Analysing cost efficiency in Spanish retailers with a random frontier model

Abstract

PurposeThe aim of the paper is to estimate the cost efficiency of supermarket chains in the Spanish retailing industry.Design/methodology/approachThe methodology applied is based on a random stochastic frontier model that enables separation of the covariates in the cost function into homogeneous and heterogeneous variables. The methodology is applied to panel data on a sample of 78 supermarket chains between 2001 and 2004.FindingsThe results reveal high levels of cost inefficiency in the Spanish retail sector. The results also reveal that the random frontier models better describe Spanish retailers than homogeneous frontier models.Research limitations/implicationsThe generalisation of the conclusions of the study to the whole sector should be made with caution, given the fact that only one of the players in the distribution channel has been analysed.Practical implicationsManagers should be aware of the importance that cost efficiency has for their own firms. Further, a common government retailing policy will be unable to reach all retailing companies, since heterogeneity exists.Originality/valueFor the first time, the cost efficiency of the intermediaries in the Spanish retailing sector is studied.