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Optimising Supermarket Promotions of Fast Moving Consumer Goods Using Disaggregated Sales Data: a Case Study of Tesco and Their Small and Medium

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Optimising Supermarket Promotions of Fast Moving Consumer Goods Using Disaggregated Sales Data: a Case Study of Tesco and Their Small and Medium Optimising supermarket promotions of fast moving consumer goods using disaggregated sales data: A case study of Tesco and their small and medium sized suppliers BY: Sheraz Alam Malik SUPERVISORS: Prof. Andrew Fearne Dr. Jesse’O’Hanley Dr. Shamin Wu UNIVERSITY OF KENT Kent Business School December 2015 This thesis is submitted to the University of Kent, United Kingdom in fulfilment of the requirements for the degree of Doctor of Philosophy in Management Science. Abstract The use of price promotions for fast moving consumer goods (FMCG’s) by supermarkets has increased substantially over the last decade, with significant implications for all stakeholders (suppliers, service providers & retailers) in terms of profitability and waste. The overall impact of price promotions depends on the complex interplay of demand and supply side factors, which has received limited attention in the academic literature. There is anecdotal evidence that in many cases, and particularly for products supplied by small and medium sized enterprises (SMEs), price promotions are implemented with limited understanding of these factors, resulting in missed opportunities for sales and the generation of avoidable promotional waste. This is particularly dangerous for SMEs who are often operating with tight margins and limited resources. A better understanding of consumer demand, through the use of disaggregated sales data (by shopper segment and store type) can facilitate more accurate forecasting of promotional uplifts and more effective allocation of stock, to maximise promotional sales and minimise promotional waste. However, there is little evidence that disaggregated data is widely or routinely used by supermarkets or their suppliers, particularly for those products supplied by SMEs. Moreover, the bulk of the published research regarding the impact of price promotions is either focussed on modelling consumer response, using claimed behaviour or highly aggregated scanner data or replenishment processes (frameworks and models) that bear little resemblance to the way in which the majority of food SMEs operate. This thesis explores the scope for improving the planning and execution of supermarket promotions, in the specific context of products supplied by SME, through the use of dis- aggregated sales data to forecast promotional sales and allocate promotional stock. An innovative case study methodology is used combining qualitative research to explore the promotional processes used by SMEs supplying the UK’s largest supermarket, Tesco, and simulation modelling, using supermarket loyalty card data and store level sales data, to estimate short term promotional impacts under different scenarios and derive optimize stock allocations using mixed integer linear programming (MILP). i The results suggest that promotions are often designed, planned and executed with little formalised analysis or use of dis-aggregated sales data and with limited consideration of the interplay between supply and demand. The simulation modelling and MILP demonstrate the benefits of using supermarket loyalty card data and store level sales data to forecast demand and allocate stocks, through higher promotional uplifts and reduced levels of promotional waste ii Acknowledgements I would like to thank first and foremost to ‘ALLAH’ Al mighty for giving me guidance and strength. My sincere gratitude to my supervisory team headed by Prof Fearne along with Dr ‘O’ Hanley & Dr Wu who provided me with outstanding support all the way in this journey. My special appreciation is for my family (my mother, wife & kids) who stood by me in the thick and thin of this journey. Last but not the least I would thank everyone from Kent Business School, Medway who offered valuable guidance and resources to achieve this seemingly unachievable task. Sheraz Alam Malik March, 2015 iii Table of Contents Abstract .................................................................................................................................................... i Acknowledgements................................................................................................................................ iii CHAPTER 1 -INTRODUCTION ................................................................................................................... 1 1.1 BACKGROUND .................................................................................................................................................... 1 1.2 PROBLEM STATEMENT ......................................................................................................................................... 2 1.3 RESEARCH QUESTION .......................................................................................................................................... 3 1.4 RESEARCH OBJECTIVES AND METHODS ..................................................................................................................... 4 1.5 CONTRIBUTION .................................................................................................................................................. 5 1.6 THESIS STRUCTURE .............................................................................................................................................. 6 Chapter 2- Literature review ................................................................................................................... 7 2.1 THE ROLE OF SALES PROMOTIONS ........................................................................................................................... 7 2.2 MARKETING PERSPECTIVES ON PROMOTIONAL IMPACTS ........................................................................................... 10 2.2.1 Brand Switching ..................................................................................................................................................... 10 2.2.2 Purchase Acceleration ........................................................................................................................................... 12 2.2.3 Category Expansion ............................................................................................................................................... 15 2.2.4 Consumer loyalty ................................................................................................................................................... 19 2.3 PROMOTIONAL PLANNING MODELS ..................................................................................................................... 21 2.3.1 Demand and supply chain coordination ................................................................................................................ 28 2.3.2 Bullwhip effect & Demand amplification ............................................................................................................... 41 2.4 EXECUTION OF PROMOTIONS .............................................................................................................................. 43 2.5 GAPS IDENTIFIED IN THE LITERATURE .................................................................................................................... 48 CHAPTER 3- Expert Interviews .............................................................................................................. 50 3.1 INTRODUCTION ................................................................................................................................................ 50 3.2 CASE STUDY 1 (AMBIENT PRODUCT CATEGORY) ...................................................................................................... 51 3.2.1 Company ‘A’ ........................................................................................................................................................... 51 3.2.2 Company ‘B’ ........................................................................................................................................................... 51 3.2.3 Promotional objectives .......................................................................................................................................... 51 3.2.4 Promotional Planning ............................................................................................................................................ 53 3.2.5 Promotional Execution .......................................................................................................................................... 56 3.2.6 Evaluation & Feedback .......................................................................................................................................... 58 3.2.7. Summary ............................................................................................................................................................... 60 3.3 CASE STUDY 2 (FRESH PRODUCE CATEGORY) .......................................................................................................... 60 3.3.1 Introduction ........................................................................................................................................................... 60 3.3.1 Company ‘C’ (Apple supplier) ............................................................................................................................... 61 3.3.2 Company ‘D’ (Mushroom Supplier) ...................................................................................................................... 61 3.3.3 Company ‘E’ (Carrot supplier)
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