The impact of a manufacturer’s financial liquidity on its market strategies and pricing and promotion decisions in retail grocery markets

Abstract

We investigate how two primary determinants of financial liquidity—leverage and cash holdings—affect a firm’s strategic orientation between profit and revenue maximizations, and the consequent tactical pricing and promotion decisions. To this end, we develop a structural model of manufacturers’ strategic behavior and marketing mix decisions in retail markets of grocery and consumer packaged goods. Applying the model to comprehensive data on 92 firms’ financial structure, and their sales, prices, and promotions for 9,111 UPCs sold at 100 retail stores in the Chicago metropolitan area over 400 weeks, we find empirical evidence in support of our hypotheses that increased leverage makes firms with low cash holdings more profit-oriented while firms with high cash holdings become more revenue-oriented. The ensuing pricing and promotion decisions to implement the strategic orientation are shown to vary with the sensitivity of demand to the marketing instruments and their costs.