are marked with the retailer's name, small print stating distribution information, and packaging design. With the reference of an article in Oakland Tribune MediaNews, titled “Save way to push store brands”, the old perceptions of store brands has changed nowadays because stores applied strategies to market their customers, capitalizes on other aspect beside price.

"Back in time, private label products had an image in the consumers, accurate or not, of lower cost and lower quality, one way to change that image is by premium packaging.

The O Organics brand which has more than 200 items, is branded with a large blue O making it easy to identify on the shelves”, said Daniel Abramowicz, an executive of

Crown Holdings Inc., a consumer goods packaging company. In-store brands on average cost 25 percent less than national brands, according to Information Resources Inc., a

Chicago-based research firm. "The more reasons you give people to buy your brand, the less important price becomes as a purchasing decision factor," said Rob Frankel, a branding consultant based in Encino (Torres, 2006).

1.5 Measurement of Consumer’s Perceived Value and Buying Behavior

Variables

Because of the most store-branded products are household merchandises and foods, the perception from customers should be unchanged, however to investigate the exact behaviors and perceived value from Indonesian customers, primarily in Jakarta, 12 towards store brands, this research has another strong point to verify. Buying power as a factor in purchasing processes is essential to most of Indonesia’s population.

High inflation that still occurs in this country creating the unbalance among their buying power and products’ prices; for low-to-middle income level people, the tendency to purchase lower price products can save their money considerably or at least decreasing the amount of shopping expenses, although the impact is not significant (occurred in middle-to-high income level people). As a result, increasing varieties of store brands for household commodities can be considered as solution for the decreasing buying power.

Other issues concerning store brands, such as: whether customers will become repeated buyers or not, familiarity issues, and risk perception will be researched also to get better understanding about the topic. Along with those concerns, the methods from notable researchers’ works, such as: study of Buying Behavior from Zeithaml, Berry and

Parasuraman (1996), an extensive theory of CPV developed by Sheth, Newman, and

Gross (1991), PERVAL multidimensional construct (Sweeney; 1996, 2001), and modifications of previous studies, dedicated to increase the relationships among CPV and purchase intentional towards store brands products to end-consumers.

1.6 The Terminology of Supermarket and Hypermarket

Convenience, self-serving concept, and well-organized system are the main differences of modern-based grocery stores and the traditional ones. These approaches follow the further development of the current stores, creating new terms, in the words of modern-based grocery store. A grocery store itself can be described as a store that is established in purposes of retailing food and selling them to customers. 13

Supermarket and hypermarket are the types of modern grocery stores which are being classified according to the size of the store itself, and also the varieties of products or items available for the customers.

A supermarket is defined in the Webster Dictionary as a large self-service grocery store selling groceries and dairy products and household goods. It was also defined in a court ruling at the State of New York Court of Appeals in 1971 as "a retail market that sells foods, convenience goods, and household merchandise arranged in open mass display. Supermarkets provide products which cater food categories

(typically meat, dairy products, canned foods, etc.) and household commodities, such as dry-goods (daily products with long expiration period). The arrangement of the products is being organized systematically according to its each category to ease customers in finding their needs.

Hypermarket can be described as self-serving modern-based grocery store that retails foods and household commodities in wider-range of option Hypermarket provides goods that are available and commonly found in supermarket and in department store.

In general, modern grocery stores can be categorized into supermarket type if the size of the establishment is approximately ranged from 1,000 meter square – 4,999 meter square, as for hypermarket, usually the size varies among 5,000 meter square and above.

1.7 Aims / Purposes

The aim of this study is to provide understanding on the subject of Consumers

Perceived Values and buying behavior towards store brands products in the perspective of Indonesia’s consumers, using measurement constructs of CPV and buying behavior. 14

Important demographic factors, such as: income levels and group of ages will be investigated to seek its relationships towards the final decision of the buyers.

This research is also the form of continuation of previous work (from the journal)

1.8 Benefits

In general, this paper outlines aspiration in providing sufficient information on today’s stores brands CPV, focused in Indonesia as market study. Moreover, as a focus in researching, using forms of consumer’s involvement, brand loyalty, price perception, quality perception, familiarity, and perceived risks as well as demographic factors, store brands attributes will be studied to dig up information on how they make a decision based on CPV variables before they buy store brands items.

Gained information from the research will be helpful for parties with the same interest, furthermore, this paper also outlines objective in providing recommendations to companies, directly related to store brands, which are the modern grocery stores.

1.9 Scope

The scope of this thesis and information gathered regarding to the study will be explained in this section. This study is about Consumers Perceived Value and their buying behavior towards the existence of store brands in Indonesia. Jakarta has been chosen as the research focus because the emerging state of supermarkets and hypermarkets chains has created wide-varieties of choices of daily needs shopping.

Furthermore, as it was stated above, a major city could be a good representative for the nation’s present economy condition. 15

The research is focused on Carrefour and Giant hypermarkets and Hero supermarket within Jakarta areas (North, East, South, West, and Central). It contains samples from 6 large groceries through self-administered questionnaires.

1.10 Presentation Systematization

This thesis follows procedures by classifying subsections according to the topic discussed, or in other word, the presentation of this thesis is organized systematically and posses chronological in writings because it have been go through these chapters:

Chapter 1 explains general information, background, and the history of the modern- era grocery stores in the U.S. as the start, in Europe, and in Indonesia, with store brands developments in this country. Background, motivation, and problem identification of conducting the research are also presented along with the previous studies related with this topic. It also provides the aims, benefits, and scope of this thesis.

Chapter 2 will discuss on the theoretical foundation of the methods that will be used in the paper. In addition to approaches from other were following studies, such as: study of Buying Behavior from Zeithaml, Berry and Parasuraman (1996), an extensive theory of CPV developed by Sheth, Newman, and Gross (1991), PERVAL multidimensional construct (Sweeney; 1996, 2001), and modifications of previous studies will be further discussed in the chapter.

Chapter 3 will discuss the methodologies used in the past studies and original study in the journal, addressed in the research, number of hypotheses, scope of research, data collection method, sampling plan, and data analysis methods. 16

Chapter 4 will elaborate the survey findings analyzed with methodologies in chapter 3. The software used for examine the statistical data gained from the questionnaires of this thesis is SPSS version 16 (Statistical Package for the Social

Sciences (SPSS Inc.)).

Chapter 5 will conclude the whole research findings, managerial implications and scientific implications to Marketing, research limitations, and recommendations to future research.