Market segmentation and competitive analysis for supermarket retailing

Segal, Madhav N ; Giacobbe, Ralph W . International Journal of Retail & Distribution Management 22. 1 (1994): 38. Turn on hit highlighting for speaking browsers Hide highlighting

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Translate Abstract Combining segmentation with competitive analysis is a very effective method to understand the dynamics of retail markets and to analyze strategic options for supermarket chains. To demonstrate its usefulness, a database of approximately 10,000 supermarket customers was processed through DMIS's system of CLUSTPLUS which assigned cluster numbers to individual records at the block group level. This resulted in the overall market being described in terms of 47 customer groups. These customer groups were reduced-regrouped into a smaller number of submarkets. To examine the competitive situation and the nature of competition, a customer attractiveness index was computed which reflected each retail chain's percentage of customers in each market segment in relation to the percentage of the market in that segment. Overall the findings suggest that many supermarket retailers must attract customers from different and often incompatible market segments.

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INTRODUCTION Retail market segmentation is necessary and often critical to the development of effective marketing strategies in today's competitive marketplace. The impetus for a market segmentation strategy is basic: customers exhibit heterogeneous needs and purchase patterns, and thus respond differently to different marketing stimuli. The benefits to be gained from a segmentation strategy are closely linked to the marketing concept. The process of identifying segments necessitates a thorough analysis of the entire market, not only focusing on the customer's needs and shopping habits but also providing knowledge of changing market conditions and competitive actions. This knowledge enables the retail organization to identify those segments that offer the most promising opportunities in relation to the organization's strengths and situational determinants. The firm can then develop strategies and implement programmes tailored to the unique needs of the targeted segments and allocate its marketing resources in the most . effective and efficient manner. Most researchers acknowledge these and other related benefits of applying a segmentation approach. However, considering its relative importance as a marketing activity (especially with the advent of the marketing concept as a business philosophy) retail market segmentation as a concept is a significantly under-researched topic in both the USA and Europe. This observation is even more applicable within the highly competitive retail food

industry. Furthermore, many segmentation studies suffer from several conceptual and methodological weaknesses[1-4]. This study recommends an approach to develop jointly homogeneous sets of retail market segments and perform an analysis of competition from which target markets may be selected and strategic positioning efforts can be developed and pursued. The general purpose of this study was to suggest, apply and empirically validate a numerical procedure for retail market segmentation and competitive market analysis which may be applicable internationally in the western hemisphere. Specifically, the objectives of this study were to: * demonstrate how a pragmatically oriented retail segmentation analysis can be performed using a large syndicated database; * show how a competitive structural analysis could be effectively linked to the segmentation results; * validate the procedure empirically; * propose implications for further research and applications. This proposed approach, though not a panacea for all problems associated with retail marketing, will help to improve the selection of target markets and subsequent positioning efforts for competitive retail organizations. Such analysis, if accurately performed, is suggested as a critical ingredient for retailer success, especially in supermarket retailing [511]. At least three reasons form the primary basis for this suggestion. First, on the global front, retail food acquisitions, mergers and new market entries are each on the rise [12,13]. Second, markets, especially for food retailers, have become highly fragmented [10,14,15,16]. And third, differences in the types of retail outlets serving such markets have proliferated in terms of product/services offered, size, and brands/lines. Today when buying groceries, customers can choose between convenience stores, up-scale speciality stores (Byerlys, Waitrose), no-frills discount "box" stores (Texas T, Aldi), hypermarkets (Havant, Auchan), conventional supermarkets (Asda, Food Giant), superstores, combination stores, future stores, membership warehouse clubs, and others[10,15,17]. Collectively, the above factors indicate that the future success for specific food retailers, whether operating in existing or new markets, will require a keen understanding of segmentation strategies, target selection and positioning (or re-positioning). At a minimum, this understanding is predicated on knowledge about consumers and their needs and the characteristics of competition and competitive structure within the selected markets. The section below discusses existing research and some issues associated with retail market segmentation, following which the research methodology and empirical results are presented and discussed. BACKGROUND: RETAIL MARKET SEGMENTATION Recent trends in retailing have emphasized that a critical need of retailers is a focus on market segmentation and market specialization rather than product specialization and mass marketing. This means bending the organization (products, distribution and promotion) to fit

the marketplace (customers, intermediaries and competitors) rather than bending the marketplace to fit the organization. While this appears to be a deceptively simple rule of survival, many retailers do not practise it, partly because of managerial preoccupation with frequent reorganization, ongoing budget management and daily retail operations. Another important reason for the lack of longer-term focus on strategic options may well be that retailers are simply unfamiliar with, or lack experience in, this process[18]. Often market segmentation studies involve bases and/or descriptor variables that do little to guide the retailing practitioner[2]. Unfortunately, literature in retailing, marketing segmentation and (joint) retail market segmentation provides few useful, specific managerial guidelines and practical approaches for market segmentation and competitive analysis. For example, 15 years ago Wind[4] stated that "management needs are an obvious but somewhat neglected consideration" in even the selection of variables for segmentation studies. Furthermore, "little is known (in the published literature) on how the translation from marketing segmentation to marketing actions occurs". This is a major drawback[2] because significant problems with market segmentation arise when a firm proceeds from an abstract conceptualization to a specific case application. As such, a meaningful pragmatic market segmentation study requires translation of results into practical and actionable guidelines. For market segmentation to be maximally useful, market segments must exhibit four characteristics: measurability, substantiality, accessibility, and actionability[19]. For retail market segmentation, actionability is a critical criterion and means the degree to which effective programmes can be formulated for attracting and serving the segments. However, numerous factors can thwart actionability such as a firm's limited resources and time constraints. Furthermore, while the normative theory of segmentation has been widely accepted by the academic community, rarely has the area of retail segmentation been subjected to a detailed examination or empirical testing, especially as it impacts the practitioner's ability to translate findings into actions. Academicians have been neglectful of the needs of the practitioner in this and other areas[2]. It is proposed that, to advance knowledge in the area, future research will require narrowing the gap between the academically oriented research on segmentation and the real-world application of segmentation research[4]. Because environments change so rapidly today, and since information and communication systems have become increasingly more efficient, retail managers require shorter time lapses between identifying problems and opportunities and obtaining research results. This can manifest into several outcomes: * a greater reliance by practitioners on syndicated data sources for addressing retail segmentation questions; * performing segmentation analyses on variables which provide immediate actionable guidelines; * combining segmentation analyses with competitor analysis as a means to improve target market selection decisions and/or positioning (repositioning) strategies. Additionally, accumulation of knowledge based on successful segmentation studies seems to be of particular importance for the research and practice of retail marketing management.

The use of syndicated databases has emerged as a valuable research design alternative in segmentation studies for three reasons. First, data collection is relatively inexpensive. Second, large representative samples can be obtained quickly, even on precise geographic areas. Third, data accuracy, including recency, has been vastly improved due to advances in information and communication systems technologies. Furthermore, systems such as pointof-sale scanning and electronic data interchange (EDI)[20] promise even better data collection opportunities for syndicated suppliers in the future. In practice, retail market segmentation is often applied rather crudely or, when performed more appropriately, does not go beyond analysing geography and shopping habits. While some progress had been made and a few useful empirical studies of retail market segmentation have been reported[1,3,9,21-26], the results of most segmentation studies have often been disappointing because the segments derived from them have not been actionable from a marketing/managerial standpoint[2]. Most published segmentation studies tend to report and define segments, fewer go on to describe them and fewer still provide actionable information to the user. A clear exception is a study by Hortman, et al.[9], in which three different segmentation bases (behavioural, attitudinal and demographic) were analysed within a supermarket context. Their results demonstrated that the impact of controllable marketing variables such as price, comfort of the shopping experience, coupons, product line breadth and quality, and service features differ greatly across segments and across segmentation bases. The authors concluded that further study of patronage influences across customer segments is warranted and that additional clustering variables should be used to refine segments and provide a better understanding of patronage behaviour influences. In many instances, researchers have failed to incorporate the marketing environment (especially the competitive structure) into their segmentation analysis. It is also not surprising that articles which review literature on retailing strategy have recommended that competitive analysis be incorporated with market segmentation as input to strategy formulation[25,27,28], Because target market strategy and market positioning for a retail organization depend on an analysis of both customer segments and competitors (in addition to several other factors[l,61) an integration of market segmentation analysis with competitive structure analysis can provide a very effective framework through which the dynamics of a retailing situation and its environments can be understood[25]. Typically, one would presume that competitor analysis would follow market segmentation; however, at least one study has incorporated competitor analysis as an input to segmentation[25]. The present study demonstrates the usefulness of combining market segmentation with competitive analysis, consequently it presents a very useful managerial picture of the marketplace, especially for highly competitive retail markets including those served by supermarket and grocery-food stores. An explication of the relationship between market segments and competitive analysis is undoubtedly necessary to bring about more actionable retailing applications. The authors examined this relationship through a large-scale market segmentation study sponsored by a large regional supermarket chain and partially supported by a nationally syndicated marketing research firm, Donnelly Marketing Information Services (DMIS). The specific objectives of the research were to: * determine market segments of customers based on geodemographic factors for a specific large metropolitan area (population > 2.2 million people);

* determine and analyse the competitive structure of major competing supermarket retail chains for the specified metropolitan area as per the results of the segmentation analysis; * develop managerial recommendations and discuss strategic options for competing supermarket retail chains based on the above analysis. RESEARCH METHODOLOGY AND APPROACH The database included approximately 10,000 names and addresses of supermarket customers from a large metropolitan area in the USA with a population in excess of two million residents. This delineation of the geographical area was made to coincide with the marketing area of major supermarket chains competing directly with each other. There are four major regional chains in the market area, each with a minimum of 15 stores. The customer database was processed through the DMIS's system of CLUSTPLUS which assigned cluster (customer group) numbers to individual records at the block group level. This resulted in the overall market being described in terms of DMIS's basic 47 customer groups. Each case (customer group) was defined and described in terms of a number of demographic variables (broad categories for variables included occupation, household composition, socio-economic status, income, housing, education, age, and mobility). The next phase of the study involved reducing/grouping DMIS's customer groups into a smaller number of submarkets which were more meaningful and actionable from a managerial perspective. To accomplish this objective, Ward's hierarchical cluster analysis was performed on a selected number of key demographic variables. The key variables were selected on the basis of perceived managerial usefulness and attempted to avoid potential redundancy and were identified as white collar family (per cent), female householder (per cent), married couples (per cent), Asian householder (per cent), household with children (per cent), two-worker families (per cent), median household income (dollars), single family homes (per cent), median education (years), median age (years), and length of residence (years). All these variables were standardized prior to cluster analysis to remove the effect of differences in units of measurement. To determine the "compactness" of uncovered clusters, a discriminant analysis procedure was used. Besides "validating" the cluster solution, the procedure also identified key variables which differentiated between basic segments (clusters) uncovered. To examine the competitive situation and the nature of competition, a customer attractiveness index was computed which reflected each retail chain's percentage of customers in each market segment in relation to the percentage of the market in that segment. Therefore, the overall competitive analysis involved a comparison of an average index (discussed later) for each retail chain within each segment. Figure 1 presents an overview of the data analysis.(Figure 1 omitted) DATA ANALYSIS AND RESULTS SEGMENTATION ANALYSIS Two criteria dominated the search for retail market segments: compactness and interpretability. The segments had to be compact, distinct and valid if the research was to have any managerial value. And the explanation for the segments had to be understandable by management (devoid of arcane terminology), otherwise the research would have been neither believed nor accepted. Together, these criteria contributed to whether the results were actionable from a managerial perspective. The cluster analysis uncovered four basic "natural" demographic segments. Figure 2 presents the basic segmentation scheme (dendrogram) and indicates a very clear four-cluster solution.

(Figure 2 omitted) This scheme was verified through a discriminant analysis procedure. The discriminant analysis indicated that all variables (except median age) were statistically significant (p < 0.01) in differentiating the clusters (see Table I). (Table I omitted) The discriminant functions were able to classify correctly each case (DMIS's customer group) into its respective segment (100 per cent classification rate--see Table II). (Table II omitted) Findings from the cluster analysis clearly indicate that these four segments/clusters are quite distinct, cohesive and compact. All basic demographic information was used in profiling the four retail market segments (see Table III) and a descriptive interpretation of these four market segments, together with descriptive labels for each group, is based on average demographic scores as given below.(Table III omitted) SEGMENT 1. ESTABLISHED WEALTHY * highest socio-economic status index (SESI); * highest income; * professionally employed; * white-collar workers; * highest incidence of two-worker families; * highly educated; * married couples; * highest incidence of households with children; * highest incidence of home ownerships; * low mobility (longer length of residence). SEGMENT 2. MOBILE PROFESSIONALS * above average SESI; * average income; * above average education; * white-collar professional workers; * highest incidence of multiple family residences; * high mobility (shortest length of residence); * fewer families with children;

* highest incidence of senior citizens (aged 65+). SEGMENT 3. AVERAGE MIDDLE CLASS * average SESI; * average income; * average education; * high incidence of married couples; * high incidence of two-worker families; * homeowners; * families with children; * very low mobility (longest length of residence). SEGMENT 4. DISADVANTAGED FAMILIES * lowest SESI; * very low income; * less educated; * lowest incidence of married couples; * highest incidence of female householders with children; * highest incidence of minority (Black and Spanish) families; * low mobility. Table I also shows the relative segment sizes. The sizes of these segments are not surprising and offer insight for strategic opportunities to supermarket chains. Their relative sizes may suggest, for example, that retailers might profit by taking a long, hard look at their positioning in the market and assessing what it might mean to pursue a segment to which they may appeal. Clearly segment 1 is the largest (41.3 per cent) followed by segment 3 (27.9 per cent), and segment 2 is not as large (17.9 per cent); segment 4 is the smallest market segment (12.6 per cent). While other determinants (e.g. competitive structure, image maintenance, inter-state barriers, within segment household consumption level) significantly impact target market strategy, segment profiles, including size, provide crucial information for managerial decision making. COMPETITIVE ANALYSIS Table IV summarizes the basic statistics pertaining to the share of market information for all four major supermarket retail chains (labelled as chain A, B, C, and D) for all four market segments. (Table IV omitted) This information is used to compute a customer attractiveness

index (ratio of percentage share for a chain to the percentage of total market) for each chain within each market segment (see Figure 3).(Figure 3 omitted) The results are indicative of the following: * While retail chain A is doing well in attracting relatively more customers in market segment 1 (in relation to the proportion of customers in the segment), retail chain B is clearly a market leader with superior performance. Retail chain D's performance in this segment is "average", but supermarket C is clearly not able to do as well (below average performance index < 100). * In segment 2, supermarket chain C has clearly the highest attractiveness index and retail chain B's performance is less than satisfactory. While retail chains A and D 6o fairly well in attracting more customers in proportion to customers in the segment, retail chain C is clearly the dominant leader of this segment. * Supermarket chain A's performance in segment 3 is quite good in terms of an above average (> 100) attractiveness index. However, it is retail chain D that is the dominant competitor in the segment. While retail chain C's performance is better than A's, retail chain B does quite poorly in this segment. * While no major supermarket retail chain is able to attract relatively more customers in proportion to the size of the market in segment 4, retail chain C's performance is better than any of its competitors'. Overall, the performance of all major chains in this segment is quite dismal. Of course, this should not necessarily be viewed negatively. Such interpretation is also dependent on several factors which influence the general and firm-specific attraction to this segment. STRATEGIC IMPLICATIONS This study has identified a useful methodology to uncover basic market segments and to analyse competitive positions for various supermarket chains within each of the segments. From this perspective alone, the study broadens and extends previous research in the area. Strategic implications can be derived by closely examining the following summary of the empirical findings: * There are four basic "natural" market segments in the specific metropolitan area. * A descriptive interpretation of these four segments indicates the presence of established wealthy, mobile professional, average middle class, and disadvantaged families. Additionally, all four market segments are quite distinct, cohesive and fairly compact submarkets. * Based on the substantiality criterion alone, the first three segments appear to be far more desirable than the fourth segment. * Retail chains B, C, and D enjoy dominant market positions in segments 1, 2, and 3, respectively. * While the retail chain A appears to do well in terms of attracting customers in the three desirable segments, it has no leadership position in any of the market segments uncovered. This is perhaps indicative of a lack of focus or poor positioning by the supermarket chain.

Consequently, chain A is the most vulnerable of all major chains in the competitive marketplace. Since any strategic option depends on clear positioning against competitors and customer groups, the present approach of integrating competitive analysis with market segmentation is a necessary first step to achieving a better understanding of the retailing environment and formulating effective marketing strategies. Overall, the findings suggest that many supermarket retailers must attract customers from different and often incompatible market segments. However, to compete successfully in the retail food business in the 1990s, grocers will need to identify and pursue specific customer segments and, consequently, position themselves against competitors and customer groups. Since customer groups (segments) differ, it should be obvious that different marketing strategies will be needed by the same supermarket chain if it elects to go after more than one target segment. Perhaps these conclusions can be made more specific by the following discussion of strategic implications for one retail chain, supermarket A, which enjoyed no market leadership position. Refinement of market segmentation scheme. The segmentation information from the study can augment any judgemental or a priori segmentation scheme developed earlier by the company's management team. Clearly, the retailing organization may wish to re-examine its earlier approaches to market segmentation. Selection of target markets. The company needs to re-examine the strategic positioning options in each of the three desirable segments. A prioritization for the three segments is a necessary first step and should be based on factors such as size of segments (both current and potential), expected growth rate, nature and extent of competition within each segment, availability of marketing resources, a match between the company's capability/capacity with the target customers' needs/preferences, and stability of market segments. Further marketing research and a careful cost-benefit analysis are an integral part of target market selection process. Development of positioning strategy. This step will ensure that retail chain A will integrate marketing and management activities to optimize its strategic position in a given market. Since this chain enjoys no dominant position in any of the market segments, it is perhaps most critical that it develops a positioning strategy for the selected target market(s). The key to this strategic positioning is to focus on a selected target market by using a strategy of differential advantage. This will require that this retail chain be cognizant of current and future customer needs, wants, preferences and shopping habits in addition to keeping a close watch on how competitors are developing alternative means of satisfying the same customer groups. This is important, especially in mature markets where significant growth can be achieved only through geographic expansion or gaining shares from entrenched competitors. A similar analysis could be conducted for each retailing supermarket chain. The above analysis for retail chain A illustrates how an integration of market segmentation with competitive analysis presents a useful framework to examine strategic options. However, some caution must be exercised in interpreting results from this research study because of the number of limitations. First, cluster analysis is basically a heuristic procedure and, consequently, statistical tests of significance are less meaningful when applied to cluster solutions. Additionally, the segmentation scheme from cluster analysis is dictated by the data and not by any a priori

conceptual! theoretical factors. Descriptive interpretation of clusters is qualitative and quite judgemental in nature. Consequently, results should be interpreted accordingly. Second, parsimonious reduction in the number of clusters is gained at the expense of some meaningful details. Third, this segmentation is based strictly on geodemographic factors only. It is quite likely to have a very different segmentation scheme if either psychographic, attitudinal, or behavioural (e.g. shopping pattern) variables are included in the cluster analysis. However, our recommended approach is to examine the role of additional variables within each segment. Next, segments based on any type of measure may not be stable over time[4,29]. Consequently, new updated analyses should be conducted periodically over time to address segment stability concerns. Finally, any generalizations made for areas other than those studied in this investigation should be made with some caution. CONCLUSION Depending on the strategic retailing objectives, the approach demonstrated here offers a logical way to understand the dynamics of retail markets and to analyse strategic options for supermarket chains. Much or' retailing has become international in character[30,31], and many retailers have evolved into widely diversified companies, often away from both their core business and their domestic markets; this phenomenon has been well documented[3235]. From this perspective alone, the approach presented here is directly applicable to retailing elsewhere in the USA and other countries, especially Europe where, with the inauguration of the single European Market, the retail environment is expected to become increasingly competitive in the near future. While retailing activity varies widely between the countries (e.g. in Germany the mail order retailers are relatively strong because of the restrictions placed on the store-based retailers; in France, the hypermarket is a well developed trading format along with mail order), many retailing organizations such as Aldi, Burtons, Next and TSB have demonstrated that effective target market segmentation leads to success[6]. Because of market restrictions and reduced domestic growth opportunities, retailing companies will continue to expand outside their home countries (e.g. Ahold will continue to expand outside The Netherlands, British retail companies have already gathered nearly $3.9 billion worth of American acquisitions between 1984 and 1989). It has been documented that countries with a similar social and cultural environment along with a comparable state of economic development would make ideal targets for expansion [36,37]. The growing interest among large US supermarket chains in expansion overseas is another major change affecting retailing in many Western countries today. Clearly, the approach presented here can be valuable in understanding the emerging dynamic retail markets and in analysing strategic options for competitive retailing organizations in the USA, Europe, and several other countries. In summary, this article reports on a market segmentation and competitive analysis approach and research methodology for major supermarket chains competing in a large metropolitan area. The distinguishing feature of the study is to demonstrate a practical procedure for market segmentation and competitive analysis. The approach demonstrates the usefulness of integrating competitive analysis with market segmentation to improve strategic decision making in a highly competitive retail business. The methodology is general enough that it can easily be adapted to other retailing contexts and situations. REFERENCES

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