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Do Promotions Increase Store Expenditures?
A Descriptive Study of Household Shopping Behavior

Authors:

Xavier Drèze
Patricia Nisol
Naufel J. Vilcassim

Publisher:

Quantitative Marketing and Economics
2004, 2 (1), 59-92

Abstract:

This paper investigates whether households' grocery shopping expenditures are preset before entering the store or are flexible and determined while in the store as a function of the specific store offerings encountered during the store visit. This is an important question for the retailer in light of the vast array of temporary promotions offered to consumers. Indeed, should expenditures be fixed before entering the store (for instance, as a function of the household’s inventory and/or socio-demographic characteristics), it is possible that retailers might actually decrease their profitability when running promotions by displacing expenditure from high margin items to lower margin ones.

We claim that to answer this question meaningfully one must consider the totality of the household’s within-store purchases (i.e., the market basket) and not just purchases of the promoted products. Accordingly, we propose an expenditure allocation framework derived from the economics literature on the neo-classical theory of household choice behavior. Using an extended version of the Almost Ideal Demand System (AIDS), we study not only the household’s expenditure decision, but also how that expenditure is allocated across product categories. We show how this framework can be applied at all stages of decision making, from broad product expenditures to specific item selections. We apply our methodology to analyze household purchases of an entire basket of goods at a leading European supermarket chain and show how retail store managers can gain meaningful insights from this analysis regarding their pricing and promotion decisions.