Understanding the Determinants of Retail Strategy: An Empirical Analysis

Abstract

Two powerful, highly effective strategic tools that retailers possess involve pricing and store format decisions. From the several strategic choices available for each decision, a retailer can choose any combination. We focus on two gaps in the literature. First, both decisions are specific to the consumers to whom the stores cater and the environments within which they operate, yet little academic research studies them jointly. Thus, it is important to determine the joint effects of considering pricing and format decisions in a single framework. Second, do retailers, privy to findings from rich prior literature pertaining to consumer store choices related to their pricing and format preferences, actually take such information into account when making strategic choices? In this descriptive rather than prescriptive study, we determine whether a retailer that makes an initial choice about which policy to implement complies with existing understanding about consumer preferences. Using a unique data set that covers all grocery retailers in three states, we apply a multinomial logit model to study the determinants of price, format, and combination strategies for retailers. Although some combinations are more similar than others, a consideration of the pricing or format strategy in isolation fails to depict a complete picture, and the strategic implications change significantly when we study price and format strategies in combination.