Evidence from UK Food Retailing De Ce O U Ood Eta G
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Do SSlales MMtt?atter? Eviden ce fr om UK F ood R etailing Tim Lloyd , Wyn Morgan, Steve McCorriston and Evious Zgovu Paper prepared for the INRA-IDEI Semi nar, “Competiti on and Strat egi ies in the Ret aili ng Ind ust ry” , Toulouse School of Economics, 16/17 May 2011. Funding from the European Union Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 265601 is gratefully acknowledged. The results reflect the views of the authors only. Motivation and Aims Supermarkets have come to dominate the retail landscape A distinctive feature of supermarket prices is the prominent use of discounting (‘sales’) in price variation Variation in food prices is important at two levels: Macro-economic: . Retail price inflation Microeconom ic: . Sales as a competitive tool in imperfectly competitive markets Nielsen Scantrack© : scanner dataset of 230,000 prices Literature Literature on retail price dynamics: . relatively recent and growing with the availability of new microdata sources (Maćkowiak and Smets 2008, Dhyne et al. 2006) . empirical evidence does not sit easily with standard theory (Nakamura and Steinsson 2008, Berck et al. 2008) . emphasises the role of retailer (not manufacturer) in price setting (Chevalier et al. 2003, Nakamura 2008,) . downplays cost shocks as principal source of variation (Nakamura 2008) . importance of sales in price variability (20-50%) (Pesendorfer 2000, Hosken and Reiffen 2004, Berck et al. 2008, Naaakamu uaadra and Steinsso n2008) Heterogeneity a recurrent theme Contribution We focus on sales in retail price dynamics in food sector, relatively few studies, particularly in EU . Are sales less important in EU than US? . Retailers or manufacturers? . Brands and private labels? Nie lsen Scan trac k© extens ive, barcod e specific, hig h frequency First UK study using data of this sort Outline . Nielsen Scantrack© dataset of prices . Identifying Sales . Stylised facts of prices and sales . Examine retailer and label aspects of sales . Price variation . Synchronicity . Conclusions Retail Price Data Neilsen Scantrack© . Electronic Point of Sale (EPOS) data . laser bar-code scanners at chhkeck-out . Prices are the national average for each supermarket chain by bar-code . Prices reflect 100% transactions of sampled products in each retailer Retail Price Data . Panel of 231,000 price observations . 507 bar-coded products . 15 food categories : Orange juice, instant coffee, breakfast cereals,,g,yg,, teabags, yoghurt, bread, tinned tuna, tinned tomatoes, tinned soup, corned beef, fish fingers, frozen peas, frozen chips, Jam and frozen pizza. 7 national retail chains : Tesco, Sainsbury, Asda, Safeway, Somerfield, Kwik Save, Waitrose. 1,704 unique product codes (UPC) . Weekly prices over two and a half years . 8th September 2001 to 17th April (137 observations) Retail Price Data While not a representative sample, wide product coverage . Beverages and processed foods . Chilled, ambient and frozen formats . All chains well represented . No fresh foods Brand status . 74% (manufacturer) branded products . 26% (supermarket) own label products Promotion-inclusive prices . Quantity-based (‘buy one get one free’) . Price discounts (10% off) . Exclude loyalty card bonuses Orange Juice: Del Monte 1 Litre Tetra Single 110 100 90 80 70 60 50 1 112131415161718191101111121131 TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE Instant Coffee: Nestle Standard Granules 200g jar 400 350 300 250 200 150 1 112131415161718191101111121131 TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE Kingsmill Medium Sliced White 800g 80 70 60 50 40 1 11 21 31 41 51 61 71 81 91 101 111 121 131 TESCO SAINSBURY ASDA SAFEWAY SOMERFIELD KWIK SAVE WAITROSE Jam: Streamline Strawberry 400g Jar 160 140 120 100 80 1 112131415161718191101111121 TESCO ASDA SAFEWAY SOMERFIELD KWIK SAVE Stylised facts . Prices vary by product, retailer & label status . Products: e.ggj. bread and jam . Retailer: average product price range is 30% . Label: Price range own labels (45%) brands (27%) . Two distinct states, ‘regular’ and ‘sale’ prices . Cost type changes apparent in some . Sales seems to play a more important role in variability . Sales strategy (‘Hi -lo’, EDLP) differ by retail chain So which is the cheapest retailer . .? Average prices . Asda. Products stocked by Retailer All On both classifications Price (p) Price (p) Asda____ 117 127 . And by Label Tesco________ 128 128 . But there’s not much Kwik_______ Save_ 121 131 between the mainstream Sainsbury________ 132 131 Waitrose 140 137 ________Somerfield 127 140 Cluster selling cheap brands Safeway 142 140 Average 130 133 Cluster mainstream retailers SD 9.6 5.5 selling national brand s and own llbabel at low cost Interestingly, Asda is only EDLP retailer Identifying Sales . No sales flag in the Scantrak data so sale prices need to be detected empirically . Sale : ‘short periods of low prices below the reference price’ . Some Methodological issues . The duration of short? No more than 12 weeks . How low is low? 10%, 25% and 35% . What is the reference price? ‘Peak-to-trough’ actual . We attempt to overcome some of the shortcomings in previous work . MdMode . Week-on-week changes Sales Identification in a Stylised Weekly Time Series of Prices R R R R R R R S S S S S R R R R R R R R R R R R R R R -2 10 -6 -9 -6 13 13 -5 ~p -2 2 -9 t t t Stylised facts: Sales . Sales are unusual, but only deep sales are rare 10%, 25%, 35% sales occur 8%, 3.5%, 1.4% of the time . 63% of UPCs experience a sale Occur roughly once per year A small number of products discounted frequently One-third of products never discounted Brands discounted twice as frequently & more deeply than own labels . Sales last around four weeks irrespective of depth . Sales typically represent discount of 25% . Differences in use of sales by retailer Use of Sales by retailer Sales and costs in price variation Measure price variation using regression standard error Assess impact of ‘common costs’ (market average regular prices) and sales on how this changes Model 1: Baseline log price = UPC dummies Model 2: Importance of product costs log price = UPC dummies & costs Model 3: Importance of Sales log price = UPC dummies, costs and sales dummies Sales and costs in price variation Mdl1Model 1 Mdl2Model 2 Mdl3Model 3 UPC UPC + Costs UPC+ Costs+Sales All Products 0.1185 0.1052 0.0609 Label Brand 0.1182 0.1052 0.0592 Own Label 0.1207 0.1050 0.0737 Retailer Tesco 0. 0949 0. 0832 0. 0382 Sainsbury 0.1122 0.0894 0.0452 Asda 0.0912 0.0749 0.0569 Safeway 0.1461 0.1227 0.0713 Somerfield 0.1232 0.1100 0.0509 Kwik Save 0.1298 0.1138 0.0589 Waitrose 0.0943 0.0819 0.0388 Sales and costs in price variation Mdl1Model 1 Mdl2Model 2 Mdl3Model 3 UPC UPC + Costs UPC+ Costs+Sales All Products 0.1185 0.1052 0.0609 Label Brand 0.1182 0.1052 0.0592 Own Label 0.1207 0.1050 0.0737 Retailer Tesco 0.0949 0.0832 0.0382 Sainsbury 0.1122 0.0894 0.0452 Asda 0. 0912 0. 0749 0. 0569 Safeway 0.1461 0.1227 0.0713 Somerfield 0.1232 0.1100 0.0509 Kwik Save 0.1298 0.1138 0.0589 Waitrose 0.0943 0.0819 0.0388 Decomposing Price Variation Us ing these measures, resu lts sugges t : CtCosts . account for 10% of price variation . vary rela tive ly little across re ta il c ha ins SlSales . are four times as important as costs . illin all excep tAdt Asda . more important for brands than own labels Decomposing Price Variation By Retailer 50% 40% 30% 20% 10% 0% Tesco SalesSales Sainsbury Asda Safeway Costs Somerfield Costs Kwik Save Waitrose Are sales across retailers related? Use of sales varies by retailer. However, results suggest they are synchronised. Using a fixed effects conditional logit model . Sales in rivals significantly increase the probability of a sale . The probability is however surprisingly low (14%) suggesting that promotions are typically supermarket specific . RltfResults for own lbldtdiffttbdlabel products no different to brands Summary Offer sketch of pricing ‘landscape’, sales a key feature According to our measures, . Sales are unusual (8%), . commonly applied (63%), . short-lived (4 weeks) . and typically represent 25% discount All UK supermarkets use them, only one sparingly Summary Are sales less important in EU than US? . For UK at least, no. Account for 40% of retail price variability . Low importance of costs 10% (similar to US too). Brands and private labels? . Sales more common for brands, although in key respects similar Retailers or manufacturers? . Evidence points to retailers not manufacturers being principally responsible for sales..