Peter Schnedlitz, Dirk Morschett, Thomas Rudolph, Hanna

Peter Schnedlitz, Dirk Morschett,Thomas Rudolph, Hanna Schramm-Klein, Bernhard Swoboda (Eds.)

European Retail Research

GABLER RESEARCH EditorsDirk Morschett, University of Fribourg, Switzerland, [email protected] Rudolph, University of St. Gallen, Switzerland, [email protected] Schnedlitz, Vienna University of Economics and Business, Austria, [email protected] Schramm-Klein, Siegen University, Germany, [email protected] Swoboda, University of Trier, Germany, [email protected]

EDITORIAL ADVISORY BOARDIn the editorial advisory board, a number of distinguished experts in retail research from different countries support the editors:

– Steve Burt, University of Stirling, UK– Michael Cant, University of South Africa, South Africa– Gérard Cliquet, University of Rennes I, France– Enrico Colla, Negocia, France– Ulf Elg, Lund University, Sweden– Martin Fassnacht, WHU - Otto Beisheim School of Management, Germany– Marc Filser, University of Dijon, France– Thomas Foscht, University of Graz, Austria– Juan Carlos Gázquez Abad, University of Almeria, Spain– Arieh Goldman, Hebrew University, Israel (†)– David Grant, University of Hull, UK– Andrea Gröppel-Klein, Saarland University, Germany– Herbert Kotzab, Copenhagen Business School, Denmark– Michael Levy, Babson College, USA– Cesar M. Maloles III, California State University, USA– Peter J. McGoldrick, Manchester Business School, Manchester University, UK– Richard Michon, Ryerson University, Canada– Dirk Möhlenbruch, University Halle-Wittenberg, Germany– Heli Paavola, University of Tampere, Finland– Luca Pellegrini, IULM University Milan, Italy– Barry Quinn, University of Ulster, Northern Ireland– Will Reijnders, Tilburg University, The Netherlands– Thomas Reutterer, Vienna University of Economics and Business, Austria– Jonathan Reynolds, Oxford, UK– Sharyn Rundle-Thiele, University of Southern Queensland, Australia– Brenda Sternquist, Michigan State University, USA– Gilbert Swinnen, Universiteit Hasselt, Belgium– Ikuo Takahashi, Keio University, Japan– Waldemar Toporowski, University of Goettingen, Germany– Volker Trommsdorff, Technical University Berlin, Germany– Gianfranco Walsh, Koblenz-Landau University, Germany– Barton Weitz, University of Florida, USA– Joachim Zentes, Saarland University, Germany

Peter Schnedlitz, Dirk Morschett,Thomas Rudolph, Hanna Schramm-Klein, Bernhard Swoboda (Eds.)

European Retail Research 2010 | Volume 24 Issue I

RESEARCH

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Preface of the Editors

EUROPEAN RETAIL RESEARCH is a new bi-annual that is in the tradition of the reputable

and distinguished book series „Handelsforschung“ (Retail Research) which has been published

by Prof. Dr. Volker Trommsdorff in Germany for more than two decades. With Volume 22

appearing in 2008, Prof. Trommsdorff handed over this publication to a team currently consist-

ing of retail researchers from Austria, Germany and Switzerland. The aim of the publication is

to publish interesting manuscripts of high quality with a focus on retail researchers and lectur-

ers, retail students and retail executives. As it has always been, retail executives are part of the

target group and the knowledge transfer between retail research and retail management remains

a part of the publication’s concept. Following the international development in the field of retail

research and publication, the new team has decided to introduce some changes and extensions

to the concept:

- Language - articles will appear in English

- Content - manuscripts will be double-blind reviewed and the book will invite manuscripts

from a wider regional context but with a focus on Europe

- Institutional - a permanent team of editors will be supported by an Editorial Advisory Board

Frequency - EUROPEAN RETAIL RESEARCH will be published in two parts per year, Issue I

in spring and Issue II in fall. The review process will support the authors in enhancing the qual-

ity of their work and will offer the authors a reviewed book as a publication outlet. Part of the

concept is an only short delay between manuscript submission and final publication, so the

book is intended to become a quick publication platform. Therefore the deadlines are always

fixed. Issue I (publication in April): submission deadline: End of August, notification of accept-

ance: End of October, re-submission of revised manuscript: End of January. Issue II (publica-

tion in October): submission deadline: End of February, notification of acceptance: End of

April, re-submission of revised manuscript: End of June. An electronic database with all pub-

lished articles will be prepared and will be available with an adequate delay after the printed

edition.

EUROPEAN RETAIL RESEARCH welcomes manuscripts on original theoretical or conceptu-

al contributions as well as empirical research – based either on large-scale empirical data or on

the casestudy method. Following the state of the art in retail research, articles on any major

issues that concern the general field of retailing and distribution are welcome, e.g.

- different institutions in the value chain, e.g. customers, retailers, wholesalers, traders, service

companies such as logistics service providers, but also manufacturers’ distribution activities,

- different value chain processes, esp. marketing-orientated processes (e.g. innovation, customer

relationship management, category management), supply chain processes (e.g. purchasing,

logistics), organisational processes, informational or financial management processes,

V

- different aspects of retail management and retail marketing, e.g. retail corporate and compet-

itive strategies, incl. internationalisation, retail formats, e-commerce, customer behaviour,

branding and store image, retail location, assortment, pricing, service, communication, in-

store marketing, human resource management,

- different aspects of distribution systems, e.g. sales management, key account management, ver-

tical integration, alliances and networks, channel power, conflicts and multi channel strategies.

However, EUROPEAN RETAIL RESEARCH is also interested in manuscripts that focus on

wholesaling, distribution concepts, specific strategies or country markets and we accept that

non-English literature is used to. Basically, we are considering different types of papers. Arti-

cles can be based on large-scale empirical data, on the case-study method or on conceptual

issues:

- Research articles should provide a relevant and significant contribution to theory and prac-

tice; they are theoretically well grounded and methodologically on a high level.

- Manuscripts submitted as more practice- or conceptual-based articles show new questions,

issues, solutions and contributions from practice or conceptual issues. These papers are

selected based on relevance and continuing importance to the future retail research communi-

ty as well as on originality.

Manuscripts are reviewed with the understanding that they are substantially new, have not been

previously published in English and in whole, have not been previously accepted for publica-

tion, are not under consideration by any other publisher, and will not be submitted elsewhere

until a decision is reached regarding their publication in EUROPEAN RETAIL RESEARCH.

The only exceptions are papers in conference proceedings that we treat as work-in-progress.

Furthermore, the editors invite articles from specific authors, which address the retailing situa-

tion in a specific European country. Those articles will also be double blind reviewed.

Contributions should be submitted in English language in Microsoft Word format by e-mail to

the current EUROPEAN RETAIL RESEARCH managing editor or to info@european-retail-

research.org. Questions or comments regarding this publication are very welcome. They may be

sent to one of the editors or to the above mentioned e-mail-address.

Full information for prospective contributors is available at: http://www.european-retail-

research.org. For ordering an issue please contact the German publisher “Gabler Research”

(www.gabler.de).

We are extremely grateful for editorial assistance provided by Eva Lienbacher, Robert Zniva and

Ruth Angerer.

Fribourg, St. Gallen, Siegen, Trier and Vienna, Summer 2010

Dirk Morschett; Thomas Rudolph; Hanna Schramm-Klein; Bernhard Swoboda

Peter Schnedlitz (managing editor for Volume 24 Issue I)

VI Preface of the Editors

Contents

Interactive Web 2.0 Applications in the Multi-Channel Marketing for Retailers.................. 1

Dirk Möhlenbruch, David Elias Blunck and Falk Ritschel

How to Maintain a Process Perspective on Retail Internationalization: The IKEA Case ..... 27

Anna Jonsson

Trade Credit Periods in Retail Commerce for Products of Mass Consumption:An Application to Spanish Legislation.................................................................................. 51

Javier Oubiña, Jaime Romero and María Jesús Yagüe

Customer Satisfaction with Loyalty Card Programs in the Austrian Clothing Retail Sector- an Empirical Study of Performance Attributes Using Kano’s Theory ................................ 71

Eva Walter, Claudia Steyrer and Stefan Wiesel

Clustering Customer Contact Sequences - Results of a Customer Survey in Retailing........ 97

Sascha Steinmann and Günter Silberer

The In-Store Antecedents and Consequences of Perceived Shopping Valuefor Regularly Purchased Products ......................................................................................... 121

Wolfgang Weitzl and Robert Zniva

Strategic Differentiation in the Japanese Convenience Store Business.The Example of Lawson’s Format Variation.......................................................................... 149

Ari Huuhka, Nobutoshi Shimizu and Martti Laaksonen

Country Reports

Retailing in the United Kingdom - a Synopsis...................................................................... 173

Steve Burt, Leigh Sparks and Christoph Teller

The Danish Retail Market: Overview and Highlights ........................................................... 195

Jesper Aastrup, Mogens Bjerre, Niels Kornum and Herbert Kotzab

EUROPEAN

RETAIL

RESEARCHVol. 24, Issue I, 2010, pp. 1-222

Interactive Web 2.0 Applications in the Multi-Channel Marketingfor Retailers

Dirk Möhlenbruch, David Elias Blunck and Falk Ritschel

AbstractThis literature review recapitulates the state of the art knowledge about the characteristics ofWeb 2.0 instruments and deduces application options for multi-channel marketing by retailers.The different instruments of Web 2.0 and the theoretical foundations of multi-channel market-ing are introduced. The authors assign the specific Web 2.0 applications through the instrumen-tal areas of retailing by confronting their particular features and functions with the specificchances, risks, goals and the operational and strategic demands (needs) of multi-channel man-agement. This systematization gives retailers the chance to choose their instrumental assign-ments strategically, based on their specific goals in multi-channel marketing.

KeywordsRetailing, Multi-Channel Marketing, Web 2.0, Cross-Channel

Dirk Möhlenbruch (corresponding author)Department of Business Administration, Martin-Luther-University Halle-Wittenberg, Halle, Germany(Tel: ++49 345 5523391; E-mail: [email protected]).

David Elias BlunckInstitute for Innovation and Entrepreneurship, Martin-Luther-University Halle-Wittenberg, Halle,Germany.

Falk RitschelDepartment of Business Administration, Martin-Luther-University Halle-Wittenberg, Halle, Germany.

Received: September 3, 2009Revised: February 23, 2010Accepted: February 25, 2010

EUROPEAN

RETAIL


1. Introduction

The discussion about Multi-Channel-Systems in retail business might not be new - but it

has gained momentum against the background of consolidations and mergers, the develop-

ment of information and communication technologies (ICT) and experiences of disillusion-

ment with pure e-commerce players (Dohmann et al. 2002; Barth et al. 2007). This is

additionally evidenced by the increasing number of academic publications and the gain in

importance of multi-channel distribution in retail-practice - where many pure e-players have

augmented their structure of distribution with alternative channels (Tang/Xing 2001; Schögel

et al. 2004).

Despite the lively discussions on the part of academic researchers and the growth of experience

in practice, there is still an unsatisfactorily low level of knowledge - which might be the reason

why companies often fail in the realization or achieve only suboptimal levels of channel inte-

gration - even though the domination of multi-channel companies in the B2C e-commerce sec-

tor (with the exception of a few companies, e.g. eBay or Amazon) implies a great potential for

success (Hudetz/Baal 2005; Emrich 2008). For this reason most authors seem to agree upon the

potential as well as the relevance of multi-channel distributors. Hudetz/Baal identify multi-

channel companies “a good starting base to get even more dominant in the future” (Hudetz/Baal

2005, p. 136). Emrich agrees that multi-channel strategies might become “crucial to survive”

(Emrich 2008, p. 1), and Ahlert/Hesse (2003) substantiate with empirical studies the preference

that customers have for multi-channel distributors.

The ability to establish, integrate and uplink different distribution and communication channels

becomes one of the main challenges in retail management. This applies especially against the

background of the enormous intensity of competition in this field. Even though there is an

undisputedly high impact of the internet on the buying decisions of consumers, many retail

companies use this important medium not as a strategically integrated interactive communica-

tion and customer-retention tool, but more like an encrypted business card (Silberer 2002). In

this context, Web 2.0 and its applications gain importance but are often disputed as controver-

sial. Neither Web 2.0 nor its applications can be limited to a single technology - in fact it should

be understood as new perceptions and uses of the internet, with a strong leaning towards inter-

action (Thackeray/Neiger 2009). While roles on the internet have been separated in the past

between the active content producers and passive content consumers, today the use of inter-

active instruments - like wikis, blogs, virtual communities and RSS feeds for example - allows

not only new business models in e-commerce but enables a close and interactive dialog between

companies and their relevant stakeholders (Kollmann/Häsel 2007).

Despite the already-mentioned range of scientific and practical-oriented specific literature

about the topics of Web 2.0 and multi-channel marketing and against the background of the

2 European Retail Research, Vol. 24, Issue I, pp. 1-26

importance of the online-channel, surprisingly little attention has been paid to the specific

potentials of Web 2.0 applications in multi-channel marketing in the retail business, and Web

2.0 is still in an experimental stage in practice (Marfleet 2008; Ailawadi et al. 2009). This arti-

cle therefore describes the necessary theoretical backgrounds of multi-channel marketing and

Web 2.0, displays the characteristics of the specific instruments, and confronts their particular

features and functions with the explicit chances, risks, goals and operational- as well as strate-

gic demands of multi-channel management to deduce a systemization of application fields of

Web 2.0 applications through the different instrumental areas of retailing. This gives retailers

the chance to choose their instrumental assignments strategically based on their specific goals

in multi-channel marketing.

2. Theoretical Background of Multi-Channel Retailing

The complexity and heterogeneity of retailing, combined with inconsistent market structures

(Zentes/Morschett 2005) are important reasons that a comprehensive characterization of the

market environment cannot be carried out in adequate dimensions. We will therefore limit the

description to the spurring factors with the highest influence on the general development in

retail business (Barth et al. 2007) and on Multi-Channel-Business in particular (Ahlert/Hesse

2003; Bachem 2004). Increasing mobility and the development of ICT (which, among other

things, leads to new marketing channels and increasing capacities in the back end) expand the

competitive situation in retail business to an additional geographical level (Purper 2007). The

intensity of competition increases the need for a consistent orientation toward customer require-

ments, market demarcation, and boosts accelerated tendencies towards consolidation processes

in reseller markets (Zboralski/Gemünden 2004; Weinberg/Purper 2006). Accordingly, the

changes in society’s values - which precede the changes in buying behavior - have a higher

impact on developments in the retail business. There has been a lively scientific discussion

about changes in consumer behavior for quite some time, but the dynamics as well as the

dimensions of those developments present themselves in a new quality (Foscht/Swoboda 2007).

While the debates about brand- and price-related behavior have been supplemented since the

early 1990s by terms like “hybrid customer”, “smart shopper”, “bargain shopper”, “variety

seeking” and “convenience orientation” is the phenomenon of “multi-optional consumers”

increasingly mentioned in modern marketing literature (Hurth 2002; Foscht/Swoboda 2007).

Those types of consumers follow different acting principles at once and change their behaviors

and group memberships as well, which results in multi-optional buying behavior and shifts

between different distribution channels during a single buying process (Wegener 2008; Ahlert/

Hesse 2003). Their differentiated needs are not limited to the actual transaction but range over

the whole buying process including pre- and post-buying phases (Möhlenbruch/Schmieder

2002). These developments have a great impact on multi-channel distribution and lead to the

Möhlenbruch, D.; Blunck, D.E.; Ritschel, F. 3

necessity of meeting the differentiated needs of consumers during the various phases of a buy-

ing process through the implementation of an integrated multi-channel system (Hurth 2002;

Kilcourse 2008; Kwon/Lennon 2009).

Even though multi-channel marketing is not a new phenomenon (Möhlenbruch/Schmieder

2002; Barth et al. 2007.) the scientific literature does not offer a standardized definition

(Schramm-Klein 2003; Hudetz/Baal 2005; Wirtz 2008). In fact there are a multitude of terms

and definitions dealing with sales and communications via several channels which appear sim-

ilar at a first glance, but often differ in meaning (Wirtz 2008). Multi-channel marketing of

retailers is defined in this paper as “market oriented management of retailers using a multitude

of parallel and integrated information, communication, and distribution channels” (Möhlen-

bruch/Schmieder 2004, p. 104). This includes the strategic planning and operational application

of the whole marketing-mix of retailers with the objective to develop new distribution channels

or to strengthen existing ones, respectively. While strategic retail management establishes new

potentials for success, operational retail management is geared to tap the full potential of exist-

ing chances for success and defines the operational instruments to serve as strategic pillars

(Ahlert 2002).

The integration of different channels with an otherwise homogeneous system allows retailers to

meet the multi-optional behavior of consumers and their differentiated needs during the respec-

tive phases of a buying process (Schramm-Klein 2003; Möhlenbruch/Schmieder 2004). There

are potentials for integrated multi-channel systems, especially during the initiation phase, for

upscale products and distance selling (Baal/Hudetz 2007). Additional customer acquisition,

retention and win-back potentials open up through the integration of distance channels, the

expansion of market areas and the chance to meet the channel-specific preferences of cus-

tomers (Schröder 2005). Furthermore, empirical studies prove a higher loyalty of consumers to

integrated Multi-Channel-Systems (compared to mono- or multiple-channel retailers) and high-

er turnover per customer and therefore invalidating the fear of channel cannibalization

(Ahlert/Hesse 2003; Baal/Hudetz 2004; Wegener 2008). According to these findings, multi-

channel retailing allows for increasing market share at the expense of competitors’ (Schramm-

Klein 2003; Schröder 2005). The combination of different channels can also build trust and

enlarge the perceived service competence. Additionally, the integration of innovative channels

can help to vitalize the brand image and demarcate markets (Wegener 2008). Last, but not least,

the potential to decrease costs in communication and market research through direct- and indi-

vidual customer approaches and an active navigation of interaction to the most efficient chan-

nel should be mentioned (Schröder 2005). On the other hand, channel conflicts and a lack of

channel flexibility are potential risks of multi-channel strategies (Kilcourse 2008). If synergetic

effects and goodwill transfer are seen as important goals of an integrative branding of market-

ing channels it is obvious that negative experiences can also have unwanted effects on the whole


system (Hurth 2002). Imperfect channel integration can complicate communication with cus-

tomers and can lead to confusion in cases of incoherent goods and services, image positions,

levels of prices, and service quality in the respective channels (Möhlenbruch/Schmieder 2002;

Ahlert/Hesse 2003; Kreutzer 2008).

Integrative planning, monitoring and controlling of different channels and their differentiated

sale- and handling processes, combined with the necessary rearrangement of cross-channel

customer contacts, implies a high coordination effort and often leads to the limiting of integra-

tion efforts to standardized purchase transactions (Ahlert/Hesse 2003; Wegener 2008). Realiz-

ing the already mentioned potentials for success, however, requires increased effectiveness of

market cultivation as well as using efficiency- and synergy effects (Bachem 2004). While the

first is dependent on a consistent perception of the retail brand in all channels, integrated mer-

chandise planning, control systems and customer relationship management system are basic

prerequisites for the second (Hurth 2002; Böing et al. 2003). This requires a corresponding

infrastructure, cross-channel coordination of the marketing-mix, and a relocation of channel-

specific marketing budgets (Hansen/Madlberger 2007). The knowledge of customer needs and

their basic trends gains importance in the specific market environment of retailing (Möhlen-

bruch et al. 2007; Promondo 2007). Multi-channel retailers have to use all contact points with

their customers to gather relevant information concerning buying behavior and have to combine

this with a comprehensive and differentiated picture of consumers (Schröder 2005). In chapter

3 we will analyze the specific contributions of Web 2.0 applications to the already mentioned

requirements, tasks and goals of multi-channel marketing.

3. Foundations of Web 2.0

The internet and associated technologies are developing rapidly. Consequently, the portfolio of

technical resources for the effective and efficient ascertainment, archiving, processing, and

transmission of data, information and knowledge is continuously growing. Accordingly, the

electronic realization of business processes through electronic media has obtained more and

more economic relevance for an increasing number of vendors in the last years (Lihotzky

2003). Many of the technological changes are summarized under the term “Web 2.0”, which is

not yet precisely defined. Most of the attempts to define Web 2.0 go back to a definition of

O’Reilly, who understands the term more as an approach than a technology (O’Reilly 2005).

Even though there is no precise definition, most publications seem to agree in the characteriza-

tion of the central idea of Web 2.0: Internet users transform from passive consumers of mostly

static content to active, content producing and distributing participants (Kreutzer/Merkle 2008).

According to O’Reilly (2005), there are a number of other characteristic requirements for appli-

cations belonging to the term Web 2.0:


- The application is net based; only a web browser is essential.

- The content is not static but is going to be dynamically generated. It will change depending

on the input of the user.

- There are possibilities for users to generate content by themselves.

- Role and authorization models enable the differentiation of who is enabled to view which

content and who is allowed to edit the information.

- Users own their data and are able to edit it by themselves. There are possibilities for personal-

ized content and layout.

- Users are able to comment on articles by other people and communicate among each other.

- A strong community feeling is going to develop between users.

Since economic and technical principles are as important for Web 2.0 applications as socio-

economic, psychological and legal aspects, it’s safe to say that the limitation of the phenomenon

Web 2.0 to specific instruments or technologies is not valid. In fact it is rather based on a modi-

fied attitude towards electronic media on the whole and the internet in particular (Kollmann/

Häsel 2007; Möhlenbruch et al. 2007). To discuss the specific potentials of Web 2.0 applications

for multi-channel marketing for retailers later on, it first seems necessary to take a closer look at

the paradigms and underlying motivational structures of internet users. Due to the dynamic

changes in electronic media the following explanations can make no claim to be complete.

Efficient search-engines, open interfaces and usability of web-based software gain in impor-

tance by enabling user self-service and orientation (Alby 2008; Kreutzer/Merkle 2008; Töpfer

et al. 2008). This technological development combined with growing user participation enable

new possibilities for personalization and individualization and therefore a consequent orienta-

tion on the differentiated consumer needs (Schenk 2007). Moreover, internet applications are

increasingly based on user-generated content and have to open themselves for participation

(O’Reilly 2005; Schenk 2007). At the same time Web 2.0 is changing the proportions between

individuality and collectivity, culminating in a virtual collective intelligence which is learning

with every new participator (Richard 2008). Additional benefits in terms of knowledge quality

improvement are generated through collaborative inspection, systematization and validation of

information on the internet (Kollmann/Häsel 2007). Those benefits increase, according to Met-

calfe’s Law, with the number of active internet users (network effects) which develop a sense of

community over the time (Möhlenbruch et al. 2008). Nevertheless, Web 2.0 applications have

to be understood as a part of a continuous development process which is not an expression of

defective planning but of inherent adaption flexibility (Kollmann/Häsel 2007). Simplicity and

lightweight user interfaces of net-based software applications have relatively low hardware

requirements for end-user devices and boost an increasing convergence of the internet, tele-

vision and mobile telephony (Kollmann/Häsel 2007). Open interfaces and technologies like

AJAX enable the combination of separated (knowledge) resources as well as the cross-linking

of interactive information and collaboration (O’Reilly 2005; Souders 2007).


It has to be mentioned that user generated content and the joint development of open source

software create specific problems concerning copyrights. On the one hand it is essential to pro-

vide open licenses to benefit from the collective cooperation in communities but on the other

hand there are growing concerns of users about the (commercial) use of personalized data, con-

tent and applications (O’Reilly 2005). But it’s not enough to limit the view on new technologi-

cal options of participating users, in fact it’s necessary to take a closer look at the motivation of

users to participate and provide information and content (Schenk 2007). Self-expression and

image cultivation by publishing, for example, one’s own interests, opinions or achievements are

the driving factors for providing user generated content (Mühlenbeck/Skibicki 2008). This is

closely connected to a general talkativeness of some individual users and their desires for (vir-

tual) contacts. Needs can be satisfied through Web 2.0 in manifold ways (Sassenberg 2008).

Furthermore there are a lot of platforms like Second Life or Weblin which allow users a tem-

porarily escape from reality (escapism) and enable them to present themselves in a way they are

prevented from doing in real life (Kreutzer/Merkle 2008). Since the number of active partici-

pants in Web 2.0 is much lower in proportion to passive content consumers, and the quality of

additional benefits and network effects depends on the amount and quality of user-generated

content, provider and other business models should try to satisfy the commercial motives of

users in order to reward their content supply (Drüner et al. 2007). While searching for relevant

information during buying decisions reduces transaction costs, consumer-generated content

helps the social orientation and reduces the social risks of buying decisions. Moreover, there is

a strong bonding phenomenon inside social communities, even for passive users who often pro-

vide each other additional technical assistance for the use of products or services (Hennig-Thu-

rau 2005). The paradigms described above lead to a number of applications often linked to the

term Web 2.0 (see Figure 1).


Figure 1: Description of Web 2.0 Applications

Application Definition Authors

Customer Reviews Virtual opinion platforms are special forms of virtual Richter et al. 2007;and Virtual Opinion communities and offer users features to evaluate revue Baumgarth 2008;Platforms and/or comment the service-performance or product Enderle/Wirtz 2008;

quality. Customer reviews are able to influence the Töpfer et al. 2008.buying decision process and enable companies tocommunicate a high level of transparency.

Mashups Mashups are (re-)combinations of different, technically Alpar et al. 2007; independent internet applications (or their content, Alby 2008; respectively) to a new service. The individual services Emrich 2008; are linked on the basis of open interfaces and generate Möhlenbruch et al. added value by connecting different bits of content 2008;(like store locations or transparent price comparison e.g.). Hudson-Smith et al.

2009.

(Continued at p. 8)


Figure 1: (Continued)

Application Definition Authors

Podcasts/ Podcasts/Vodcasts are digital audio-/video files which Bienert 2007;Vodcasts can be downloaded to a computer or any other Haygood 2007;

compatible device (e.g. a mobile phone) and consumed Klee 2007.independently of time and place. So called “podcatchers”allow users to subscribe to podcasts and download themautomatically.

RSS-Feeds RSS is a file format for the XML-based exchange of Klee 2007;information of all kinds and it allows users to subscribe to Alby 2008;regularly-updated content automatically. The information is Bienert 2007;archived and provided to feedreaders which are integrated Koller/Alpar 2008.into almost all modern e-mail software and web browsers.If the information on a website changes, the feed will beupdated and a notification (either an abstract or thecomplete file) will be sent to the feedreader.

Social Social bookmarking can be described as the storage, Bienert 2007; Bookmarking exchange and indication of personal bookmarks with Möhlenbruch et al. and Tagging content describing catchwords via Social Bookmarking 2008;

Services like mister-wong.de, del.icio.us, yigg.de or Warr 2008;furl.net. Panke/Gaiser 2009.

Social Shopping The term social shopping describes the adoption of the Purper 2007; interaction potentials of virtual communities, regarding the Richter et al. 2007;product purchased or their combination with online-shops Mühlenbeck/Skibicki(combined with it being possible to exchange, for example, 2008;personal experiences or concrete recommendations). This Schäfers 2008;implies that socialization processes, human expertise and Töpfer et al. 2008.an additional level of cooperation and communicationin e-commerce are taking center stage.

Virtual Social Social networks are definable, (sometimes loosely-) linked Baeumle-Courth etNetworks nodes of actors/groups of actors (individuals, families, al. 2004;

organizations, political parties, etc.) tied together by one Kunz/Mangold 2004;or more types of interdependence based on power, rituals, Cyganski/Hassvivid exchange of information, emotional bonds etc. 2008.Modern information and communication technologiesfacilitate the dissolution of spatial determinations so thatvirtual social networks can emerge in intangibleenvironments such as the Internet.

Virtual Worlds Internet based virtual worlds are artificially created, Thomas/Stammer-three-dimensional simulations in which users move via mann 2007.animated alter-egos (so called avatars) in real time andwithin the scope of specially defined physical laws.

Weblogs A Weblog (short: blog) is a regularly updated chronological Reitler 2007. listing of articles (similar to a diary) published on theinternet.

Wikis Wikis are content management systems which do not Algesheimer/Leitl differentiate between read and write access and which 2007;allow the editing of content directly and without any special Pleil/Zerfaß 2007; programming-knowledge via the web browser, and to Cronin 2009.influence the whole structure of the system as well bylinking to internal or external content.

4. Web 2.0 in Multi-Channel Retailing

Assuming a sustainable influence of Web 2.0 on consumer behavior, suppliers will have to meet

those developments (Graßmann 2004). The differentiation between strategic and operational

fields of Web 2.0 applications in multi-channel retailing, used to systemize the following state-

ments cannot always be mutually exclusive and exhaustive - a problem of demarcation that

Ahlert (2002), using the example of information in retail-management, illustrates that which

“do not per se have a strategic or an operational character”.

4.1. Strategic Potentials

As mentioned before, retailers find themselves in an increasingly dynamic and discontinuous

environment, a situation that requires and complicates long-term strategies at the same time. A

key responsibility of strategic planning is to secure existing potentials and to develop new ones

for success in the already mentioned areas of retail management (Ahlert/Kenning 2007).

4.1.1. Market Research

Marketing decisions require an adequate information background, especially in view of actual

and prospective buying behavior, its principles and variability (Bänsch 2002). A comprehensive

understanding of customer needs and preferences can lead to significant advantages in competi-

tion (Zboralski/Gemünden 2004). Accordingly, the collection of information about customers and

their behavior via interactive media gains importance for retailers (Möhlenbruch/Schmieder

2004). This applies especially for multi-channel retailers which, in the ideal case, manage to col-

lect information about their customers at every contact point (Schröder 2005; Emrich 2008).

Hence Web 2.0 instruments can be used as subjects of research (e.g. the exploration of virtual

communities in view of consumer behavior) and as platforms for research (e.g. investigation of

market acceptance of innovative products) (Kunz/Mangold 2004). User-generated content, espe-

cially, allows deep insights into customer requirements and gives access to information about

(potential) consumers (Drüner et al. 2007; Stampfl 2007). Systematic monitoring of blogs,

forums, tagging platforms or virtual communities delivers information about company-, product-

or brand-image, for example, and allows the researcher to detect social trends, changing lifestyle

concepts or hints about the general change in values (Drüner et al. 2007; Ammann/Bentele 2008).

In addition there are new approaches for the categorization of consumers in the context of cus-

tomer value analyses created through the monitoring of user-generated content in communities,

blogs or forums (Stampfl 2007). The collected data can be used to develop user-, consumption-

and preference-profiles or to identify lead users (Drüner et al. 2007). While the transfer of

industry driven lead-user concepts to consumer goods marketing is considered to be difficult

due to the multitude of potential customers and the wide range of goods and services, the mon-


itoring of Web 2.0 creates new approaches to lead-user identification in the retail business

(Ernst et al. 2004). Once identified, relevant content of specific users has to be analyzed in view

of use- and object-knowledge, trend leadership and innovativeness. Similar potentials open up

for customer lifetime value analyses. Taking the social position of users in virtual communities

and their influence potentials on other members into account can lead to completely deviant

customer categorizations (compared to a limitation of the examination on the values of, for

example, sales taken place) (Stampfl 2007). Additionally Web 2.0 allows one to contact relevant

(groups of) customers directly after their identification because, unlike traditional market

research and futurology methods, it connects the information directly to its author (Drüner et al.

2007; Herstatt/Sander 2004). Further dialog can be used to gather additional information

regarding innovation processes, for example, or the (de)listing of products and services, how-

ever, the utilization of Web 2.0 instruments for market research creates specific difficulties as

well. First of all it has to be decided whether to choose a (passive) observation of blogs, commu-

nities etc., or an (active) dialog-oriented exploration (Herstatt/Sander 2004). An active

approach would be pointless without the previous identification of suitable interaction partners,

their approval, and the resources required for individual communication. Similar difficulties

result from the complex task of filtering the relevant information from the enormous multitude

of data. This is shown by Koller/Alpar (2008) in an analysis of selected blogs, where less than

0.5% of private posts dealt with companies, but those usually contained valuable information.

While manual filtering requires a lot of time and resources, automatic scanning methods are not

yet able to assure adequate data quality. Once identified, interesting blogs can be monitored rel-

atively resource-friendly via RSS feeds (Koller/Alpar 2008).

Problems in data quality are one of the major points of critique in online market research and have

to be taken into account in results evaluation (Emrich 2008). It has to be questioned whether or

not users of Web 2.0 applications can build representative samples for general analyses of con-

sumer behavior (Kunz/Mangold 2004). This gets even more important when explorations are lim-

ited to company-owned or topic-specific applications to ensure the exclusivity of the results or

the efficiency of the survey (Ernst et al. 2004). The sheer number of more than 60 million

weblogs with more than 1.2 million daily posts in 2007 (Drüner et al. 2007) demonstrates the

potentials for information as well as the difficulty in identifying relevant data. The results have to

be critically examined in view of representativeness as well. Therefore it does not seem to be

advisable to substitute traditional market research methods through the analysis of Web 2.0 appli-

cations. Rather, it is suggested to use their specific potential to get insights on trends or to include

consumers into innovation processes (Herstatt/Sander 2004; Drüner et al. 2007).

4.1.2. Communication

The integration of new media into consistent communication strategies comprehensive to all

channels is one of the main challenges of multi-channel marketing (Möhlenbruch/Schmieder


2004). In this regard, the potentials of Web 2.0 range from the direct one-to-one dialog between

companies and their relevant stakeholders as well as internal knowledge transfer, up to the com-

munication between customers amongst each other (Bughin/Manyika 2007; Kreutzer 2008).

There are application fields for RSS feeds in communication policy which, for example, allow

one to build an innovative, customized push channel as well as for communities, whose mem-

bers can be provided with additional information (Möhlenbruch et al. 2008). The user-initiated

subscription of feeds and thereby indicated preferences can be used to customize the communi-

cation with an individual customer across all channels. Blogs and their functions for comment-

ing on posts and linking to other blogs provide a fast and wide platform for communication and

can be an adequate basis for viral marketing campaigns (Langner 2007; Emrich 2008). Such an

advertising message can be placed in forums, blogs or communities and spreads out without

any additional costs to the initiator (Mühlenbeck/Skibicki 2008). Humans in social relation-

ships show, according to the sociological concept of “homophily”, similarities regarding their

level of education, social status and their buying preferences, and spread information mainly to

interested people in their environment (Mangleburg et al. 2004; Stampfl 2007). User-initiated

downloads and RSS subscriptoins of pod- and videocasts reduce waste coverage and allow for

the efficient measuring of diffusion rates simply by counting the numbers of accesses and

downloads (Mühlenbeck/Skibicki 2008). Because the message is delivered by one’s own circle

of acquaintances, viral marketing reduces the defensive demeanor of consumers against classi-

cal advertising messages and is able to increase the probability of cognition (Emrich 2008;

Mühlenbeck/Skibicki 2008). Although viral marketing is not bound to specific media in princi-

ple, Web 2.0 enlarges the possibilities for spreading information with enormous speed and

improved efficiency and allows one to influence personal opinions in the buying process (Hein

2007; Schelske 2007). Additionally, the chance increases that topics from the blogosphere or

virtual communities are adopted into the classic media, because Web 2.0 applications are more

and more included into the research done by the classic media (Töpfer et al. 2008). Neverthe-

less, sufficient added value for multipliers, additional incentives and an appealing presentation

of the content remain substantial conditions for viral marketing (Langner 2007). Besides, a con-

tinuous monitoring is necessary to observe the spreading and to influence the discussion by

active participation in case of need (Schönefeld 2006) and it has to be mentioned that there are

varying channel- and product-specific effects (for example, online purchases are nearly twice

as often influenced by viral marketing as offline purchases) of viral marketing (Riegner 2007).

4.1.3. Harmonization and Integration of Marketing Channels

The integration of different marketing channels into a consistent system is an important area of

responsibility for multi-channel marketing. Extensive knowledge about customers and markets

are fundamental for avoiding channel conflicts (Emrich 2008). The specific potentials of differ-

ent Web 2.0 applications to generate information have been stated already, but blogs and cus-


tomer diaries, especially, can help to identify critical incidents in view of channel integration

and should be mentioned again.

Against the background of the intangible elements of the retail business, the reliance of cus-

tomers towards a retail brand can be considered a key factor in retail-management

(Zentes/Morschett 2005). Because positive experiences in one marketing channel have effects

on the whole system of channels it can be assumed that the usage of Web 2.0 applications has

cross-channel positives. Those positives are especially based on a high credibility level of user-

generated content (Enderle/Wirtz 2008). In this regard, wikis, blogs and reviews, especially,

seem to be able to convey authenticity, reliability and transparency (Richter et al. 2007). To

meet the consumer’s expectations, particular care must be taken in regard to the safety of user-

specific information and to the non-restrictive publication of even negative opinions (Möhlen-

bruch et al. 2008; Schnieders 2008). At the same time, Web 2.0 applications can be used to sup-

port cross-channel marketing campaigns. Virtual worlds, for instance, could support real events

or product presentations in an interactive, 3-D environment (Thomas/Stammermann 2007).

4.1.4. Internal Communication and Knowledge Management

Web 2.0 applications also show great promise for internal communication in complex organiza-

tions facing dynamic environments (Warta 2007). As described before, this characterization

applies especially to multi-channel-retailers. Wikis and blogs for example are able to accelerate

communication and collaboration processes and can be cost-saving alternatives to commercial

knowledge management systems (Algesheimer/Leitl 2007; Drüner et al. 2007). Those instru-

ments are especially able to build location-independent communities of practice, to contribute

to organizational learning and to globalize company-specific knowledge in a decentralized

structure (Zboralski/Gemünden 2004; Schütt 2007).

Internal blogs can be used to announce product decisions and to discuss them with branch man-

agers or suppliers in order to include their field-specific knowledge into decision making. Staff

blogs on internal platforms allow employees to document their work, search problem-specific

information and contact persons or to identify best-practice alternatives inside the organization

(Algesheimer/Leitl 2007). In addition, the amount of internal waste coverage by unspecific e-

mail can be reduced through RSS feeds. Wikis could, too, by the construction of a company-

specific knowledge and information platform or they could serve as a continuous basis for

exchange and collaboration, training or further education (Oeltjen 2005; Bienert 2007; Warta

2007). Their main advantage is the objectification of subjective knowledge resources through

collective validation and improvement of existing information (Müller 2008). Since the neces-

sary software is usually open source, free of charge and easy to use, Web 2.0 instruments are

often more cost-effective than commercial applications (Algesheimer/Leitl 2007). Neverthe-

less, the lower number of potential users of internal wikis limits their growth speed and requires


active promotion by the executives to secure a successful implementation. The necessary com-

mitment on the part of the management, however, can be limited because this approach towards

self organized communication and knowledge management defies direct control, makes expert

knowledge available corporation wide and flattens hierarchies (Warta 2007; Müller 2008). To

avoid the misuse of sensitive data, specific access rights for different staff levels and rigid user

administration have to be assured - which erects barriers and reduces the growth speed of inter-

nal wikis even more (Oeltjen 2005).

4.1.5. Acquisition of New Target Groups and Customer Retention Management

Against the background of the dynamic market environment of retail business, retail manage-

ment attaches high importance to the “acquisition of new target groups” and “customer reten-

tion management” objectives (Möhlenbruch/Schmieder 2004). The potential contributions of

Web 2.0 to meet those objectives are mainly based on the ability to enable interactive commu-

nication between retailers and (potential) customers as well as among customers themselves

(Drüner et al. 2007; Ammann/Bentele 2008; Kreutzer/Merkle 2008). This can be illustrated

with the example of a telecommunication company which was able to raise the speed of the

acquisition of new customers up by a factor of five by addressing community members having

contact with steady customers (Stampfl 2007). Web 2.0 is especially able to increase the level of

awareness of retail brands in young target groups with a high affinity for the internet (Wegener

2008; Thomas/Stammermann 2007). Based on the assumption that perceived interactivity of a

website goes along with a more positive brand- and company image and an increasing involve-

ment of users into the communicated content (Gerpott 2004; Lueg et al. 2006), it can be

assumed that there are positive effects of Web 2.0 on customer retention management. Besides

the use of communities (esp. company-owned communities) which are able to increase the den-

sity of communication, design of an interactive brand environment and expanding the customer

relationship on an emotional level; pod- and videocasts, RSS feeds or wikis can affect customer

retention in a positive way (Wirtz 2001; Kunz/Mangold 2004; Möhlenbruch et al. 2008). While

communities enable retailers to provide customers with additional and emotionally charged

information during the post-purchase phase (Klee 2007), wikis and their user generated content

can be used to replace FAQs and act as a first source consulted by customers in case of prob-

lems (Pleil/Zerfaß 2007). Furthermore, the cooperative buying processes in social shopping

enhance the tendency for cross- and re-buying, the recommendations of other community mem-

bers affect trust and customer loyalty, and the emerging social bonds create switching costs

(Hsieh et al. 2005; Möhlenbruch et al. 2008; Verhoef et al. 2009). Additionally, there are inter-

esting perspectives to identify constraining factors for successful customer retention manage-

ment via customer diaries or blogs, respectively. The chronological listing and the detailed

description of customer contacts allow for the identification of crucial experiences and to dis-

play them as whole chains of events. The systematic comparison of different customer diaries


can provide an overall picture of the customer experience and become the basis for uncovering

drivers of enthusiasm and frustration (Bauer et al. 2008). Those findings can then be transferred

into strategic recommendations to optimize customer experiences. This field of application

gains importance against the background of the heretofore mentioned problems regarding the

integration of different marketing channels into an integrated multi-channel-system and multi-

channel-behavior.

Those positive effects of Web 2.0 instruments for customer retention management and the

acquisition of new target groups come along with the risk of negative expressions of opinions

and spill-over effects on other customers (Herstatt/Sander 2004). Furthermore, attempts at

manipulation of communities can be perceived as annoying by their members (Möhlenbruch et

al. 2008). Multi-channel retailers should also try moderate dosages of the interaction potentials

of Web 2.0 and to regard it as situational to avoid additional negative attitudes caused by cogni-

tive overload (Gerpott 2004). It is also disputable that retailers will always succeed with build-

ing their own virtual communities because their wide product ranges and heterogeneous target

groups reduce the chance to reach a critical mass of community members with equal interests.

To avoid this, thematic networks could be a solution.

4.2. Operational Potentials

Multi-channel marketing includes the operational planning, implementation and evaluation of

all demand-orientated instruments: those that contain merchandise, price and communication

(Barth et al. 2007).

4.2.1. Merchandise

The orientation by retailers on customer value gains importance because of the competitive

environment and high failure rates of market launches for consumer products (Ernst et al. 2004;

Zboralski/Gemünden 2004). There are interesting fields of application for Web 2.0 instruments

in view of the differentiation potentials of merchandise accruing from the analysis of user-gen-

erated content. On the one hand, Web 2.0 enables retailers to detect wishes, needs and trends

(for example, through passive monitoring of communities, blogs, social bookmarking plat-

forms), while on the other hand it allows them to directly integrate customers into product

(range) development processes (Schönefeld 2006; Schnieders 2008). A representative survey

about the buying behavior of Germans regarding distance selling verifies that consumers want

their needs to be taken into account and that they are willing to participate in innovation

processes (Promondo 2007). This would secure the consequent orientation towards customer

value and could contribute to cost efficiency, reduced development times and accelerated mar-

ket launches (Bartl et al. 2004; Algesheimer/Leitl 2007). It additionally communicates close-


ness to customers and can therefore have a positive effect on company image and customer

acquisition (Herstatt/Sander 2004).

RSS feeds enable a customized information supply about product availability and additional

services and the information displayed about preferences can be used to optimize the product

line (Möhlenbruch et al. 2008). Accordingly, this can help to optimize goods in stock and gen-

erate cross-selling effects. The German multi-channel retailer “Tchibo” follows an interesting

approach to customer integration into its internal processes with the “Tchibo-Ideas” communi-

ty, www.tchibo-ideas.de, a platform where users can post interesting innovations and participate

in idea competitions. It is intended to check innovative ideas in view of technical feasibility and

to realize them in collaboration with the inventor. Even though Tchibo ideas has engendered no

successful product launch yet, the potentials in principle and the willingness to participate are

proven by the number of 4,500 registered members. But this approach requires the uncondition-

al clarification of patent and copyright issues and it seems to be necessary to offer added value

in monetary form or at least in form of detailed feedback to secure the long lasting participation

of users (Zboralski/Gemünden 2004). The level of openness in a community is a tightrope walk.

Free access opens a community to a wide range of target groups and enlarges the potential for

innovation but this allows access for competitors as well (Ernst et al. 2004). Additionally, the

inclusion of customers into innovation processes can encounter internal opposition which can

manifest itself in specific defense mechanisms of the organization against outside ideas (Bartl

et al. 2004). Furthermore, examples from industry areas hint that there is often not enough

innovation potential inside open communities to actually lead to new products (Herstatt/Sander

2004).

4.2.2. Pricing

The rising importance of electronic business has already had a high impact on price manage-

ment (Wirtz 2001). There are not only new options to orientate pricing more exactly according

to the individual’s willingness to pay, but new ways to realize differentiated prices for cus-

tomized goods and services as well (Weiber/Weber 2002). Insufficient knowledge about the

willingness to pay made such pricing strategies difficult to implement. Monitoring of blogs,

forums and virtual communities can enlarge the basis of information and can simplify such

pricing decisions (Möhlenbruch et al. 2008). Customer oriented pricing can affect the perceived

price-performance risk and helps (along with price transparency and price consultation) to

transfer it to price satisfaction, which strengthens customer loyalty and can result in competitive

advantages (Diller 2005). Following this line of argumentation, customer reviews and rating

functions can increase the perceived price transparency and lower price-performance risks. This

also applies to social shopping, where user-initiated price discussions and collective buying

activities opens up interesting application fields in price policy (Möhlenbruch et al. 2008).


Nevertheless, passive monitoring in view of pricing can quickly become unprofitable because

companies and their pricing policies are seldom subjects of private blogs, forums or communi-

ties. Because value-added-services increase the perceived quality of buying experiences and

decrease price sensitivity, wikis and mashups can have positive effects in price policy, too, and

raise the probability of transfering website visitors into loyal customers (Panten 2005). Theoret-

ically, it is also possible to receive information about the willingness to pay via RSS feeds and

to inform customers about special offers and prices, but this contains the risk of directly inform-

ing competitors about one’s own actions as well. Research also shows that online-consumers are

less price sensitive provided there is non-price information available on brand, quality and prod-

uct features (Ailawadi et al. 2009).

4.2.3. Communication

The individual need of customers for guidance and advice depends on the breadth and depth of

the product mix and its complexity as well as on the necessity for explanations of the products

themselves (Madlberger 2004). This is the determining factor of the necessity for retailers to

have a counseling service. Research shows that the absence of social interaction is one of the

main reasons why many customers still avoid online shopping (Doolin et al. 2006; van Dolen et

al. 2007; Weathers et al. 2007). The quality of electronic counseling depends on the information

content and its didactic preparation, and therefore concerns web-design aspects and editorial

content creation as well. The ability of some Web 2.0 instruments to let users create content or

to embed third-party content proffers interesting fields of application for mashups, wikis, com-

munities and forums to shift retail functions (in this case counseling) over to the customers

themselves and therefore decreases costs. At the same time, retailers are able to reduce the per-

ceived high buying risks in online purchasing through the high levels of reliability and authen-

ticity shown by consumers to user-generated content (Laroche et al. 2005; Enderle/Wirtz 2008).

It must be mentioned though, that this comes with a loss of control for the retailer, especially

regarding statements made on third-party platforms (Hennig-Thurau 2005). Therefore, it seems

useful for companies to provide those functions on their own platforms in order to retain reac-

tivity and at least a limited amount of control in view of dissatisfied customers who expect

transparency, honesty and a satisfactory problem-solving orientation in cases of criticism

(Schnieders 2008). Those heretofore named fields of application for Web 2.0 in sales promotion

and advertising policy can be demonstrated with two examples: The German DIY-store “Horn-

bach” upgraded its website with discussion forums and podcasts and an extensive virtual

helpdesk where users could help each other (Michael/Rose 2008). Ikeafans.com is also an

example of an independent virtual community where members post decoration suggestions or

examples of use, describe their experiences with the furniture manufacturer or discuss the com-

pany and its policy in different forums. The presence of user generated content shows that com-

munities enable companies to get direct access to the wishes and needs of their potential cus-


tomers and even get suggestions for example for visual merchandising or additional fields of

application. The “user-generated help” in cases of product-specific problems generates addi-

tional value for customers and therefore gains relevance in post-purchase marketing (Dellaro-

cas 2006; Enderle/Wirtz 2008; Schnieders 2008).

5. Conclusion and Implications

The previous chapters introduced several Web 2.0 instruments and analyzed their fields of

application in multi-channel marketing. The prevailing growth rates in the sector of Web 2.0

suggest that this is not just short-term hype, but rather a sustainable and strident evolution of the

information society, trending towards increasing levels of participation, information, and inte-

gration of internet users and an increasing influence of consumers on goods and services (Rieg-

ner 2007; Rölver/Alpar 2008). The version number in the term Web 2.0 already implies that this

is just an intermediate step in an ongoing development (Schnieders 2008). Even though some

instruments are currently only used by small user groups, it can be assumed that in the course of

the proceeding development of the internet and end-user devices there will be an ongoing diffu-

sion into all classes of population and age groups (Klee 2007). Even though this opens up inno-

vative perspectives for marketing, there is hardly any systematic utilization of potentials. This

might be the result of the dynamic and complex nature of the topic which contributes to the fact

that the innovation potentials of some instruments are widely accepted, but their whole range of

application fields is not yet identified. The following Figure 2 (see p. 18) shows the results of

this paper and categorizes the range of application fields for Web 2.0 instruments.

The potentials of Web 2.0 instruments accrue from the online channel and allow a manifold

strategic and operational cross-channel usage of their effects based on the interaction between

the different channels in integrated systems. It is therefore possible for multi-channel retailers

to create advantages in competition and increase the potentials for success with the addition of

this approach.

A general rating of the performance potentials of single instruments seems impossible against

the background of inhomogeneous target groups and the range of goods and services of multi-

channel retailers and will therefore be avoided. In fact it is advisable to give specific instru-

ments a thorough context sensitive check regarding the product range and the focused target

group. Although some instruments can be used as substitutes, a coordinated and differentiated

implementation of different Web 2.0 applications, in line with the market, can be considered

meaningful (Alpar et al. 2007; Enderle/Wirtz 2008). Their integration into aligned cross-media

communication strategies can even increase their potentials. Additionally, it seems to be appro-

priate to increase the positive effects of virtual communities for example by exclusive (live)

events for members.



Figure 2: Range of Applications for Web 2.0 in Multi-Channel Marketing

Cross Channel Fields of Application

Strategie Operational

Marketresearch

Communi-cation

Customerretention

Channelintegration

Merchandise Communi-

cationPricing

We

b 2

.0 In

str

um

en

ts

Virtual

Commu-

nities

Subject/Objectof Research

Virtual

Marketing

Targeted Custumer Approach

InternalCommuni-cation

Switichingbarriers

(passive)Monitoring

(active) Integration

Substitutionof retail-functions to Customers

Decreasingbuying risks

Presentation of examplesof use

Monitoringview of willingnessto payWeblogs

Monitoring

Trend Analysis

Lead User

Customer diaries

Critical incidents

Pod/

Videocasts

Informationaboutpreferences

Appealing informationdesign

Emotional/assistanceoriented information

Book-

marking/

Tagging

Monitoring

Trend analysis

SearchengineMarketing

Monitoring

Trend analysis

Virtual Words

Informationabout marketacceptance

Rejuvenation of brand image

Young targetgroups

Assistanceof real Events

3-D Environ-ment forproductpresentation

Wikis Internalknowledge management

Increasingservice

Substitutionof retail-functions through user-gener-ated-content


Presentation of examplesof use

Decreasingprice sensitivity

Social

Shopping

Informationaboutwillingness topay

Crossbuying

Re-buying

Informationaboutwillingnessto pay

Mashups Integration ofthird partycontent

Value-added services

Collective price negotiation

Revisions Monitoring Trust and credibility

Perceived competence

Substitutionof retail-functions through user-generated content


Presentation of Examples of use

RSS-Feeds Preferences

Monitoring ofblogs

Additionalpush-channel

Cross-channel information

Preferences

Cross-selling

Informationaboutproductavailability

Informationaboutwillingnessto pay

In summary it has to be stated that there is still need for further research. For example, compre-

hensive approaches for the systemization of Web 2.0 instruments are still missing. Those

found in the scientific literature are mostly too rough and often not well-founded. Accordingly,

there is need for further (especially empirical) research to explore the motivational structures

and main focuses in use of Web 2.0 instruments as a potential basis for stable approaches to

Strategical

Cross-buyingRe-buying

a systemization of Web 2.0. While some instruments like blogs are used quite frequently and

have already become an important part of corporate communications, other instruments (e.g.

virtual worlds and internal wikis) are still in the stage of development and their fields of

application in multi-channel marketing should be seen as a learning arena. In this regard,

there is a lack of empiric research, e.g. regarding the interrelationship between real and virtu-

al buying behaviors. This applies to market research with Web 2.0 applications and the trans-

fer of lead-user-concepts from the field of industrial goods to consumer goods as well. There

is also a special need for systems for the automatic filtering of relevant posts in forums or

communities (Ernst et al. 2004; Herstatt/Sander 2004). Further difficulties in the practical use

of the described Web 2.0 instruments result from the limited controllability and measurability

of their profit contribution. This applies especially because positive effects will most likely

only appear over time and can hardly be resolved into isolated activities. Because the general-

ly necessary critical mass of participants is often hard to attain and in view of the dynamic

of consumer behavior, the question arises that some instruments like Second Life or other

specific communities might not have enough lasting potential to legitimate long term invest-

ments.

Strategic manipulation by third parties is another risk resulting from handling user-generated

content, reviews and the anonymity of the internet. Dellarocas even models a user-anticipated

manipulation through the retailer in a theoretical game analysis (Dellarocas 2006). Following

these thoughts, companies would actually be forced to manipulate ratings and reviews to match

their anticipated level of manipulation. But this would imply the additional risk of a substantial

loss of image and trust in case of exposure (Enderle/Wirtz 2008). It should also be noted

that, besides of the effects of Web 2.0 on consumer behavior and especially on click behavior,

“traditional” factors like the perceived cost/performance ratio, the urgency of the fulfillment of

demands, the financial situation or buying comfort will not lose their importance (Gerpott

2004).

One of the major tasks of multi-channel marketing in regard to Web 2.0 is therefore to assess

the specific risks and potentials of the different channels and their instruments in view of target

groups and offered goods as well as services, and to derive strategic investment decisions on

that basis. It is essential to consider the resulting changes concerning the increasing transparen-

cy, hierarchical conflicts and the necessary adjustments of company structures and resources.

Capitalization of interaction potentials of the respective Web 2.0 instruments in the context of

multi-channel strategies requires the renunciation of traditional mass-communication and a

new approach towards the identification of target groups. Even though a prognosis as to the

effects of the development of the internet on retail business seems impossible against the back-

ground of its dynamic, it appears that a great deal of adaptability is required to face changes in

the environment for retailers in the era of Web 2.0.


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How to Maintain a Process Perspective on Retail Internationalization:The IKEA Case

Anna Jonsson

AbstractThe retail industry has witnessed fast international growth during the last couple of decades andvarious models and theories have been proposed for how to best explain the process and whysome firms succeed while others fail. Recently researchers have argued that not only do weneed more in-depth longitudinal case studies, and case studies from different sectors, but wealso need to understand the core activity of internationalization, namely the learning processesof how to manage the complex process of entering and operating in different markets. Whilemuch research has focused on market and marketing aspects of internationalization, organiza-tional aspects have received less attention. This article aims to fill that gap by focusing on theinternational home furnishings retail firm, IKEA, and their organizational routines for ensuringand managing a process perspective on their so-far-successful international expansion.

KeywordsRetail, Knowledge, IKEA, Internationalization, Organizational Routines

Acknowledgements: The author would like to thank the following: Handelsbanken’s researchfoundations, SSAAPS, SI, and HUR for funding this study; the staff of IKEA for their help andcontributions; Professor Steve Burt, Professor John Dawson, and her former supervisors Pro-fessor Ulf Elg, Associate Professor Kristina Eneroth and Professor Pervez Ghauri for interest-ing and valuable discussions in relation to retail internationalization and knowledge sharing.

Anna Jonsson (corresponding author)Lund University, School of Economics and Management, Department of Business Administration,P.O. Box 7080, Lund SE-220 07, Sweden(Tel: ++46 (0)46 222 36 48, E-mail: [email protected]).

Received: September 28, 2009Revised: March 4, 2010Accepted: March 15, 2010

EUROPEAN

RETAIL


1. Introduction

The retailing industry has witnessed fast international expansion and many researchers have

sought explanations and new models for explaining the internationalization process and why

some firms succeed while others fail. Recently, Burt et al. (2008) presented a review of existing

models and theories for retail internationalization. It was stressed that when trying to simplify

and categorise, i.e. when trying to present yet another model for retail internationalization,

there is a risk of leaving out important variations in behaviour and outcomes. In their conclu-

sion they state that “retail internationalization is a process in which management learning is a

core activity” (Burt et al. 2008, p. 91). It is further argued that strategies cannot be linear and

static as the internationalization process is very complicated. In general, external market and

marketing aspects of internationalization are often stressed, while internal aspects focusing on

why organizations fail often receive less attention. In order to deepen our understanding of the

retail internationalization process it is crucial to comprehend how firms learn (if they do) from

their experiences of entering international markets. In order to be able to do so there is also a

need for an in-depth study of how an international retail firm learns from its experiences. This

is further supported by Burt et al. (2008, p. 91) who claim that

in order to make sense of strategic business practices and the outcomes which we tend tointerpret, we need more longitudinal and in-depth case histories and studies of many moreretailers from different sectors, countries and with different histories.

Retailing is more complex than and different from manufacturing in several aspects. For exam-

ple, in terms of its strategic objectives, its responsiveness to local culture, the dispersed nature

of operations and the large extent of network activities with many consumers and suppliers (e.g.

Dawson 2000, 2007; Elg 2003; Helfferich et al. 1997; McGoldrick 2002). Retailers offer an

intricate mix of products and services and in order to meet the consumers’ varying and chang-

ing needs and wants requires effective research procedures in order to understand cultural dif-

ferences that will influence buying behavior. Consequently, an international retailer needs to

operate on three organizational levels: a global corporate level; a national market level respon-

sible for stores in the specific market; and at a third level, each individual store (Elg 2005).

Moreover, retailing is interesting, as the industry has witnessed fast international expansion and

the retailer’s role has shifted from being a sales agent to a production agent for the consumer

(Dawson 2007); and some of the world’s largest firms are retail firms (Kumar 2005). This sup-

ports the argument that we need more and better in-depth studies of the process rather than stat-

ic, market and marketing related, explanations. Many retailers, such as IKEA, have evolved

from small domestic and local stores to large retail chains providing them with a basis upon

which they then later chose to develop abroad (Helfferich et al. 1997). The retailers’ power has

increased dramatically as they have grown into international, global, multinational and transna-

tional retailers. It is argued that various IT solutions have provided the opportunity to acquire

and share information and knowledge across borders. Still, publications on the impact and im-


portance of how knowledge is created and shared in the retail internationalization context are

rather scarce (e.g. Palmer/Quinn 2005). The subsequent aim of this article is to develop our

understanding of organizational routines on how to manage the internationalization process by

focusing on an in-depth case study of how knowledge is shared within an international retail

firm.

In the following section recent research on retail internationalization as well as theories of

knowledge sharing will be discussed. The empirical case study of IKEA is then presented with

a focus on their internationalization process and the IKEA organizational structure. A discus-

sion of organizational routines about how IKEA manages its internationalization process is then

presented. Some general conclusions and implications for future research and management are

also presented.

2. Retail Internationalization

During the last two decades, research on international retailing has developed from empirical

observations toward more conceptually grounded models and frameworks (Alexander/Myers

2000). While some of these conceptual frameworks have sought integration with or inspiration

from the more general international business or marketing literature, others have sought to

develop these without drawing from general theories. Picot-Coupey (2006, p. 218) notes that

most research focusing on factors for entry mode choice are not grounded on theoretical frame-

works but rather on empirical findings. Burt et al. (2008) further notes that many of the pro-

posed models are too simplified and do not offer reasonable explanations for the complex

process that retail internationalization is characterised for. Research on retail internationaliza-

tion may be classified into three themes (Evans et al. 2000; Jackson/Sparks 2005). One theme

concerns the geographical spread of international activity. The second concerns motives for

internationalization. The third theme regards the selection of entry modes. Other themes have

been on retail internationalization and corporate culture, and management style and its implica-

tions for organizational learning. These other themes are argued to be examples of research

searching for a wider and deeper understanding of the internationalization process. However, as

it will be discussed further, researchers on retail internationalization have not fully explored the

research on, for example, organizational learning and knowledge management, but rather have

developed their own concepts derived from empirical studies (Palmer/Quinn 2005).

Picot-Coupey (2006) stresses, as does Evans et al. (2000), that research on retail international-

ization should benefit from more theoretically grounded approaches and that researchers have

so far neglected coherent theoretical frameworks. Doherty (1999), too, criticizes research on

retail internationalization for focusing on descriptive and empirical studies. It is further noted

that few others have focused on market entry strategy. By drawing on internalization theory,

Jonsson, A. 29

agency theory and information asymmetry, she develops a framework for explaining this

process. Doherty represents those researchers who argue that there are many deficiencies in the

existing research on retail internationalization, due mainly to the ignorance of other research

streams and for being mainly derived by models from empirical studies. This is partly in con-

flict with Burt et al.’s (2008) argument that there is a need for more detailed, in-depth studies

trying to explain the process rather than trying to simplify and codify it. Alexander and Myers

(2000, p. 349) argue that too much attention has been paid to the process and too little to “the

consideration of such developments within the broader framework of conceptual thought on

international business”. Still and what might be contradictory is that Alexander and Myers

(2000) are among those researchers reluctant to draw on general internationalization research.

Although Dawson (e.g. 2007) is reluctant and hesitates to adopt general research models to

retail internationalization, it is stressed that research on organizational learning should be able

to contribute to the retail literature. It has also been stressed by, for example, Doherty (1999),

Dawson (2000, 2003) and Palmer and Quinn (2005). This research acknowledges both strands

by offering both an in-depth case study and by drawing on existing research focusing on knowl-

edge sharing within the MNC as will be further outlined below.

Another type of criticism, i.e. separate from the criticism of loosely theoretically grounded

studies, relates to the discussion of the importance of taking a process perspective on interna-

tionalization. Dawson (2003) argues that questions about why, where and how retailers enter

new markets have been in focus but that there is still much to develop. There is a need for more

process-oriented research about retail internationalization. Most research on retail internation-

alization has focused on episodes of internationalization rather than on the processes of market

entry and internationalization (e.g. Jackson/Sparks 2005). As also noted by Picot-Coupey

(2006, 2007) researchers have focused on the entry mode choices but not on the choice of fur-

ther expansion and what might influence those choices. The argument put forward in this article

is that market entries should be viewed as part of the internationalization process. Jackson and

Sparks (2005) argue that research about retail internationalization needs to focus much more

on the implications and impact of “how” and “why” questions regarding retail internationaliza-

tion. The “how” is very much linked to the question of how knowledge is shared within the

retail organization when expanding and entering new markets. But before reviewing literature

on organizational routines as to how knowledge is shared across borders a few words need to be

said, in order to contribute to a better understanding of retail internationalization, about the con-

text of international retailing.

2.1. Retail Internationalization – a Different Context?

Retail internationalization is viewed by retail researchers as a field of research separate from

general research on internationalization and international business. Why do researchers on


retail internationalization claim that retail is different from general internationalization research

and therefore should be viewed in a special context? This is an important question, sometimes

neglected in the academic debate, to pose in order to underline the argument that we need more

in-depth studies on the process of retail internationalization. Some of the arguments provided

are that retailing is more complex and different from manufacturing in several aspects; for

example, in terms of strategic objectives, its responsiveness to local culture, the dispersed

nature of operations, the large number of products and services offered, and the large extent of

network activities with many consumers and suppliers (e.g. Dawson 2000, 2007; Elg 2003;

Helfferich et al. 1997; McGoldrick 2002). Furthermore, it is argued that retailers offer a com-

plex mix of products and services in order to meet the consumers’ varying and changing needs

and wants. Another difference is the high cost and risk of setting up operations abroad com-

pared to straightforward goods exports. Many of these explanations relate to market and mar-

keting aspects of internationalization. However, it is possible that because of the peculiarities

with retailing; i.e., its close contact with the end-consumer and local suppliers, researchers have

tended to focus on these aspects. It is also possible that although there are differences from a

marketing perspective there may be similarities from an organization perspective, so that

although there are different marketing challenges between retail and manufacturing firms, there

may be organizational similarities for handling these challenges, i.e., in terms of how to share

knowledge. As noted by (Birkinshaw 2005) the service sector is characterized for competing

not on manufacturing assets but on the collective capabilities of their employees. It is therefore

surprising that there is a dearth of research focusing on the organizational aspects of retail inter-

nationalization. Because of the lack of research on intra-organizational processes in the litera-

ture on retail internationalization there is a need for investigating this issue further (e.g. Burt et

al. 2003). It is possible that a process lens focusing on routines regarding how to share knowl-

edge illustrates that there are more similarities between industries than the episodic perspective

has suggested so far.

Within the international retailing literature there are a number of different views as to whether

or not it is possible to adopt general theories about internationalization to retailing. When some

researchers argue that it is not possible or that it should be avoided, (e.g. Alexander/Meyers

2000; Dawson 2007) some argue that it is possible (Sternquist 1997), and some argue that it is

possible as long as they are adapted to better fit a retail context (Vida/Fairhurst 1998; Vida et al.

2000) [1]. Dawson (1994) argues that it may be possible to borrow some concepts from interna-

tionalization theory but that it is unlikely to apply them directly to the retail industry because

their structure, process and behavior are different from those of manufacturing firms. These

conflicting views stress the need for additional research. Dawson (2007) underscores that, at the

very least, researchers should be aware of these differences. Still, and despite these views, gen-

eral research should be able to learn from a study in a retail context because of the complexity

that stems from retail operations in different markets.

Jonsson, A. 31

It is interesting to note that researchers of general internationalization make no claims of differ-

ences between general research on internationalization and retail internationalization, whereas

retail researchers do. Researchers focusing on internationalization in general have not paid much

attention to retail firms (Dawson 2007). As pointed out by Doherty (1999, p. 396), it is surpris-

ing that the general internationalization literature virtually ignores international retailing.

Researchers should look beyond the traditional international marketing studies for new andinteresting perspectives.

The complexity that international retailers face should be interesting to study. The lack of re-

search within the general internationalization and international business field that focuses on

retail internationalization opens up many research opportunities. In relation to this study which

focuses particularly on the retail industry, the following argument by Walczak (2005, p. 330)

stresses the importance of studying knowledge sharing across borders within a retail firm.

The worldwide economy has shifted from industrial manufacturing, product oriented econ-omy to one based on knowledge and service, where the principle commodity is informationor knowledge.

Furthermore, as noted by Foss (2002, p. 11),

tasks and activities in the knowledge economy need to be coordinated in a manner that isvery different from the management of traditional manufacturing activities, with profoundimplications for the authority relation and the international organization and boundaries offirms.

2.2. Knowledge and Learning in the Retail Internationalization ProcessLiterature

Researchers focusing on retail internationalization have expressed the possible contribution of

theories on knowledge and learning to a better understanding of the process perspective on

retail internationalization (e.g. Doherty 1999; Dawson 2003, 2007; Palmer/Quinn 2005; Palmer

2005). Palmer and Quinn (2005) note that researchers have implicitly discussed issues of

knowledge and learning but not in relation to research. A few examples of research studies,

implicitly discussing issues related to knowledge sharing in international retailing, are briefly

discussed in the following paragraph. The ambition is to underscore the importance of putting

knowledge sharing in retail internationalization into a theoretical context, i.e. in relation to

existing research focusing explicitly on knowledge sharing. Palmer (2005) notes that focusing

more explicitly on knowledge and learning may increase the understanding of retailers’ interna-

tionalization processes and at the same time provide an opportunity to reinterpret and re-evalu-

ate existing research. However, as argued in this article it is also important to understand that

knowledge and learning have been discussed by researchers within different fields and to go

beyond knowledge management.


There are many examples of research that could be linked to the topic of knowledge sharing in

retail internationalization. Burt and Mavrommatis (2006) focus for example on the internation-

al transfer of store image. Here, the term “standardization”, although not explained, is some-

times used interchangeably with replication a concept within research on knowledge sharing of

organizational routines (Winter/Szulanski 2001). However, the focus is not on how this image is

transferred but rather on what and whether or not the store image is standardized. Another

example is the study by Currah and Wrigley (2004) on transnational retailers. Drawing on find-

ings by Dawson (1994) that it is extremely difficult for retailers to protect knowledge (because

of its open nature) or store and retail offerings, Wrigley and Currah (2006) note that transna-

tional retailers need to pay attention to trying to achieve embeddedness. The authors analyze

and contextualize the geographies of organizational learning and adaptation among those

transnational retail corporations. The competitive advantage of transnational retail corporations

lies in the ability to adapt retail formats to different and changing consumer landscapes. How-

ever, much of their discussions relate to contextualizing international retailers as transnational

corporations rather than on how knowledge is shared within the organization, and on how that

influences the internationalization process. Another study which more explicitly focuses on

knowledge sharing, although not in relation to existing research on the retail internationaliza-

tion process, is the study by Hurt and Hurt (2005). They discuss the transfer of managerial prac-

tices and work routines by food retailers from France to Poland. From empirical studies, it was

found that the French management had problems in transferring or reproducing their business

model with the behavioural model of the Polish recruits. This is an interesting case, focusing the

problems of transferring French managerial practices and work routines to Polish store manage-

ment and floor personnel. However, as noted by Burt et al. (2008) there is a need for research on

retail internationalization in different sectors. Focusing on IKEA, a member of the home fur-

nishing retailing sector, should therefore contribute to a better understanding of the retail inter-

nationalization process.

Recently, Palmer and Quinn (2005) presented a framework for international retail learning.

Drawing on research on organizational learning and on retail internationalization that implicit-

ly focus on learning aspects, Palmer and Quinn (2005) present 16 research propositions for an

increased understanding of retail internationalization learning. When outlining the propositions

related to the first group, i.e. dimensions of international retail experiences, Palmer and Quinn

(2005) stress the importance of incorporating both internal and external circumstances when

focusing on what retailers can learn from their international experiences. In a subsequent arti-

cle, Palmer (2005) analyzes Tesco’s experiences from international retailing, focusing on the

dimensions of international retail experiences. The focus is on explaining what retailers can

learn from their international experiences, derived from interviews with retail managers. From

the discussion, it is clear that the lessons learned emphasize both internal and external circum-

stances although these do not necessarily have to be distinguished. Furthermore, Palmer and

Jonsson, A. 33

Quinn (2005) propose that researchers need to investigate the “degree of learning” and the

“locus of learning diffusion”. The degree of learning relates to how knowledge is absorbed by

the organization; that is, the ability to adopt and adhere to acquired knowledge. The locus of

learning diffusion relates to how knowledge is coordinated, diffused and embedded within the

organization. Furthermore, it is suggested that the ability to diffuse knowledge is related to

the level of international experience. In a subsequent article, Palmer (2005) focuses on what

mangers at Tesco learned from their international experiences. However, it is not shown how

knowledge is developed nor how it is shared and it is questionable whether Palmer (2005)

focuses on knowledge or just information. Still, the work by both Palmer (2005) and Palmer

and Quinn (2005) illustrates the importance of investigating knowledge sharing in retail inter-

nationalization by adopting research on, in this case, organizational learning. It is noted that

because knowledge is such a complicated concept there are many wins with looking into

research explicitly focused on knowledge sharing.

3. Knowledge Sharing Across National Borders

Although research on retail internationalization has only recently recognized the importance of

knowledge, general research on internationalization has for a long time acknowledged the

importance of transferring knowledge from HQ to subsidiaries. Foss (2006, p. 6) argues that

the theory of MNC has some lead-time with respect to understanding how knowledge andorganizations connect, particularly relative to the economics of organization.

However, as Foss and Pedersen (2002, p. 50) argue,

focus on knowledge has traditionally been a (static) matter of explaining the existence of theMNC by focusing on failures in markets for knowledge rather than on (dynamically) stress-ing the MNCs distinct capabilities of realizing competitive advantages through managingknowledge flows.

As pointed out by Ambos et al. (2006) the role of HQ as the source for knowledge is changing

and subsidiaries have grown to become important providers of knowledge necessary to stay

competitive in the increasingly global and competitive environment. As noted by Holm and

Sharma (2006), knowledge is no longer created in only one market, rather simultaneously in a

number of markets. The traditional hierarchically structured HQ-subsidiary relation has been

replaced by a more responsive structure; for example, “heterarchical” (Hedlund 1986), “multi-

focal” (Prahald/Doz 1987) or “transnational” (Bartlett/Ghoshal 1989) that can meet different

“demands of innovation and knowledge creation in a dynamic global economy” (Nohira/

Ghoshal 1997, p. 3). The differentiated MNC literature has become increasingly mainstream

and challenges the traditional transaction cost theories to focus more on issues related to knowl-

edge sharing (e.g. Nohira/Ghoshal 1997; Frost/Zhou 2005). As pointed out by Ambos et al.


(2006, p. 295) the transnational solution adheres to the view of the firm as a “knowledge inte-

grating institution” (Kogut/Zander 1993), where the MNC is a result of the ability to integrate,

combine and create new knowledge within it. When adopting the view of the MNC as a transna-

tional corporation, subsidiaries become “strategic partners” (Bartlett/Ghoshal 1989, p. 102) and

it is important to recognize that within the MNC knowledge may originate from subsidiaries as

well and thus take different flows. Ambos et al. (2006, p. 294) address the question as to what

drives the benefits that headquarters can gain from learning from subsidiaries. It is argued that

changes in both the subsidiary’s context and its capabilities to process knowledge drive the effi-

ciency of the knowledge integrating MNC. Ambos et al. (2006, p. 296) further discuss forward,

reverse and lateral knowledge flows within MNCs. Forward knowledge flows refer to knowl-

edge from HQ to subsidiaries, reverse knowledge flows refer to knowledge from subsidiaries to

HQ and lateral knowledge flows refer to knowledge flows between subsidiaries. There is also an

expressed need within the general internationalization and MNC literature to develop our

understanding for how an organization manages knowledge flows and the micro perspective of

how the individual co-worker is motivated to contribute to share and benefit from knowledge

flows within the organization (e.g. Felin/Foss 2005).

3.1. Organizational Routines for Knowledge Sharing

Research on knowledge sharing stems from different fields such as technology and innovation,

strategic management, organizational learning and knowledge management, stressing different

factors for what might make or break knowledge sharing (e.g. Dierkes et al. 2001; Easterby-

Smith/Lyles 2003). The manifold suggestions may be categorized into different groups. One

suggestion is to focus on knowledge or cognitive issues (e.g. tacitness, absorptive capacity,

causal ambiguity and cognitive variety), organizational context (e.g. structure, intra-organiza-

tional integration and training) and institutional forces (e.g. individual and group motivation,

and norms and values) for knowledge sharing (Ciabuschi 2005; Kalling/Styhre 2003). Most of

the empirical work on knowledge sharing, and especially research focusing on IT systems as a

means of knowledge sharing, strongly emphasizes knowledge issues as explanatory factors

whereas organizational context and, in particular, institutional forces are more rarely addressed.

However, in order to fully understand the impact of knowledge sharing it is necessary not only

to investigate the role of IT systems but also routines and work methods in order to capture

more tacit pieces of knowledge. It therefore becomes even more important to understand the

organizational context and institutional forces. Recently, researchers have stressed the need for

more research on organizational context and institutional forces to reach a better understanding

of what enables or hinders knowledge sharing (e.g. Ciabuschi 2005; Gertler 2003, Gupta/

Govindarajan 2000; Kalling/Styhre 2003; Kane et al. 2005; Tsai 2000; Walczak 2005). This is

especially important when considering how organizational routines for managing a process like

retail internationalization develop. Organizational context and institutional forces seem to be

Jonsson, A. 35

especially evident in research focusing on knowledge sharing within MNCs (i.e. in the general

internationalization and international business literature). It is likely that knowledge factors

alone are unable to explain the complexity of knowledge sharing within MNCs. The need

for more research on organizational routines is stressed by Heimeriks and Duysters (2007, pp.

26-27) who argue that

[…] few studies have been able to explain how experience can be translated into a capability[and that] little empirical evidence exists with respect to how firms can best distribute andinstitutionalize organizational knowledge. More precisely the mechanisms that allow forknowledge transfer which can enhance adoption of new practices have hardly been analyzed.

4. Method

This research is based on a case study. In order to develop an understanding of the process per-

spective on retail internationalization process it is important to delve deeply in order to gain an

understanding of this phenomenon (Tsoukas 1989; Yin 2003). The main reason for choosing a

case study is when the aim is to search for new insights, findings and interpretations rather than

to test certain hypotheses (Merriam 1998). This research adheres to Dyer and Wilkins (1991,

p. 617) notion of case studies, namely that the researcher’s ambition should be to tell good sto-

ries rather than striving to create good constructs

the classic case study approach has been extremely powerful because these authors havedescribed general phenomenon so well that others have little difficulty seeing the same phe-nomenon in their own experience and research. We turn to the classics because they are goodstories, not because they are merely clear statements of a construct.

It is important to offer rich descriptions in order to be able to offer alternative aspects on how to

develop our understanding of the retail internationalization process. This was also further sup-

ported recently by the argument in Burt et al. (2008).

IKEA is an interesting case to study. It is the biggest global retail furniture company with an-

nual sales of almost 20 bn EUR in 2008. So far most in-depth case studies, as well as other

studies, have focused on international food retailers. IKEA was founded by Ingvar Kamprad in

1943 and is today owned by a foundation, the Stitching INGKA Foundation. During the last 40

years IKEA has grown from being a small Swedish family-owned company to the world’s

largest home furniture retailer with 283 stores in 36 countries, of which the IKEA Group owns

262 stores in 24 countries, employing 127,800 people. In 2009 the IKEA Group plans to open

26 new stores in 13 different countries. IKEA has witnessed a fast international expansion dur-

ing the last five to six years, the fastest expansion in IKEA history [2]. IKEA’s strategy is to

expand, both organically [3] and through franchising, with a standardized business model and

concept offering one standardized product range. IKEA was to look and be perceived as exact-

ly the same, no matter whether you visit a store in Älmhult in Sweden or Tokyo in Japan.


The empirical data was mainly gathered through in-depth semi-structured interviews about the

international expansion of IKEA and knowledge sharing. In total, 70 interviews were carried

out with IKEA between 2003 and the present. Interviews were conducted at market level in

Russia (23), China (11) and Japan (17). Although not all of them were used for this specific

article they all provide an interesting and necessary background to understand IKEA’s replica-

tion strategy for internationalization and how knowledge is shared across national borders. In

addition to the interviews at market level, 19 were conducted at the global Service office in

Sweden as well as with IKEA of Sweden and Trading & Distribution and IKEA Inter Services

AB. These interviews focused on IKEA’s internationalization approach, strategic orientation,

culture and values as well as strategies for knowledge sharing. In each country, interviews were

carried out with employees from different parts of the organization, encompassing managers at

the national service office and store managers as well as a number of employees responsible for

certain product categories in the store. The interviews started with open and inductive questions

about IKEA’s international expansion. As the interviews progressed, the questions gradually

became more structured, inquiring more about routines for knowledge sharing within IKEA.

All the interviews lasted between 90 and 180 minutes. Participant observation looking for ways

in which knowledge is shared in the day-to-day work was also carried out. The observation in an

IKEA store in Tokyo, Funabashi, Japan [4], took place over a period of five days in December

2006. And for three days participant observation was used when a Business Area (BA) Manag-

er (and part of the time) her co-workers were followed and observed in their daily work. In addi-

tion, secondary sources such as corporate material, documents and manuals, as well as books

and magazines about IKEA’s history and business ideas were collected (Merriam 1998). The

empirical findings were compared with the theoretical framework, according to Yin’s (2003)

pattern-matching method of analysis.

5. IKEA’s International Expansion

In order to understand IKEA and its internationalization process it is important to establish a

starting point as to how the business idea and the IKEA concept have evolved over time and

even more so regarding how IKEA has learned from experience. The exploration of the busi-

ness model is expressed by IKEA in the following manner [5]:

The IKEA concept has evolved over more than 50 years as a result of serious opportunitiesand experiences, both large and small in many different areas. The result today is a strong,tried and tested concept, which has proved that it is possible to combine global businessideas with local business opportunities.

The IKEA business idea is to offer “a wide range of well-designed, functional home furnishing

products at prices so low that as many people as possible will be able to afford them” [6], and in

order to do so it is expressed that it is important to find solutions that are both innovative and

Jonsson, A. 37

cost-efficient. Thus as will be discussed further, organizational routines on how to work for

IKEA are actually embedded in the business idea.

In the following section the reader is introduced to the “IKEA-world” by discussing how IKEA

has evolved into a global home furnishing retailer and how IKEA is structured. More specifi-

cally the discussion will underline arguments as to how IKEA manages to maintain a process

perspective on their internationalization process, i.e. using standardised solutions while at the

same time constantly searching for new opportunities and better solutions through successful

knowledge sharing by focusing on their organizational routines. In the subsequent section links

to the theoretical discussion about retail internationalization and knowledge sharing will be

made.

5.1. The International Expansion of IKEA

In the following paragraphs the international expansion of IKEA is summarized, structured

according to a time-line where critical events are discussed and serve as explanations for how

experiences and lessons learned have influenced the ongoing internationalization process.

IKEA started its international journey in 1965 by entering the Norwegian market. Six years lat-

er IKEA entered the Danish market. In 1973 Ingvar Kamprad decided that it was time to go

even further away from Älmhult. The first store outside Scandinavia opened in 1973 outside

Zurich, Switzerland. The international expansion was a direct consequence of saturated growth

and an ambitious idea that larger volumes could enable IKEA to lower prices and therefore

become more competitive. The process and that decision is described by one manager (Salzer

1994, pp. 59-60) who said,

have you heard about how we started abroad? By then we had entered Norway, but that wasby mistake, you know… a kind of consultant who had duped us to buy some building lot.And then they pondered, which market is the most conservative when it comes to furniture?Well, it’s Switzerland. So they took the train to Switzerland. Well it was Janne [Jan Aulin]and Kamprad. And they stood outside the shops that sold modern furniture in Switzerland,you know, and they stood there and they asked the people who stopped and looked in thewindows. […] And when they had been standing there for half a day they were assured thatthere were enough people who liked that kind of furniture but that it was too expensive, sothere must be a market, they thought, and then they went back to Sweden. And so we boughta building and started the first store in Switzerland. … And it’s continued like that.

The initial process of entering new markets can be described as a trial and error process. It was

during the 1960s and 1970s that IKEA learned the “basic techniques” for entering foreign mar-

kets. IKEA acquired the necessary learning in order to enter new markets more rapidly during

the 1980s–1990s (Torekull 2003, p. 175). During this period IKEA opened so-called “test

stores” in city centers. However, this decision was later changed to open up bigger stores on city

outskirts with good infrastructure instead, and to make all IKEA stores similar; that is, to paint


them blue and yellow. Over time it has become even more important to standardize the store

format and there is nowadays a minimum size for new stores, thus securing the possibility for

bigger volume. Standardized marketing solutions enable IKEA to focus more on the organiza-

tional aspects, i.e. the organizational routines on how to support the internationalization

process.

During the initial phase of IKEA’s internationalization process there was a special team respon-

sible for entering new markets. The expansion team normally moved into a new market, set up

the first store, and then left for another market. This phase can be described as the exploration

phase, as IKEA explored the techniques for setting up new IKEA stores in new markets. The

expansion team had a great entrepreneurial spirit and was very enthusiastic. However, their role

was not always appreciated as they left once the store had opened and the store manager was left

behind with problems. During this period there was a saying about “the action group fool Hum-

lan [the bee]” meaning that the signals sent from HQ (by that time Humlebaeck in Denmark)

would not always be followed (Torekull 2003).

In 1979 a project called “Kraft 80” was initiated. There was an increasing concern that IKEA

had grown too fast and the project was a reaction to the risk of “losing the heart” (Salzer 1994,

p. 66). A few drawbacks made IKEA realize that conceptualization was important and that

IKEA could benefit from a more conceptualized business, i.e. from replicating their business

when entering new markets. The “IKEA Way”, an internal document, is one result of those

efforts where guidelines for replicating IKEA are clearly stated. Inter IKEA Sytems B.V

describe the IKEA Way as consisting of: the IKEA culture (the common platform); the IKEA

concept (the framework for turning the business idea into reality); and the organization,

processes methods, policies, guidelines and supporting systems that are all necessary to achieve

the business idea. However, many of these ideas had existed since the beginning of the 1970s

but had not been documented. A manager at Inter IKEA Systems B.V stressed that the ideas and

the concept were already clear but there was a greater need, as a consequence of the growing

company, to conceptualize and document them.

The second phase of IKEA’s internationalization can be characterized as exploiting a business

mode. IKEA sent out the “expansion group” to set up new stores in new countries before mov-

ing on to the next country. Standardized marketing solutions were in focus for reasons of cost-

savings. Format stores were developed and the blue and yellow stores were “planted” in new

cities and new markets. The reason why IKEA stores are standardized; that is, painted in blue

and yellow and having a standardized layout, is to save costs on building the IKEA stores. How-

ever, IKEA later realized that by standardizing certain solutions they could spend more time on

finding the right organizational routines for running and managing IKEA according to the

IKEA way. This is a rather new insight and characterizes what can be described as a third phase,

or the current phase, of IKEA’s internationalization process.

Jonsson, A. 39

During the last five to seven years there have been almost 100 store openings in 19 different

markets, of which three are new markets. During these years IKEA has witnessed the fastest

international expansion ever in its history. This phase can be described as a phase of both explo-

ration and exploitation, i.e. where small adjustments and improvements are made to the

concept. In order to survive a competitive environment it is important to be innovative, and

this can only be achieved through both exploration and exploitation. In an internal document,

“The future is filled with opportunities” (Salzer 1994, p. 61), it is clearly stated that IKEA will

continue to grow and furnish the world and in order to do so it is important to be able to both

explore and exploit.

Today you will find IKEA all over the world and IKEA’s size will give rise to new problems,problems that will be solved in the same unconventional way that IKEA has always solvedits problems. IKEA will never be completely finished. Life will feed IKEA with newproblems. Problems that create new ideas and new solutions. Solutions that will changeIKEA.

5.2. The IKEA Organization

IKEA is not just IKEA. IKEA consists of many different organizations with different responsi-

bilities but with the common goal of satisfying the IKEA customer. The background to the cur-

rent organization structure stems from the many challenges with the international expansion of

the 1970s and 1980s and the efforts of conceptualizing IKEA. The present ownership structure

was developed during the exploration phase and IKEA was given away to the INGKA Stitching

foundation. In the beginning of the 1970s Ingvar Kamprad had already started to think about the

time after his death and what would then happen to IKEA. There was a need to conceptualize in

order to protect the organization from external interests and hostile takeovers as well as a way of

solving the problem of high taxes in Sweden. In 1976 the “Furniture Dealer’s Testament” was

written, an internal document explaining the IKEA concept, norms and values that are and have

been important for the internationalization process. This document has become a key document

for IKEA. For Ingvar Kamprad [7] himself “maintaining a strong IKEA culture is one of the

most crucial factors behind the continued success of the IKEA concept”. In 1996, 20 years after

“A furniture Dealer’s Testament”, Ingvar Kamprad wrote what is known as the “IKEA values”. It

is stressed that the IKEA values are part of the work environment at IKEA and from the perspec-

tive of knowledge sharing across borders it is interesting that through the IKEA work environ-

ment “you’ll be able to contribute to the development of others”. This clearly emphasizes that

knowledge sharing between “co-workers”, as they are called, is important. The IKEA values are

part of the Human Resource Idea and through these values new IKEA co-workers are recruited.

From the perspective of knowledge sharing these values represent an important factor for knowl-

edge sharing, i.e. focusing on institutional forces or what motivates people to share knowledge

(e.g. Kalling/Styhre 2003). IKEA describes the recruitment process [8] by saying,


Our goal is to employ co-workers who understand and embrace our core values and who willreflect and reinforce those. We want to recruit the candidates most suited for work life atIKEA, based on value set and attitude, in addition to skills and experience. We can supportthe recruitment process by working through the words of our core values using effectivequestioning techniques.

In the middle of the 1980s IKEA was restructured and the “three legs”, the IKEA Group (“the

blue group”), Inter IKEA Systems (“the red group”) and IKANO (“the green group”) were cre-

ated. It is claimed that the major reason for this organizational structure is that Ingvar Kamprad

wanted IKEA to be structured in such a way that the IKEA concept would not get lost and that

IKEA would be able to continue to grow. In Torekull’s (2003) book about IKEA the organiza-

tion is described as being controlled by both the “hand” and the “spirit” and that Ingvar Kam-

prad personifies this idea. The “hand” controls the physical ownership such as in the stores,

whereas the “spirit” controls the IKEA concept. In the middle of this there is Älmhult in Små-

land, where it all started. Ingvar Kamprad notes (Torekull 2003, p. 199) [9],

the IKEA spirit emanates from those lessons we learnt during the first pioneer years in thiscountryside. Both as a smålänning and as a rational thinker I defend the idea that Älmhult isour heart, our spiritual home.

In order to understand the IKEA concept it is important to comprehend the whole pipeline; i.e.

Retail, Distribution and Range. To be able to offer IKEA to the customers, the IKEA stores; i.e.

IKEA Retailing, needs to be supported by Distribution; Purchasing; Industry group (Swed-

wood); IKEA of Sweden (IoS), responsible for developing the range; and various expert and

supporting functions including, e.g. IKEA IT and IKEA Communications. Inter IKEA Systems

gives IoS the assignment of developing the IKEA range so that the IKEA concept is main-

tained. All other parts of IKEA operate on the local level. Concerning the relationship between

IKEA Retail, IoS and IKEA Inter Systems, one manager describes the relationship between the

organizations thus:

We do our job but we are totally dependent on each other. We kind of live in a symbiosis.

The organizational structure of the IKEA Group is a matrix. It is important to understand the

matrix especially in order to understand how knowledge is shared within IKEA. Each country

has a Service Office (SO). The SO will support the stores in that market. In each store there is a

store manager and department managers for HR, Sales, Restaurant, etc. Under the Sales depart-

ment there are managers responsible for different product areas. Then in the Service office there

is an overall Sales manager, overall HR etc. In relation to factors for knowledge sharing, organ-

ization structure is important (e.g. Kalling/Styhre 2003) in order to understand how knowledge

flows within the firm. The matrix organization and ideas about a shared vision reminds one of

the ideas about the transnational solution (Bartlett/Ghoshal 1989), where knowledge takes mul-

tiple paths as it flows between levels and markets.

Jonsson, A. 41

The people of IKEA are vital for its growth including its expansion into international markets.

As one manager at IoS expressed it,

I can see that IKEA as a company is very much driven by development. We talk aboutgrowth. And I used to say that, we need growth, we need to grow as a company. But then weneed growing people. In some sense it starts with recruitment, to have people that really seethe challenge in this not to be stable and secure but willing to take risks, willing to exposethemselves. […] And in that sense it is motivation and maybe it is hard to relate to that,because we can see that people, at least the people that we want to stay with us, they take thechallenge and they want to grow as the best reward. And I think that is why we don’t need togive a lot of salary, and a lot of other compensation benefits because we don’t promise that.We promise that we will grow and expand with you.

It is significant for one group of IKEA employees that they stay with the company for many

years. In an internal brochure [10] it is expressed as “Masses of jobs for masses of people in

masses of places”. The average employee or “co-worker” (the title IKEA uses for their employ-

ees) at IKEA has worked for many years and has tried many different positions at both the

strategic and the operational levels in the IKEA-world. “Many years” normally means 15-30

years. One IKEA co-worker described it as “part of the natural development of the organiza-

tion”. The typical career path within IKEA is to try new positions within IKEA (i.e. the differ-

ent organizations forming IKEA) in order to get broad knowledge about IKEA and to under-

stand the whole pipeline. CEO Anders Dahlvig (Kling/Goteman 2003, p. 37) argues,

what is fundamentally important for us is for people to work well together across functionsbecause they have to understand our pipeline. We have always been good at knowing certainparts, but now more of a pipeline-oriented understanding is required.

However, it is not just that people move around from one position and country to another. On

IKEA’s Intranet [11] rules for expatriates are to be found, where it is stressed that knowledge

sharing is important.

People who move across borders and learn different parts of IKEA gain an insight into dif-ferent cultures and expand their network. People who move across functions learn new anddifferent skills. This gives them an opportunity to contribute more to both the daily work anddevelopment of the company.

There are of course also a number of co-workers who remain for only a few years. These are

people who usually work only part-time in the stores. The employee turnover is a huge chal-

lenge which can vary considerably between different countries. In some stores in the US, the

turnover can be up to 70% whereas in Italy, for example, it can be no more than 3%. In terms of

knowledge sharing, it is the group of part-time co-workers that is a real challenge for IKEA;

how to motivate these people to learn and also to share their experiences. Therefore, IKEA puts

a lot of emphasis on IKEA values when recruiting new co-workers. A “climate check” is made

every year when an internal survey called the “Voice” is sent to IKEA co-workers where the

IKEA culture is mirrored in the questions. Many of these questions are related to motivational

or institutional factors for knowledge sharing within the organization.


5.3. Routines for Knowledge Sharing within IKEA

In order to be able to replicate IKEA the IKEA way in new markets and to prevent IKEA from

turning into a German or a Russian IKEA there are different methods for sharing knowledge

across national and intra-organizational borders. The organization responsible for the IKEA

concept and for securing its replication all over the world is Inter IKEA Systems B.V. The

“commercial review” is an internal tool used for measuring how the IKEA concept is followed

in other countries and in various functions. The purpose with the commercial review is both to

control adherence to the concept and to acquire new business opportunities and new “best prac-

tices”. Best practices explored from the review process are then published on the Intranet or in

the manuals provided by Inter IKEA Systems B.V. As one manager describes the process:

To conceptualize is very much about documenting and making the concept accessible allover the world.

Best practices are thus explored and exploited in the IKEA-world. Best practices are spread

both through manuals and via the Intranet, through what is called a Toolbox. In an ad in the

internal newspaper IKEA Ideas it is written that the

IKEA toolbox is a digital concept communication system from Inter IKEA Sytems BVwhere information about IKEA retailing know-how and tools to use within the IKEA con-cept […] Take a look in the IKEA tool box and see how you can use it to improve your skills.And save time and money [12].

The Intranet is considered an important tool for sharing knowledge about best practices. How-

ever, depending on ones position within the organization it is regarded as more or less impor-

tant. Part-time co-workers working on the shop floor do not have much time or easy access to

the Intranet. Different solutions, such as installing computers in the staff canteen, can provide

the means for all co-workers to explore the Intranet and learn more about IKEA. The IKEA

Group is responsible for the organic growth of IKEA and thus for securing that these best prac-

tices and “proven solutions” are followed. However, part of the IKEA concept is to question and

seek new solutions, to explore new opportunities. There is an organizational structure for guid-

ing co-workers in new countries in their search for new solutions at the same time as they

adhere to the IKEA concept.

From the interviews it is obvious that knowledge sharing is central to IKEA’s expansion and for

securing the IKEA way of doing business. Part of IKEA’s strategy when entering new markets

is to send out expatriates to share their knowledge about IKEA. This solution is an example of

organizational factors explaining knowledge sharing (e.g. Kalling/Styhre 2003). One HR man-

ager expresses it this way:

When the expatriates leave it is necessary that it has grown under the tree because otherwisewe will have a huge problem … . […] So that you really work with transferring your knowl-edge, to really share with others. You can’t sit in a corner with all your knowledge and giveorders without sharing - then there will be a vacuum when you leave.

Jonsson, A. 43

Expatriates and existing co-workers are responsible for sharing this knowledge with new co-

workers. Having a “buddy”, an experienced IKEA employee, is one solution for IKEA to edu-

cate new employees in the IKEA way of doing business and to share their knowledge about

IKEA. In each country there is one IKEA store functioning as a learning centre for new IKEA

stores managed by that country’s Service office. In this learning centre new co-workers are

trained according the IKEA principles. When entering a new market, and if a learning centre is

not yet in place, employees are sent to other markets in order to learn about IKEA. This is

applied both for co-workers working at the Service office and for co-workers and department

heads working in the store. In addition, expatriates are not only employed for the purpose of

entering a new market and to set up the business but also to train local employees according to

the IKEA way. Having a foundation and long-term strategies enables the organization to work

with knowledge sharing at all levels, ensuring that everybody can identify with the IKEA con-

cept. In the HR idea it is explicitly stated that,

as an IKEA employee you are willing to share your knowledge and experience with allIKEA employees (IKEA HR Idea).As an IKEA co-worker you continually learn from your own and other’s experiences, whichenable you to solve and complete your own tasks (IKEA HR Idea).

6. Concluding Discussion

This article has taken an intra-organizational perspective on the retail internationalization

process, by focusing on organizational routines and specifically on knowledge sharing in order

to better understand how to manage and maintain a process perspective on retail international-

ization. Because of the lack of research on knowledge sharing in the context of retail interna-

tionalization, this present study provides an opportunity to reinterpret and re-evaluate existing

research on retail internationalization.

The case study of IKEA illustrates how knowledge is shared within the IKEA-world. Focusing

on organizational routines for supporting multiple knowledge flows across national and intra-

organizational levels. The dynamic capability of IKEA to manage the internationalization

process according to “IKEA way” is a result of what has been learnt from the international

expansion. As IKEA learns from challenges met in new markets, best practices are spread to

IKEA worldwide. There are a number of routines and mechanisms for sharing knowledge and

supporting the international expansion of IKEA. These have developed over time and as a con-

sequence of experiential knowledge. Knowledge sharing has become increasingly important as

an enabler for the expansion of IKEA. Knowledge sharing was often mentioned as part of the

IKEA culture, which is important to understand as it explains the institutional forces driving

knowledge sharing across borders. Knowledge sharing within the IKEA world is also support-

ed by a matrix organization, ensuring multiple knowledge flows throughout the organization.


The central organization, in this case both the IKEA Group and Inter IKEA Systems, also plays

an important and coordinating role in terms of both securing that experiential knowledge is

acquired from different markets and that the replicating formula is kept viable; i.e., where

adjustments are made in accordance to gained experiences, and shared and followed within the

IKEA-world. The method for how knowledge is shared within IKEA corresponds with recent

research stressing the importance of acknowledging the organizational context and institutional

forces (e.g. Ciabuschi 2005; Kalling/Styhre 2003). This view also corresponds with the ideas

about the transnational corporation as first introduced by Bartlett and Ghoshal (1989). An inter-

esting link to this discussion is the argument by Özomer/Gençtürk (2003) that, when taking a

transnational view, it becomes clear that it is also necessary to incorporate reasoning on how

experiences gained in one market will influence the ongoing replication process, and on how

knowledge flows across national borders.

In relation to the contribution to research, this study contributes to the expressed need for devel-

oping our understanding of the process perspective of retail internationalization and where

management learning is a core activity (Burt et al. 2008). By focusing on how knowledge is

shared within an international retail firm this study also contributes to research that has

expressed the need for a deeper understanding for knowledge and learning in the retail interna-

tionalization process (e.g. Dawson 2007; Doherty 1999; Palmer/Quinn 2005). There is also a

need to incorporate and benefit from existing research and move away from a focus on only

descriptive or empirical studies (Picot-Coupey 2006). By linking existing research on knowl-

edge sharing, and illustrating that knowledge and learning are complex concepts spanning dif-

ferent research fields, this research aims to meet that criticism. This study also contributes to

general internationalization and MNC research seeking more details on how experience can be

translated into a capability and how firms can best distribute and institutionalize organizational

knowledge (Heimeriks/Duysters 2007).

In terms of implications for managers this study has focused on the organizational routines sup-

porting the retail internationalization process. The IKEA case clearly illustrates the importance

of always being open to learning from experiences, good and bad, in order to be innovative and

cost efficient; i.e. to understand and take a process perspective. A part of the IKEA business

idea stresses that it is essential to always search for new opportunities and better solutions.

Organizational routines must embrace continuous learning in order to employ such a pattern.

From the IKEA case it is clear that HR plays an important role in building and nurturing a

strong corporate culture supporting organizational routines such as those for knowledge shar-

ing. Drawing on the insights of this in-depth case study it is clear that managers will have to pay

more attention to how knowledge is shared in order to facilitate international expansion. For

international firms this has to do with the challenges of entering new markets, and at the same

time maintaining growth and gaining market share in existing markets. Market entries must be

Jonsson, A. 45

supported but the ongoing activities in existing markets must also be recognized and supported.

Thus it is crucial to understand the process perspective of the retail internationalization process.

Not only is knowledge sharing important from a cost-efficiency perspective, but also from an

innovation perspective when new opportunities or lessons learned are explored and then

exploited throughout the organization. When focusing on factors for knowledge sharing it was

illustrated that when knowledge sharing has become part of the corporate culture and work rou-

tines, less effort has to be put into steering knowledge flows.

Notes

[1] For an overview of research on retail internationalization that has drawn from generalinternationalization.

[2] Figures from August 2009 (http://www.ikea-group.ikea.com, accessed August 30, 2009).

[3] All IKEA stores are franchise operations that have been granted their franchise licenses byInter IKEA Systems B.V. When referring to organic growth it is expressed that this is runby means of internal franchising as the IKEA concept and brand is owned and controlledby Inter IKEA Systems B.V.

[4] In July 2002, the IKEA Group established IKEA Japan KK. IKEA opened its first store inTokyo, Funabashi in April 2006. The second store also placed in Tokyo, Kohoku opened inSeptember 2006. The entrance is described as the biggest Greenfield foreign investmentever made in Japan. Initially, IKEA plans to launch eight to twelve outlets, with the firststores in Tokyo. In a longer perspective IKEA plans to open 46 stores in Japan.

[5] “Inter IKEA Systems B.V - The owner and franchisor of the IKEA Concept”, Inter IKEASystems B.V. 2002: 8.

[6] “The IKEA Symbols - leadership by example”, Inter IKEA Systems B.V. 2001: 10.

[7] http://www.ikea.com/ms/en_GB/about_ikea/timeline/full_story.html, accessed May 11, 2007.

[8] “Recruitment through our values”. Inter IKEA Systems.

[9] My translation.

[10] “IKEA - We’re looking for more enthusiasts to help us prove that nothing is impossible”,Inter IKEA Systems B.V. 2006. http://www.ikea-group.ikea.com, accessed August 30, 2009.

[11] “Mobility - working abroad with IKEA”, IKEA Intranet, 2006-01-11.

[12] Ad in IKEA ideas 3.03. Inter IKEA Systems B.V.

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Jonsson, A. 49

Trade Credit Periods in Retail Commerce for Productsof Mass Consumption: An Application to Spanish Legislation

Javier Oubiña, Jaime Romero and María Jesús Yagüe

AbstractTrade credit periods from providers constitute a key indicator of the market power of large retailgroups in distribution channels. The current study uses a database of financial statements ofretail and production firms to demonstrate that the legal measures established at the Europeanlevel in general, and specifically in Spain, to fight delinquency in commercial operations arehaving an appreciable effect on reducing payment periods for retail firms. On the other hand, ananalysis of trade credit periods at the level of manufacturers enables us to confirm that manu-facturers also postpone a substantial part of their payment to their respective suppliers of rawmaterials. Finally, we propose an explanatory model for trade credit periods in retail firms that,once contrasted, enables us to conclude that the explanations for trade credit periods should befound in the market power, efficiency and level of indebtedness of the retail firms.

KeywordsTrade Credit, Payment Period, Manufacturer-Retailer Relationship, Market Power, DistributionChannel

Acknowledgements: This study received support from project ECO2008-00488 of the SpanishMinistry of Science and Innovation and from the agreement signed between the SECRETARYOF STATE OF TOURISM AND COMMERCE of the Ministry of Tourism and Commerce andthe Autonoma University of Madrid to analyze the trade credit periods in retail commerce forproducts of mass consumption.

Javier Oubiña (corresponding author)Departamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid,Spain(Tel: ++34 914973551; E-mail: [email protected]).

Jaime RomeroDepartamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid,Spain.

María Jesús YagüeDepartamento de Financiación e Investigación Comercial, Universidad Autónoma de Madrid, Madrid,Spain.

Received: August 31, 2009Revised: January 31, 2010Accepted: February 1, 2010

EUROPEAN

RETAIL


1. Introduction and Objectives

“Commercial credit”, that is, credit that firms provide amongst themselves, is the first form of

extended credit that appears as society develops. For example, the manufacturer who provides

the distributor with specific merchandise enables him or her to defer payment until the distrib-

utor has resold the merchandise and received payment from the end consumers (Petersen/Rajan

1997; Alfaro 2005). At present, this is one of the most problematic issues of manufacturer-

distributor relations, as it is one of the key elements demonstrating the market power of large

retail groups in distribution channels (Cruz et al. 1997; Sheu/Hu 2009).

The concern shown by the main associations and groups that represent European manufacturers

indicates the importance of this topic, as do the legal initiatives that government bodies in each

of the European Union member countries have undertaken. The European Economic and Social

Committee takes this market power approach when it makes the claim that long-term payments

often stem from the abuse of a dominant position and that reducing payment deadlines must be

an economic policy objective (EESC 1998; Iglesias et al. 2007). In Spain, specifically, Law

3/2004 of December 29, which went into effect January 1, 2005, introduces legal regulations to

limit the excessive use of this kind of commercial practice.

This article is a practice and conceptually based article that will use a series of simple research

methodologies to answer the main questions that should be considered in the study of trade

credit periods granted by providers in the distribution channels. The main objective is to con-

firm the effect of European governments’ legislative measures to combat excessive numbers of

days of trade credit in commercial operations. We will take as our reference the impact of the

Spanish law cited above, which establishes measures to fight delinquency in commercial oper-

ations. The law fixes maximum limits for trade credit periods at 30 days for fresh or perishable

products and 60 days for canned goods and non-food mass consumption goods.

A full study of trade credit periods in the value chain of mass consumption products requires

complementing information on retail firms’ deferrals of payment with data on the number of

days that manufacturers of products of mass consumption in turn postpone paying their raw

materials suppliers. In this way, we hope to identify the proportion of the financing cost of the

commercialization process that each agent in the channel assumes until the products are in the

hands of the end consumers. The second goal of this study is thus to quantify the manufactur-

ers’ deferments to their respective providers.

Finally, we cannot conclude this study without addressing the causes for trade credit periods

among retail firms. We therefore propose an explanatory model based on the main theoretical

focuses that have been contrasted empirically in different economic contexts. In the model, we

incorporate different independent variables that reflect financial, competitive, and marketing

arguments to explain the differences in entrepreneurial behavior observed among the main


firms in the sector. The information on these variables comes fundamentally from the structure

of their results accounts and balance sheets. We attempt to identify the main factors and their

effect on the different periods of trade credit that retail firms establish in their commercial

transactions with their providers.

Thus, in this study we apply a twofold methodology. On the one hand we provide a descriptive

analysis of the evolution of trade credit periods for both manufacturers and retailers. On the oth-

er hand we develop a regression model that aims to identify the drivers of trade credit period

length.

2. Literature Review

Distribution in Europe has undergone an especially intense and rapid process of modernization,

changing in three decades from a distribution-based model of traditional commerce to the

implementation of modern hypermarket and supermarket chains. This consolidation of mass

distribution involved considerable increases in concentration levels in the retail step of distribu-

tion channels (Casares/Rebollo 2004).

The first efforts to systematize knowledge of the distribution channels were based on the analy-

sis of the functions to be performed by commercial distribution (Alderson 1954) and analysis of

the efficiency of their execution (Bucklin 1965). This “economicist” perspective was followed

by considerations of the distribution channel’s socio-political aspects (Stern/Reve 1980). This

second perspective considered that issues related to market environment and connections

between firms in the commercial process have components and repercussions that go beyond

the strictly economic aspects of commercial transactions. However, “socio-political” and “eco-

nomic” aspects are without doubt closely related to each other, as the exercise of market power

by the party with a strong negotiating position is revealed in a series of economic concessions

granted in one form or another by the party in a weaker position.

Specifically, one of the most common ways that large retail groups show market power in dis-

tribution channels is the achievement of longer payment periods, through which these retail

groups carry out a financial leveraging strategy to take advantage of the “cash flow” generated.

If applied without proper financial analysis, this dynamic can considerably increase the risk of

insolvency and ultimately the firm’s vulnerability if the guarantees that the financing itself pro-

vides decrease substantially.

In the debate on trade credit periods from producers to distributors, it is usually argued that pay-

ment periods cannot be classified as “correct” or “excessive” when they emerge from the rules

of the market itself. According to this view, agreements between the parties should determine

the contract conditions, one of which is payment period. The principle of freedom of contract

Oubiña, J.; Romero, J.; Yagüe, M.J. 53

cannot be considered to have absolute validity, but only to be valid within a specific kind of

environment. The principle of mercantile relations states that payment should be made when the

transacted product is delivered, while admitting the possibility that the parties negotiate pay-

ment deferrals by mutual agreement in recognition of the need to finance the existing merchan-

dise for the duration of the commercialization process.

It is on this basis that the contracting parties establish the relation that leads to sharing respon-

sibility for financing during the “maturation period” of the goods based on the average time of

sale of each product in the different phases of the commercialization process. If the payment

period exceeds the time of commercialization, it seems clear that this “denaturalizes” the eco-

nomic foundation of the trade credit period. The credit can then be seen either as a strictly

financial credit (at low cost) not motivated by the buying and selling of products, or as an

“excessive” deferral outside common commercial practice.

In Spanish markets, these “commercial practices” have traditionally been the well-known prac-

tices of cash payment at 30, 60 or 90 days, depending on the kind of product. The principle of

freedom of contract thus has a basis in the commercial practices that serve as common, tacit

pre-agreements whenever they appropriately include the different product maturation periods.

In principle, we can thus consider “excessive” a payment period that goes beyond these com-

mon commercial practices.

Based on the BACH database (Bank for the Accounts of Companies Harmonized) developed by

the Commission of the European Communities and distributed by the Second Directorate Gen-

eral of the European Commission, Román (2000) argues that during the 1990s, Spanish retail

commerce experienced a considerable difference between the period of payment to providers

and the customers’ payment. At the same time, there was a greater laxness in payment periods

in large firms relative to small and medium-sized enterprises. His results show that during this

period Spain was, after Italy, the European country with the longest trade credit periods from

providers, with periods considerably higher than in countries like France, Austria or Belgium.

The patterns reported by Román (2000) are still valid (see Figure 1). Mediterranean countries,

such as Italy, Portugal and Spain, have longer trade credit periods (around 80 days) than coun-

tries in Central Europe such as Austria, Germany, Finland and Belgium (around 40 days). This

is partly due to differences in the legal environment of these nations. The regulations in Central

Europe, which arise from Germanic Law, state that owning a good requires having previously

paid for it. This has encouraged low non-payment rates and the acceptance of low trade credit

periods. In contrast, the regulations in Mediterranean countries which come from Roman Law

don’t require prepayment in order to transfer the property of a good. This has provoked a per-

missive attitude towards non-payment and the incorporation of trade credit periods as an impor-

tant element in negotiations.


The legislative measures to fight delinquency are based on the idea that providers are exploited

by customers, who impose long periods for payment and payment delays without compensa-

tion. And apparently the large distributors obtain the longest deferrals of payment, while the

small manufacturers are obliged to grant them, making trade credit periods the result not of

efficiency but of the large commercial distributors’ abuse of their dominant position (Alfaro

2005).

Cannari et al. (2004) in fact argue that large distributors with a good reputation obtain very long

payment periods and the small providers, who lack such a reputation, suffer especially from

these deadlines. The large firms receive better treatment, whether in prices or in payment peri-

ods, than the small ones. These findings are corroborated by the European Commission, whose

“Guide for Companies on Directive 2000/35/CE” indicates that “the results of research per-

formed show that large firms make delinquent payments twice as often as is recorded for SMEs

and that, further, the delays in payment of large firms to SMEs are twice as long as the delays

recorded for payments by SMEs to large firms.”

The study by Iglesias et al. (2007) shows, however, that even if the theories on market power in

distribution channels are essential to understand the phenomenon of trade credit periods, they

are not sufficient and should be complemented by a focus on efficiency. According to this


Figure 1: Trade Credit Evolution in European Countries

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Source: Boletín Económico ICE (2009, No. 2969, pp. 79-81).

study’s findings, some retailers use commercial credit as an instrument of protection against

potential opportunistic behavior on the part of the provider. Likewise, distributors who invest in

the provider’s brand image tend to obtain more commercial credit. Finally, distributors with

high degrees of flexibility benefit from financial efficiency without having to have a strong

negotiating position.

Cruz et al. (1997) argue that the greater the degree of entrepreneurial growth experienced by the

retail company, the greater the financing needs. We can thus expect that those retail organiza-

tions which are growing rapidly will focus their negotiating strategy on achieving longer trade

credit periods. The goal is to find ways to finance their assets without explicit cost, ways that

complement traditional sources of financing.

In addition to their own resources, retail firms can turn to essentially two kinds of outside

financing, one of these short- and the other long-term. In the case of retail businesses, the short-

term source is constituted fundamentally by financing from trade credits from providers, while

the second involves using creditors or credit entities that grant a financing period of longer than

one year. It is clear that the firms with a smaller proportion of long-term outside financing will

tend to turn more to commercial creditors in the short term.

3. Methodology: Database and Variables

To achieve the first goal proposed, we analyze the evolution of trade credit periods granted to

retail firms by providers in recent years. By doing this, we hope to verify and quantify the effect

of Law 3/2004, of December 29, which establishes measures to combat delinquency in com-

mercial operations. As three years have passed since the law went into effect, we have a long

enough time to make a sufficiently realistic and reliable evaluation of the influence of Law

3/2004 on trade credit periods from providers to retail firms.

The sample of retail firms to be studied is formed of retail organizations belonging to non-spe-

cialized commerce (Group 521 of the NCEA - National Classification of Economic Activities).

Our study focuses on the sector of products of mass consumption (primarily, fresh and canned

foods, personal hygiene and home cleaning products).

The study performed is based on analysis of the financial statements of these retail firms (prof-

it and loss accounts and balance sheets). The information comes from CABSA [1] (Centre for

Analysis of Balances), a firm that specializes in the creation and management of economic and

financial databases included in the financial statements of firms in Spain. Further, this study

includes complementary information provided by the DGPC (Directorate General for Commer-

cial Policy of the Ministry of Industry, Tourism and Commerce).


We hope to achieve a fundamentally descriptive analysis whose keystone is the definition and

quantification of the concept of the trade credit period from providers under study. The indica-

tor for evaluation is “the number of days that firms on average postpone or defer payment to

their providers.” Taking two of the items included in the financial statements of the retail firms,

we construct a variable of trade credit period from providers (TCP) using formula (1), the for-

mula usually employed in studies of commercial credit:

TCP = Commercial creditors * 360/Sales costs (1)

Where:Commercial creditors are the items so-named included under the rubric of short-term creditorsof the liability of the balance,360 is the number of days in the year and,Sales costs: the item in the profit and loss statement.

The ratio above is used to calculate the trade credit period from providers for each individual

firm. The aggregate indicator, the object of interest in our study, is calculated by the weighted

sum of the individual ratios of trade credit periods for the billing percentage that each firm’s

sales represent with respect to the total sales in the sample analyzed.

The time period of the study includes the maximum number of years for which we have full

information on the sample analyzed, 1999-2007. The time period 1999-2007 represents a suffi-

ciently long period of time to observe the basic trend of trade credit periods from providers in

recent years and the effect of the legal measure introduced during this period to regulate com-

mercial delinquency.

The common sample is constituted of 99 retail firms for which we have complete information

from 1999-2007. We thus hope to minimize the presence of bias from the incorporation into the

study of factors not controlled for, such as variation in the number and characteristics of the

firms analyzed at different moments in time. In this way, differences in the results obtained can-

not be attributed in any case to changes in the sample. According to AC Nielsen the sales vol-

ume of the five largest retailers of consumer goods in Spain represent a market share of more

than a 60% in 2007. The 99 companies of our sample represent 38.97% of retail firms with

more than 49 employees and 83.52% of sales volume in Spain, thus ensuring that the sample is

representative.

Further, we establish a classification based on size, using business turnover as a variable to

measure size. We establish two groups of firms distinguished by whether their turnover in the

last year analyzed, 2007, is less than 300 million EUR (SMEs) or greater than or equal to that

figure (large firms). This segmentation of the sample seeks to confirm whether or not there are

significant differences in trade credit periods by providers between both groups that might be

attributable to differences in entrepreneurial size.


The second goal of this study is to complement the study of the evolution of trade credit periods

for retail firms with a corresponding study of the evolution of trade credit periods by the manu-

facturers who supply those firms with products in order to identify what proportion of the cost of

financing the commercialization process each agent in the channel assumes for the products of

mass consumption before they reach the end consumer. The starting assumption of this analysis

is that the financial burden is distributed or shared among the members of the commercialization

channel. Contrary to this assumption, the manufacturers usually complain that they are victims

who bear exclusively the entire cost of financing the commercial process of these products.

The analysis is applied to a common sample of 319 producing firms belonging to the Grocery

and Beverage Industry (Group 15 of the NCEA), which includes the following subsectors:

Meat, Fish, Fruits and Vegetables, Greases and Oils, Dairy Products, Milled Products, Pet Food,

Other Grocery Products` and finally, Beverages. See Table 1. The economic-financial informa-

tion of the financial statements comes from the SABI database [2].

The study performed consists of analyzing the evolution of trade credit periods granted to

providers by the manufacturing firms belonging to the subsectors indicated since 2005, the year

in which Law 3/2004 against delinquency in commercial operations went into effect. To facili-

tate comparison, the TCP was calculated using the indicator applied to retail firms and Formula

(1).


Table 1: Sample Characteristics of Manufacturers

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To create the aggregate indicator we weighted the trade credit period of the individual firms by

the percentage of each firm’s sales as compared with the total sales of the group considered.

The third goal of this study is to propose an explanatory model of trade credit periods granted

by providers.

To achieve this, we design a “cross-sectional” model applied to the last year, 2007, for which we

have the information necessary to calculate both the variable to be explained and the variables

representing the factors that influence the size of the TCP. Although the results obtained refer to

2007, we expect the significant factors explaining the phenomenon in one year to have a greater

temporal validity, as financial and commercial decision-makers do not modify their decision

rules with respect to the TCP in the short term.

The model’s construction is based on the theoretical focuses that have been the subject of rigor-

ous empirical contrast in different economic contexts (Cruz et al. 1997; Ng et al. 1999). Our

model incorporates different independent variables that reflect the competitive, financial and

marketing arguments supporting the factors that may potentially explain differences in entre-

preneurial behavior observed between the main firms in the sector.

Specifically, we see that the retail distributor’s market power acts as a key determinant of the

TCP. Schiller (2003), building on industrial organization models by Bain (1956) and Scherer

(1980) and the notion of extended rivalry by Porter (1979), proposes that market power refers to

the ability of a firm to alter the market price of goods or services without the fear of losing cus-

tomers to rival firms. This market power is often seen in the firm’s competitive position in terms

of market share or participation (Rhoades 1985), which translates into greater dependence on

manufacturers, who negotiate with these market-powerful retailers and are obligated to grant

them longer payment periods.

Another important indicator of market power is the gross margin [3] of the retail firm,

defined as the difference between the sales figures and the sales costs. This indicator has been

typically used as a proxy variable of market power in Industrial Economics. The relationship

between gross margins and market power is supported by classical models of imperfect oli-

gopolistic competition (Waterson 1980; Armstrong/Porter 2007). The purchase conditions are

affected by incentives in the form of discounts and rappels on the tariff prices established,

which exercise a decisive influence in increasing the gross margin. As these discounts are

usually associated with amounts purchased, they should be more substantial for larger retail

firms.

Efficiency is another of the important explanatory factors of TCP, as improvements in efficien-

cy should imply fewer financing needs and thus lower payment periods. A commonly used indi-

cator of efficiency is rotation, defined as the relation between sales and assets, or economic

profitability of assets, also understood as return on investment.

In contrast, we expect that financing needs will be greater if the retail company experiences a

higher degree of entrepreneurial growth. The indicators for measuring growth correspond to the

inter-annual rates of variation in activity, in terms both of assets and of sales.


Finally, it is clear that among the factors determining TCP we find variables of financial man-

agement. To obtain the funds necessary to function, in addition to their own resources, retail

firms can turn to two basic kinds of outside financing, one short- and the other long-term. In the

case of retail businesses, short-term funding is constituted fundamentally of the financing from

trade credits granted by the providers, whereas long-term funding involves creditors or credit

entities that grant financing with a period of more than one year. It is obvious that firms with a

greater proportion of outside financing in the long term will tend to use commercial creditors

less in the short term. Along these lines, we can introduce a battery of explanatory variables into

the model that reflect different ratios of the retail firms’ financing structure, on the level both of

liquidity and debt quality and of solvency and financial autonomy.

The description of the dependent variable used in the TCP model (number of days of the retail

firms’ trade credit) and the independent variables incorporated into the final model [4] are the

figures that contribute most to explaining the trade credit period (gross margin percentage,

asset rotation, debt quality and indebtedness) and are shown in Table 2.

We should point out that we also included a dummy variable in the analysis (1, 2) to indicate the

size category to which the retail firm belongs. For SMEs (small and medium-sized firms), the

dummy takes a value of “1” and for large firms (those whose billing volume exceeds 300 mil-

lion EUR) a value of “2”.

The empirical contrast of the explanatory model of the TCP is applied to a sample of 99 non-

specialized retail distribution firms (Group 5211 of the National Classification of Economic

Activities, NCEA). [5]


Table 2: Indicators of the Variables

Name Indicator Formula Measure unit

DependentVariable

PaymentPeriod

Commercial creditors * 360/Sales costs Days

GrossMargin

(Sales – Sales costs)*100 / Sales%

AssetRotation

Sales / Assets0-1

DebtQuality

Long-term creditors / (Long-term creditors +Short-term creditors) 0-1

ExplanatoryVariables

Indebtedness (Liabilities – Own funds) * 100 / Liabilities %

4. Results

In this section we present two types of results. We first show a descriptive analysis of the evolu-

tion of trade credit periods of food products in Spain. Subsequently we present the results of our

explanatory model for trade credit periods.

4.1. Evolution of Trade Credit Periods in Retailers

Table 3, which corresponds to the graph shown in Figure 2, presents the results obtained in the

analysis of evolution of trade credit periods from providers to Spanish retail firms in non-

specialized commerce for the period 1999-2007. In reading the table and the graph, we find

information of considerable interest on the evolution of trade credit periods granted to retailers

in Spain.

First, for the total sample of firms considered in the last year analyzed, 2007, we observe a sig-

nificant decrease - around 7 days, which increases to 10 days if we consider the period after

Law 3/2004 comes into effect in 2005. To this we must add that, even in 2004, we see some

anticipatory effect of the law when compared with 2003, as the economic agents in the sector

knew that it was about to come into effect. Thus, the sum of successive decreases that occurred

from 2003 until the last year available (2007) is quantifiable as 16 days.

This analysis shows a clear effect: decrease in the trade credit period from providers in accord

with the fundamental goal of Law 3/2004 to fight delinquency in commercial operations.


Table 3: Payment Period Evolution: Retailer

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Second, the individual analysis of the evolution of trade credit periods granted to large firms, on

the one hand, and to small and medium-sized firms on the other produces the following conclu-

sions. 1) The tendency of the total sample is marked by the evolution of large retail firms that

absorb most of the total sales in the sector, in spite of the fact that they are in the minority. This

fact can be seen in the nearly parallel, almost superimposed, evolution of both functions. 2) The

large firms maintain trade credits that are permanently longer than those of small firms. This

evidence corroborates the proposal by Cannari et al. (2004) that the large distributors show

greater market and negotiating market power to achieve longer trade credits. However, in recent

years, the difference between large and small firms has decreased due to the fact that the large

firms have reduced their number of days of delinquency more than the small firms have. 3) The

cumulative decrease by the large distributors since the Law went into effect is ten days, while

the SMEs’ reduction is just over one and a half days. 4) The weak negotiating position of the

small distributors vis à vis the providers is shown in their acceptance of shorter payment peri-

ods. In reality, we see a very constant tendency in SMEs to maintain their trade credit periods

consistently around levels that range from 66-71 days of payment deferral. In sum, we see that

the Law has affected principally the large firms, which have reduced their levels of TCP signif-

icantly.


Figure 2: Payment Period (Retailers)

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4.2. Evolution in Trade Credit Periods in Manufacturers of Food Products

Table 4, associated with Figure 3, shows the evolution of the TCP both for the full sample of the

firms manufacturing food products and for the firms belonging to each of the subsectors.

For the total of the sample, we observe that the TCP is located around 50 days, although the

quantity varies considerably based on the subsector considered. The TCP of firms that manu-

facture greases and oils is around 30 days on average, whereas the TCP for fruit and vegetables

firms is approximately 60 days.

Further, within the same subsector, we see variations over the three years considered. The TCP

of manufacturers of dairy products, animal foods and other food products shows an increasing

evolution throughout the period considered. In contrast, in the subsectors of fruits and vegeta-

bles and of greases and oils, the TCP has tended to decrease, whereas in subsectors for fish,

beverages and milled products, the period increases from 2005 to 2006 and decreases from

2006 to 2007. Finally, the TCP of meat companies hardly fluctuates, presenting a stable level

throughout the three years considered.

To provide evidence that supports or refutes our proposed assumption concerning the distribu-

tion of the cost of financing among the agents composing the chain for commercialization of


Table 4: Payment Period Evolution Manufacturers

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Figure 3: Payment Period (Manufacturers)

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products of mass consumption, we perform a comparative study of the TCP of the retailers and

of manufacturers, Table 5, associated with Figure 4.

The data indicate that the TCP of retailers is approximately the period shown, around 80 days,

whereas that of the manufacturers is less, around 50 days. The TCP of retailers is thus 30 days

longer than that of the manufacturers. However, the manufacturers postpone payment to their

providers for a period of approximately two months. Therefore, the provider located at the

beginning or at the origin of the physical distribution flow of the product in the supply chain is

the one who assumes a good percentage - approximately two thirds - of the financial cost of the

process.


Table 5: Comparative Analysis of Payment Period: Retailers vs. Manufacturers

Figure 4: Comparative Analysis of Payment Period: Retailers vs. Manufacturers

2005 2006 2007

% of trade credit periods of manufacturers overdistributors

58 % 63 % .68 %

Difference in retailer-to-manufacturer trade creditperiods

35.27 29.64 23.52

Source: Elaborated using information from CABSA y SABI.

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4.3. Explanatory Model of Trade Credit Periods for Retailers

Now that we have analysed the temporal evolution of the TCP, from the perspective of both the

production firms and the distribution companies, we present our work towards this paper’s third

major objective. The basic idea is to estimate an explanatory model of trade credit periods

granted by providers. The goal is to advance our understanding of the determinants of the dif-

ferences observed between the TCPs of the individual firms for year 2007.

In table 6 we show the average and standard errors of the dependent and explanatory variables

of the model. The average payment period is 77.78 days (standard deviation: 47.17 days)


Table 6: Descriptive Statistics of the Variables Used in the Regression Model

Mean Standard Deviation

DependentVariable

Payment Period (Days) 77.78 47.17

Gross Margin 17.65 11.75

Asset Rotation 2.44 1.33

Debt Quality .12 .15

ExplanatoryVariables

Indebtedness .64 .23

Table 7: Multiple Regression Model of the Retail Payment Period

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For the regression analysis, we apply the step-wise procedure, obtaining the results shown in

Table 7. Here we can see the statistically significant effect of the independent variables indicat-

ed in the descriptive analysis. We should mention that the coefficient of determination R2

adjusted to the ascending model is “.28”, indicating that the model explains 28% of the variance

of the dependent variable TCP. The F Snedecor obtained is 10.502, with a significance level of

.000, which shows that the model as a whole is statistically significant.

The results show that, in agreement with the hypotheses derived from our theoretical review,

retail firms’ market power and their degree of efficiency show a statistically significant influ-

ence on trade credit periods granted by providers. Indeed, the results show that the retailers with

efficient asset management measured as the quotient of sales volume over total assets (both

fixed and current) postpone payment to manufacturers less, whereas a lower level of rotation

means that the retailers must resort to greater financial leveraging to compensate for the mini-

mal productivity of their assets.

In contrast, the retailers who have greater market power, expressed in higher gross margins due

to their negotiating market power, achieve longer deferrals. And the debt quality measured as

the relation between long-term creditors and total outside funds (both long- and short-term)

helps those firms with more long-term financing not to have to resort to the financing granted

by commercial creditors in the short term.

The results show that the fundamental explanatory factor of trade credit periods granted by

providers, as well as the above-mentioned efficiency evaluated in terms of rotation, is based on

the financial policy of the retail firms, specifically in their indebtedness policy. The degree of

indebtedness was measured through the relation between outside funds and liabilities. That

indebtedness takes a positive sign in the model shows that firms with fewer of their own

resources which are therefore in greater need of outside funding achieve this funding, among

other formulas, through the financing included in trade credit granted by providers.

4.5. Managerial Implications

Some managerial implications arise from our analyses, particularly for retailers and manufac-

turers of consumer goods. First, companies do not negotiate trade credit periods without taking

into account their financial situation. By contrast, even having the same profitability and/or

growth objectives, the importance of trade credit periods of retailers varies according to their

efficiency and market power. Thus, retailers with a high monopolistic power will probably con-

sider enlarging trade credit periods as a way of reaching their objectives. On the other hand, an

efficient retailer - with a business model based upon high rotation rates - will prefer reducing its

supplying costs in exchange for accepting shorter trade credit periods. Similarly, retailers with

a different financial structure will have a different attitude toward the employment of trade

credit periods as a financial instrument.

As a consequence, retailers that use trade credit periods for obtaining financial resources at a

low cost as an alternative to long term indebtedness in order to pay for the growth of their fixed

assets are assuming a high level of risk.


Manufacturers that need to sell their products through large retail chains (due to their size or

other economic reasons) must foresee that they are going to be obligated to accept very long

trade credit periods. They must find mechanisms to compensate for the financial cost of these

credit periods. These mechanisms include: 1) increasing their prices (adequate for owners of

strong brands), 2) neutralize the increase in financial costs by lowering manufacturing costs

(appropriate for cost leader companies, usually very large firms) or 3) increase trade credit peri-

ods for their inputs suppliers. Similarly, manufacturers should deeply analyse the economic

efficiency and the liabilities of the retailers they have to negotiate with, in order to check

whether the distributors really need to postpone payments.

Finally, our study also provides some insights for policy makers. In particular, our analysis

makes clear that the identification of the links between the financial structure of retailers and

their competitive patterns are very strong. Policy makers must take into account these links in

order to set off control systems that allow anticipating when companies might stop paying their

debts.

6. Conclusions, Limitations and Future Lines of Research

Performing this study has enabled us to confirm that the legislative measures to combat delin-

quency in commercial operations have been having a considerable and continuous effect since

the law went into effect in 2005. This effect began as an anticipated influence in 2004, produc-

ing a decrease in the trade credit period as compared to 2003. The credit continued to decrease

in the first two years that the law was in effect (2005 and 2006), with a marked downward trend

in the length of trade credit from providers to retail firms. This trend has been confirmed and

consolidated in the last available set of statistics from 2007, the year in which the reduction of

days that these firms postponed their payments was especially significant.

The results obtained also show that larger retail firms always have longer trade credits than

small firms in the period analyzed. This difference in the deferral between large and small-to-

medium sized firms may be attributed in principle to the negotiating market power that larger

distribution companies have in their transactions with production firms.

On the other hand, the analysis performed of the TCP enables us to confirm that the average

length of trade credit period from providers varies considerably based on the subsector consid-

ered. Therefore, we observe that not only do distributors delay payment to manufacturers, but

manufacturers also defer payment to a lesser but not insignificant extent (especially in some

subsectors) to their providers of raw materials. These initial agents in the value chain assume to

a large extent, and in many cases the greatest part, of the financing cost for the production and

commercialization process of the products of mass consumption.


To this we must add that, while the trade credit period of retail firms has declined consistently

in recent years, the same trend does not occur in the case of manufacturing companies, which

have tended to experience moderate growth or even remain stable in the last period.

If we look for explanations for the extent of the trade credit period granted by providers, we find

the cause to lie fundamentally in the strength of the negotiating position that comes with market

power as well as in the firm’s capability to manage their retail business efficiently. Indeed, the

regression analysis shows that the retail firms which defer payment most are those with the

highest gross margins and the greatest asset rotation.

This shows that the market-powerful retailers demonstrate their influence by, among other

ways, obtaining longer trade credit periods. This enables them to easily reorganize and improve

their profit and loss statements through effective management of the greater level of cash flow

that they enjoy. On the other hand, there is less financial need in firms that manage their retail

businesses efficiently, thereby decreasing the days of trade credit granted by providers.

Although important, these two explanatory factors have less influence on the TCP than the two

financial ratios: degree of indebtedness and debt quality. The former shows that the most

indebted retail firms defer their payments longer, as part of this debt comes precisely from the

short-term debt contracted with the commercial creditors. The second ratio shows that retail

firms which obtain better long-term financing, associated with a better quality of debt contract-

ed, do not have as great a need for the financing granted by their providers of goods.

We must take into account that this study has a general and descriptive focus, as it is based on

data from the profit and loss statements of the retail firms. This limitation in the sources of

information has prevented us from incorporating into the analysis a series of explanatory fac-

tors used in other studies mentioned in the literature review as conditioners of the period of

commercial credit. These are variables such as the length of the manufacturer-distributor rela-

tionship, the provider’s control over variables of its product marketing at the point of sale, by

belonging to a purchase centre, and opportunistic behavior by the provider. In a future study, it

would be interesting to obtain and introduce this set of variables.

It would also be interesting to develop an explanatory model of trade credit periods for manu-

facturers. This would allow testing whether the drivers of trade credit periods are the same as

for retailers, thus generalizing our model’s results. Not reaching similar results would indicate

that the model should be adapted to each type of company.

In any case, the debate over whether the legal regulation of trade credit periods is appropriate

remains unresolved. It is perhaps important to remember that the key to combating delinquency

lies not only in the passing of laws but also, as Brachfield (2006) indicates, in improving Span-

ish and European retail firms’ payment behavior through an ethical code that ensures self-regu-

lation of payment periods.


Notes

[1] The authors wish to thank CABSA (Central de Análisis de Balances) for its collaboration inproviding without restrictions the information on the financial statements of the firms weanalyzed.

[2] Free access to SABI is available through the web server of Autonoma University of MadridLibrary.

[3] Gross margin can be considered as the operational variable of the theoretical conceptunderlying in Lerner’s index, which is an indicator of monopolistic power.

[4] This explanatory analysis was performed using Minimum Least squares in stages until wedetermined the indicators that best explained the differences in the TCPs observed.

[5] These 99 firms were obtained after filtering out cases that were either missing data forsome variables or that include observati ons that they are not strictly retail firms.

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Armstrong, M.; Porter, R. (2007): Handbook of Industrial Organization Series, Vol. 3, NorthHolland.

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Customer Satisfaction with Loyalty Card Programsin the Austrian Clothing Retail Sector -an Empirical Study of Performance Attributes Using Kano’s Theory

Eva Walter, Claudia Steyrer and Stefan Wiesel

AbstractThe popularity of relationship marketing has increasingly grown in the past couple of decades.Retailers recognize that satisfying and retaining consumers by building relationships is one ofthe most sustainable competitive advantages. Although the use of loyalty cards is popular inretailing, a lot of customer loyalty programs are virtually interchangeable, lacking in attractive-ness and differentiation. Therefore, it is important to identify the determinants of customer sat-isfaction relating to these programs. Does aiming for customer satisfaction mean understandingand anticipating what customers want from a loyalty card program? A Kano model of customersatisfaction is investigated; and “attractive”, “must-be”, “one-dimensional” and “indifferent”requirements are identified based on a sample of 300 customers.

KeywordsCustomer Satisfaction, Loyalty Card Programs, Kano Theory

Eva Walter (corresponding author)Department of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economicsand Business, Vienna, Austria(Tel: +43 1 31336 4622; E-mail: [email protected]).

Claudia SteyrerDepartment of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economicsand Business, Vienna, Austria.

Stefan WieselDepartment of Marketing, Institute for Retailing and Marketing, WU Vienna University of Economicsand Business, Vienna, Austria.

Received: December 4, 2009Revised: April 22, 2010Accepted: April 26, 2010

EUROPEAN

RETAIL


1. Introduction

Around the world retail competition in consumer markets continues to intensify and retailers as

well as marketers are seeking strategies for maintaining both the interest and loyalty of their

customers. Therefore, relationship marketing has grown in popularity during the past decades

and the implementation of relationship marketing programs is steadily increasing (Noble/

Phillips 2004, p. 290). Today, retailers recognize that satisfying and retaining consumers by

using relationship building activities is one of the most promising forms of sustainable compet-

itive advantage. Although loyalty cannot be taken as a direct proxy for profitability, numerous

theoretical and empirical studies have found that customers generate increasingly more profits

for each year they buy from and continue to trust the company (Meffert 2008, p. 160; Noble/

Philips 2004, p. 290; Reinartz/Kumar 2000, p. 28).

In retail practice it is very common to use card-based programs for loyalty enhancement strate-

gies. Such programs involve the issuance of specially coded cards or other special scanner-read-

able cards, which can then be used at the checkout with the objective of increasing customer

propensity. The customer can derive several benefits from the usage of loyalty cards like per-

centage/price reductions, special offers, gift-packaging-service, their own parking area or addi-

tional information (Allaway et al. 2006, p. 1318). After growing by 25 to 30 percent a year

during the 1990s, loyalty cards are now commonplace in European retailing. In some markets,

the penetration has approached saturation, while in others it is still advancing at a steady pace

(Ziliani/Bellini 2004, p. 282f.). In Austria, loyalty card programs are among to the most popu-

lar relationship-building activities (Seebacher 2007, p. 78).

Nonetheless, a lot of customer loyalty card programs are virtually interchangeable and con-

sumers do not use them (Hoffmann/Naß 2007, p. 6). There are many different reasons why con-

sumers do not want to engage in a relationship with the retailer. Often consumers do not feel

that the benefits offered by retailers are sufficient or of interest for them (Noble/Philips 2004,

p. 300). Furthermore, there is also a lack of attractiveness and differentiation (Tomczak et al.

2008, p. 325).

Consequently, it is important to identify the determinants of customer satisfaction with loyalty

programs to offer suitable benefits to the customers. Aiming for customer satisfaction means

understanding and anticipating what customers want from a loyalty card program, which per-

formance attributes generate positive response and have the ability to surprise the customer.

Which benefits can be offered to obtain a high level of customer satisfaction, which features

have a disproportional influence on satisfaction, and which attributes are essential to the cus-

tomer? Based on the Kano model of customer satisfaction, the purpose of this study is to ana-

lyze different performance attributes and to identify the most influencing factors on customer

satisfaction.


The remainder of this paper is organized into four parts. The following section (section 2) pro-

vides a literature review and the description of the Kano model of customer satisfaction. In the

third section the conceptual framework and the derived hypotheses are reported. The fourth

presents the construction of the Kano questionnaire, the empirical study and the steps of data

analysis. Finally, the results are discussed and we explore limitations and some implications for

future research.

2. Theoretical Background

In modern management theory, customer satisfaction is considered one of the most important

drivers of long-term business success. This shift in strategic thinking is based on the assumption

that customer satisfaction is one of the most powerful indicators for a company’s future, as a

high level of customer satisfaction leads to a high level of customer loyalty. Numerous theoret-

ical and empirical studies discuss the positive effects of customer satisfaction (Bolton 1998;

Homburg/Bucerius 2006, p. 93; Mittal/Kamakura 2001). Albeit nonlinear, higher satisfaction

nevertheless increases customer loyalty and ensures a lasting cash flow. Satisfied customers

are, furthermore, less price sensitive and more inclined to spend more on tried and tested prod-

ucts (Homburg et al. 2005, p. 94; Yu/Dean 2001, p. 247). Stable business relations have other

advantages: the positive image reduces the costs of attracting new customers, and the high

level of customer loyalty lowers transaction costs for existing customers (Matzler et al. 2009a,

p. 9). As a consequence, practitioners need to understand how satisfaction is engendered, how it

can be influenced, which features have a more than proportional influence on satisfaction and

which attributes are an absolute must in the eyes of the customer.

So far, the literature on customer satisfaction is characterized by the predominance of one-

dimensional models (Anderson/Mittal 2000, p. 108). The best known framework for satisfac-

tion studies is probably the expectation disconfirmation paradigm. It proposes that customers

maintain a standard of reference to which they compare perceived performance. Satisfaction

results if performance is higher than expected; dissatisfaction results if it is lower (Homburg/

Stock-Homburg 2008, p. 19; Foscht/Swoboda 2005, p. 209). In this case, only the overall cus-

tomer satisfaction with the total product or service performance is considered (Bartikowski

2002, p. 16). But the identification of the determinants of customer satisfaction is a central con-

cern for both marketing research and practitioners. It is important to know which service attrib-

utes add value and increase satisfaction, which of them merely fulfill minimum requirements

and minimize dissatisfaction, and which do both. Consider the following examples: a clean

restaurant engenders no satisfaction, but a dirty restaurant strongly attracts negative feelings;

receiving a free drink in a restaurant is pleasantly surprising, but there is no reason for dissatis-

faction if it is not delivered for free. In cases such as these, variant attributes may result in cus-

Walter, E.; Steyrer, C.; Wiesel, S. 73

tomer satisfaction or dissatisfaction or evoke no feeling from the consumer (Bartikowski/Llosa

2004, p. 68). This is the core concept of the Kano model.

The earliest concept for a two-dimensional model was proposed by Frederick Herzberg

(Herzberg et al. 1959). The motivator-hygiene theory or the two-factor theory of work intro-

duces a distinction between satisfaction and dissatisfaction. The theory posits that the factors

causing job dissatisfaction are different from the factors causing job satisfaction (Matzler et al.

2004, p. 1182; Tontini 2000, p. 728). Inspired by Herzberg’s theory in behavioural science,

Kano et al. (1984) developed the “Theory of Attractive Quality”. The theory of attractive quali-

ty is useful to better understand different aspects of how the customer evaluates a product or

service (Löfgren/Wittell 2007, p. 56; Nilsson-Witell/Fundin 2005, p. 152). To understand the

role of quality attributes, Kano et al. (1984) present a model that evaluates patterns of quality

based on customers’ satisfaction with specific quality attributes and their degree of sufficiency.

The theory explains how the relationship between the degree of sufficiency and customer satis-

faction with a quality attribute is different for different kinds of attributes. For some attributes

this relationship is positive asymmetrically, positive linearly, negative asymmetrically, non-exis-

tent or negative linearly (Ting/Chen 2002, p. 548). Depending on the nature of this relationship,

product and service attributes are distributed amongst five categories of perceived quality:

“must-be elements”, “one-dimensional elements”, “attractive elements”, “indifferent elements”

and “reverse elements” (Löfgren/Wittell 2005, p. 62). If must-be requirements are not fulfilled,

the customer will be dissatisfied, but their fulfillment will not increase satisfaction, as these

requirements are taken for granted. So, fulfilling these requirements will only lead to a state

where the consumer is not dissatisfied. Contrary to the must-be requirements, a high level of

fulfillment of one-dimensional requirements will lead to a high level of consumer satisfaction.

Attractive requirements have the most influence on satisfaction. Those requirements are neither

explicitly expressed nor expected by the consumer (Sauerwein 1999, p. 416).

Kano’s model of customer satisfaction connects the ideas of the theory of attractive quality with

the acceptations of the expectation disconfirmation paradigm. According to Kano’s model of

attractive quality, satisfaction with a quality attribute is the result of an evaluation of objective

and subjective qualities. Transferring this acceptation to the expectation disconfirmation para-

digm, customer satisfaction then is the result of an evaluation of the standard of reference to the

perceived performance (Hölzing 2008, p. 85). Figure 1 shows the nature of this relationship.

Consequently performance attributes are classified into the following five categories (Matzler

et al. 2009b, p. 322f.; Homburg/Stock-Homburg 2008, p. 33f.; Matzler et al. 2004, p. 1183f.):

- Must-be requirements: are minimum requirements that cause dissatisfaction if not fulfilled

but do not lead to customer satisfaction if fulfilled or exceeded. Negative performance on

these attributes has a greater impact on overall satisfaction than positive performance. The


fulfillment of basic requirements is a necessary but not a sufficient condition for satisfaction.

Basic requirements are entirely expected. The customer regards them as prerequisites, they

are taken for granted.

- One-Dimensional requirements: lead to satisfaction if performance is high and to dissatisfac-

tion if performance is low. In this case, the attribute performance-overall satisfaction relation-

ship is linear and symmetric. Usually one-dimensional requirements are explicitly demanded

by customers.

- Attractive requirements: are the requirements that increase customer satisfaction if delivered

but do not cause dissatisfaction if they are not delivered. Positive performance on these attrib-


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Figure 1: Kano’s Model of Customer Satisfaction

Source: Berger et al. (1993), p. 4.

utes has a greater impact on overall satisfaction and these requirements are the key to cus-

tomer satisfaction. Attractive requirements are neither explicitly expressed nor expected by

the customer.

- Indifferent requirements: these requirements refer to aspects that are neither good nor bad.

Consequently they do not result in either customer satisfaction or customer dissatisfaction.

Often indifferent requirements are those product or service attributes that are never or rarely

used by the customer.

- Reserve requirements: these requirements refer to a high degree of achievement resulting in

dissatisfaction and to the fact that not all customers are alike.

The model implies that basic requirements establish a market entry threshold. If they are deliv-

ered to a satisfactory level, an increase in their performance does not lead to an increase in

customer satisfaction. One-dimensional requirements are typically directly connected to cus-

tomers’ explicit needs and desires. Therefore, a company should be competitive with regard to

one-dimensional factors. Attractive requirements are unexpected and surprise the customer. As

they generate delight, a company should try to stand out from the competition with regard to

these attributes.

Furthermore, additional advantages exist for classifying customer requirements by means of the

Kano method. Attributes requirements are better understood. The criteria that have the greatest

influence on customer satisfaction can be identified (Matzler/Bailom 2009, p. 293). Classifying

attribute requirements into must-be, one-dimensional and attractive dimensions can be used

to focus on priorities for development. It is not very useful to invest in improving must-be

requirements which are already at a satisfactorily level, but better to improve unidimensional or

attractive requirements as they have a greater influence on the customers’ level of satisfaction

(Matzler/Bailom 2009, p. 293; Sauerwein 2000, p. 180). Kano’s method provides valuable help

in trade-off situations in the development stage. If two features cannot be met simultaneously

due technical or financial reasons, the criterion can be to identify which has the greatest in-

fluence on customer satisfaction (Matzler et al. 2004, p. 1184). Kano’s model of customer

satisfaction can be used to optimize quality function deployment. A prerequisite is identifying

customer needs, their hierarchy and priorities. Kano’s model is used to establish the importance

of individual features for the customer’s satisfaction and thus it creates the optimal prerequisite

for process-oriented product development activities (Sauerwein 2000, p. 5).

The Kano method has been discussed in numerous theoretical articles and empirical studies and

the basic idea of this model is widely accepted in current research (Matzler et al. 2009b, p. 324;

Hölzing 2008, p. 149f.; Bartikowski/Llosa 2004, p. 70f.; Matzler et al. 2004, p. 1183; Gierl/

Bartikowski 2003, p. 24f.; Anderson/Mittal 2000, p. 108f.; Vavra 1997, p. 380ff.; Tontini 2000,

p. 730ff.; Sauerwein 2000, p. 25f.). Furthermore, several researchers have studied Kano’s


method in combination with other methods (Tontini 2007, p. 603f.; Chen/Su 2006, p. 595f.).

Finally, the Kano method has been used in current empirical studies to classify consumer

requirements in, for example, supermarkets (Ting/Chen 2002, p. 548f.), building centers (Sauer-

wein 2000, p. 154f.), shopping centers (Baier 2001, p. 4), in tourist offers (Lee/Chen 2006, p.

301) and tourist agencies (Kaapke/Hudetz 2001, p. 128).

3. Research Hypotheses

The literature review does not show a consensus on the minimal characteristics of a loyalty card

program. From a retailer’s perspective, the loyalty card is the prime interface between the retail-

er’s database and the customer. From a customer’s perspective, the card is a tool that generates

extra rewards (Wieder 2009, p. 625; Tomczak et al. 2008, p. 335; Schweitzer 2003, p. 21).

Typically, loyalty card programs serve four functions (see Figure 2). First, customer cards per-

form an identification function. Nowadays cards are normally configured with a magnetic strip,

barcode or chip, to transfer information to the retailer (Kasavana 2005, p. 31). Second, customer

cards serve a memory function and act as an advertising medium. Finally, loyalty card programs

have a finance function and a marketing function (Helm/Ludl 2005, p. 1137). Through these

functions, loyalty cards provide benefits to the customers.

Customers can benefit from participation in loyalty card programs in several ways. Within the

finance function, programs offer customer price performance (percentage/price reductions,

specials offers) or payment- and credit performance (credit facilities) and bestow economic

benefits (Guldin/Ohr 2008, p. 837; Teichmann 2006, p. 57). Together, these can create economic

switching barriers, in which case customers loose advantages if they change suppliers (Meyer-

Waarden 2006, p. 225). In relation to their marketing function, customers can be offered special

services. These services endow service benefits (gift packaging, reserved parking, additional

information) and psycho-social benefits (preferential treatment sponsored by the retailer like

pre-sale campaigns, style counseling) (Guldin/Ohr 2008, p. 837; Teichmann 2006, p. 55). Such

service performance attributes can create emotional bonds that enhance customer commitment,

which will strengthen the loyalty program’s effects beyond those of the economic aspects. Con-

sumers may appreciate rewards which make them feel like preferred customers and thus will

identify more strongly with the company. In this scenario, an interactive, high quality, long-

term relationship that leads to greater trust, commitment and loyalty becomes an emotional

choice factor and could lead to a high switching cost (Allaway et al. 2006, p. 1319; Helm/Ludl

2005, p. 1139).

According to the extant literature, price performance is considered a standard attribute of a loy-

alty card program (Hari/Meyer 2008, p. 20; Teichmann 2006, p. 56; Lauer 2004, p. 46; Ploss


2002, p. 28). For customers price performance is often a basic criteria and a reason to join a loy-

alty card program. Therefore, we hypothesize as follows:

H1.a: The evaluation of price performance is identified as a must-be requirement of loyalty

card programs.

Service performance has the potential to surprise customers. The fulfillment of these require-

ments brings high satisfaction and creates emotional solidarity (Hoffmann/Naß 2007, p. 41;

Teichmann 2006, p. 55). A retailer can set itself apart from its competitors through service per-

formance. Therefore, we hypothesize as follows:

H1.b: The evaluation of service performance is identified as an attractive requirement of loy-

alty card programs.

Besides the fact that Austria has been typically a “cash” country over the past decade, there has

been a steady increase in the preference for cashless purchasing. From a consumer’s perspective

a credit card or other type of card functions as an alternative payment and financing medium.

From a retailer’s perspective it is possible to perform a payment- or credit service in several

ways. First, it is possible to create an in-house card or a sales account. Consequently, the cus-


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Figure 2: Functions of a Loyalty Card Programm

Note: Helm/Ludl (2005), p. 1137.

tomer has an additional payment card. These non-cash payment facilities are often character-

ized by high abstraction levels, and loss of subjective control over expenditures (Penz et al.

2004, p. 771; Schweizer 2003, p. 23). Second, it is possible to cooperate with a debit card com-

pany (Maestro) or a credit card company (Visa, MasterCard) to create a versatile usable card.

These facilities have the benefit that they are easy to handle and increase convenience. Also,

control over expenditures could be increased (Teichmann 2006, p. 61). In Austria, such loyalty

programs are not very popular. Hence it would be interesting to find out how these services

influence customer satisfaction and we hypothesize as follows:

H1.c: The evaluation of in-house payment- and credit service is identified as an indifferent

requirement of loyalty card programs.

H1.d: The evaluation of general payment- and credit functions is identified as an attractive

requirement of loyalty card programs.

For better customer satisfaction and less customer dissatisfaction, a company has to make the

effort to offer attractive product or service elements in new services as well as eliminate possi-

ble defects in must-be elements. Because the judgment of an attractive element or a must-be

element is highly personal, it is important to designate segments. Segmentation, the notion that

nearly any market can be divided up into variety of different behavioural, demographic, or psy-

chographic groups with potentially very different reactions to marketing stimuli, is a central

concern for marketing researchers and practitioners (Chen/Su 2006, p. 598f.; Baier 2002, p. 5).

Having now established the background that the Kano model demonstrates that performance

attributes can be transformed into terms of requirements, one can then take demographic vari-

ables such as age, gender, etc. or behavioural variables to create different market segments and

develop services with attractive requirements for these respective customer groups (Hölzing

2008, p. 87f.). Therefore, we propose as follows:

H2.a: There are no differences between men and women in the evaluation of performance

attributes within loyalty card programs.

H2.b: There are differences between credit cardholders and customers without any credit card

in the evaluation of loyalty cards with payment and/or credit functions.

Kano’s theory predicts that product and service attributes are dynamic in that, over time, an

attribute will change from being indifferent, to attractive, to one-dimensional, and finally into a

must-be (Hölzing 2008, p. 61). According to Kano product and service attributes do follow this

lifecycle. When introduced to a market, often an attribute may not be very interesting to cus-

tomers - they feel indifferent towards the new attribute. In the growth phase of a market, an

attribute might gain the ability to make customers feel satisfied, but still neutral if the service

does not include this attribute. However, customers who have used the attribute will frequently

be strongly dissatisfied if it later disappears. After frequent usage, the perception of the attrib-


ute changes to one-dimensional, and over time to must-be (Nilsson-Witell/Fundin 2005, p.

153f., Sauerwein 2000, p. 20). Therefore, we hypothesize as follows:

H3: There is a difference between loyalty cardholders and customers without loyalty cards in

the evaluation of performance attributes within loyalty card programs.

The literature review shows that customers in retail fashion are poised for testing new functions

in loyalty card programs (Pohlmann 2003, p. 161; Ritter 2002, p. 54). So it is important to find

out if there is an acceptance for a payment- or credit function and which factors influence the

use of such cards. Actually, little is known about the factors that influence consumers’ use of

store cards. According to Lee and Kwon (2002, p. 241) the usage is related to a number of vari-

ables, including the use of payment cards, income and education. In Austria, preference for

cashless payments increases with higher income and education (Mooslechner et al. 2006, p.

134). Therefore, we propose:

H4.a: Education has positive affects on the usage of cards with payment and/or credit func-

tions.

H4.b: Income has positive affects on the usage of cards with payment and/or credit functions.

H4.c: The more loyalty cards a customer has, the more likely the consumer will want to use

loyalty cards with payment and/or credit functions.

Nowadays, most customer loyalty card programs are virtually interchangeable. They lack in

attractiveness and differentiation. A retailer has to offer an additional incentive to make its card

competitive and attractive (Hoffmann/Naß 2007, p. 6). According to Ferguson (2006, p. 374) a

payment- and credit service should be an integral part of the loyalty strategy and can effective-

ly differentiate the loyalty card. Finally, an integral payment- and credit service can positively

affect customer satisfaction with the loyalty program. In line with these findings we hypothe-

size as follows:

H5: Loyalty cards with payment and credit functions positively affect consumer satisfaction

with the loyalty card.

The hypotheses formulated will be subjected to an empirical review in the following chapter.

4. Empirical Study and Methodology

4.1. Kano Questionnaire

The Kano model brings a different perspective to the analysis of product or service attributes

because it takes into consideration the asymmetrical and non-linear relationship between per-

formance and satisfaction.


The identification of attractive, must-be, one-dimensional and indifferent requirements is based

on a “Kano questionnaire”, which is constructed of pairs of customer requirement questions.

The first question, or functional question, identifies the reaction of the customer as to whether

or not the performance of the requirement is sufficient. The second question, or dysfunctional

question, identifies the reaction in case the performance is insufficient. So each question has

two parts: “How do you feel if that feature is present in the product or service?” (functional

question) and “How do you feel if that feature is not present in the product or service?” (dys-

functional question).

In the original version customers had to select one of five alternative answers for each part of

the question. These five alternatives are described as “I like it that way”; “It must be that way”;

“I am neutral”; “I can live with it that way” and “I dislike it that way”. The wording of the alter-

natives is a critical choice when using this approach.

Depending on the customers’ answers to the functional and dysfunctional questions, the

requirement may be classified as an attractive, must-be, one-dimensional, questionable, reserve

or indifferent. The five-level Kano evaluation table has 25 possible outcomes (see Table 1).


Table 1: Kano Evaluation Table

Performance DysfunctionalRequirements 1. I like it 2. It must 3. I am 4. I can live 5. I dislike

that way. be that way. neutral. with it that way. it that way.

Functional

1. I like it that way. Q A A A O

2. It must be that way. R I I I M

3. I am neutral. R I I I M

4. I can live with itthat way. R I I I M

5. I dislike it that way. R R R R Q

Notes: A(ttractive), O(ne-dimensional), M(ust-be), Q(uestionable), R(everse), I(ndifferent)

Source: Sauerwein (2000), p. 38.

A lot of studies use simplified versions of the original five-level Kano questionnaire (Löfgren/

Witell 2007, p. 58f.; Corbella/Maturana 2003, p. 73; Gierl/Bartikowski 2003, p. 24; Baier 2001,

p. 5; Sauerwein 2000, p. 82f.). The aim of this approach is to reduce complexity. The advantage

of simplified response scales lies in the fact that reduced scales represent an option for devel-

oping simpler, less extensive questionnaires, which is important for correctly filling out the

questionnaires and for attaining a higher response rate in surveys (Hölzing 2008, p. 116;

Gierl/Bartikowski 2003, p. 24; Matzler et al. 2009b, p. 334). In this study, the simplified ver-

sion according to Gierl/Bartikowski is used (Gierl/Bartikowski 2003, p. 24). For each part of

the question, the customer selects one of three instead of five alternative answers (see Table 2).


Table 3: Modified Kano Evaluation Table

Performance Requirements Dysfunctional

3. I am 4. I can live 5. I dislike

neutral. with it that way. it that way.

Functional 1. I like it that way. A O A

2. It must be that way. I M I

3. I am neutral. I M I

Notes: A(ttractive), O(ne-dimensional), M(ust-be), Q(uestionable), R(everse), I(ndifferent)

Source: Hölzing 2008, p. 18.

Table 2: Functional and Dysfunctional Questions in the Kano Questionnaire

I like it It must be I am I can live I dislike it

that way. that way. neutral. with it that way. that way.

Functional Question O O O

Dysfunctional Question O O O

Source: Gierl/Bartikowski 2003, p. 24.

The three-level classification has the additional benefit of facilitating the completion of the

classification of attributes. This scheme thus has 9 possible outcomes (see Table 3). The two

classes questionable and reserve do not exist in this evaluation table. The category “question-

able” shows that there are contradictions in the responses given by the consumer that may be

due to a misinterpretation of the answers or to errors in filling out the questionnaire.

The standardized questionnaire is divided into four parts. The questions in the first part are

related to store cardholders, their overall satisfaction and usage. The main part of the Kano

questionnaire is in the second part. The Kano pair questions are about price performance attrib-

utes (percentage/price reductions, specials offers), in-house payment- and credit function attrib-

utes (loyalty card with credit card functions, sales account), general payment and credit per-

formances attributes (debit card, credit card), service performance attributes (extra info, special

benefits like gift packaging service or reserved parking) and for psycho-social performance

attributes (special treatment like pre-sale-campaigns, style counseling). The third part of the

questionnaire is about the attitude of the consumer towards payment- and credit services in gen-

eral. The interviewee has to rank several possible ways to include a payment- or credit function

in a loyalty card program and they have to evaluate the usefulness of this combination and its

possibility to improve the overall satisfaction. Concluding, personal data like sex, age, educa-

tional background, monthly income and ownership of credit/debit cards were surveyed.

4.2. Field Study

Since the business environment of the fashion sector is constantly changing, the development

and implementation of effective and successful marketing strategies are particularly important

in the retail clothing sector (Moore/Fairhurst 2003, p. 386; Meffert 2008, p. 159; Müller-Hage-

dorn 2006, p. 35; KMPG 2006, p. 58; Liebmann/Zentes 2008, p. 170). Therefore, the empirical

study underlying this research was conducted in the main fashion shopping streets of Vienna

using personal interviews based on a standardized questionnaire containing mainly closed

questions. The experience has shown that standardized, oral interviews are the most suitable

method for Kano surveys. A standardized questionnaire is advantageous in that it reduces the

interviewer’s influence and usually increases the return rate (Hölzing 2008, p. 119f.; Sauerwein

2000, p. 39).

In selecting the main shopping streets several aspects were taken into consideration. There are

many fashion stores located on these streets and, as the interviews were done shortly after a pur-

chase, the customer was still in the shopping situation when they were asked to do the interview.

Also, the loyalty card, if available, was used a short while ago at the point of sale. The data was

collected within a period of one month. To improve data quality, the survey was carried out on

the four main shopping streets of Vienna (Mariahilfer Straße, Kärtner Straße, Landstraße and

Favoritenstraße) using a convenience sample of 300 shoppers.

70.3% of the respondents were female, and 29.7% were male. The reason for this relation may

be that women are more interested in fashion shopping and are therefore overrepresented on

shopping streets (Größe-Bölting 2005, p. 104). The survey distinguishes five age categories

(see Table 4).


Table 4: Age and income

Age Sample Income Sample

20 to 29 years of age 63 (21%) less than 1,000 Euros 37%

30 to 39 years of age 82 (27%) 1,000 to 2,000 Euros 45%

40 to 49 years of age 63 (21%) more than 2,000 Euros 9.3%

50 to 59 years of age 61 (20%) n/a 8.7%

over 60 years of age 31 (10%)

Most respondents have a vocational education or apprenticeship (40.7%), 36.3% have a gener-

al qualification for university entrance and 14% have a university degree. 6% have only com-

pulsory education. 98% own a debit card and 37% have a credit card. About 1% of the sample

has a co-branded payment card. 192 respondents (64%) have a loyalty card from a fashion

retailer.

4.3. Results

In the following the Kano questionnaire is analyzed. After combining the answers, results are

listed in an evaluation table which shows the overall distribution of the “requirement cate-

gories”. Subsequently, multi-group comparisons were drawn and a possible category shift over

the course of time was discussed. Finally, the influencing factors on the usage of cards with pay-

ment functions were determined.

Nine performance attributes were categorized. Each attribute is classified according to the

evaluation table as either attractive, one-dimensional, must-be or indifferent. The results of the

basic analysis are shown in Kano’s summary table (see Table 5). 49% of the respondents think

that a debit card is attractive, 4% are satisfied with this performance attribute, .3% see it as

must-be and 46.7% are indifferent. So, the majority sees the debit card as either a one-dimen-

sional attribute or are indifferent to it. Two or more categories are often linked

(percentage/price reductions) or almost linked (special offers, debit card, additional informa-

tion, special benefits). Moreover, this could be an indication that a more exacting analysis is

needed.


Table 5: Response Distribution by Performance Attributes and Grading of Categories

Performance Attribute A O M I Total Category

Percentage/price reductions 25 31 31 13 100 O/M

Special offers 27 32 34 7 100 M

Debit card 49 4 .3 46.7 100 A

Loyalty credit card 15 .7 1 83.3 100 I

Co-branded credit card 25.7 1 .7 72.6 100 I

Sales account 13 .7 1.3 85 100 I

Additional information 15 13.3 31.7 40 100 I

Special benefits 33.3 29.7 23.3 13.7 100 A

Preferential treatment 41 25 6.7 27.3 100 A

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; n = 300

The classification of quality attributes was tested through a t-test. This statistical test was con-

ducted for comparing the proportions of respondents classifying a performance attribute with a

specific category. This test was possible since the conditions for approximation of multinomial

distribution to the normal distribution were satisfied for this empirical investigation (Löf-

gren/Witell 2007, p. 63; Nilsson-Witell/Fundin 2005, p. 162). The classification of all attributes

is statistically significant (p < .001) (see Table 6). Fong (1996) developed a test for analyzing

the statistical significance of the classification. This test can be used if the analysis of frequen-

cies does not show satisfactorily results. Therefore a classification is presumed to be non-sig-

nificant, when

[1] a - b < 1.65a + b(2n - a - b) 2n

a and b are defined as the categories most mentioned and n is the total number of mentions

(Fong 1996, 22). Therefore, the classification of the attributes store credit card, co-branded

credit card, sales account and preferential treatment are significant (see Table 6).


Table 6: Results of t-test and Fong test

Performance Attribute A O M I Cat. t-test Fong test

Percentage/price reductions 25 31 31 13 O/M 40.57* mixed

Special offers 27 32 34 7 M 41.55* n.sig.

Debit card 49 4 .3 46.7 A 28.78* n.sig.

Loyalty credit card 15 .7 1 83.3 I 56.56* sig.

Co-branded credit card 25.7 1 .7 72.6 I 42.21* sig.

Sales account 13 .7 1.3 85 I 60.86* sig.

Additional information 15 13.3 31.7 40 I 48.21* n.sig.

Special benefits 33.3 29.7 23.3 13.7 A 36.11* n.sig.

Preferential treatment 41 25 6.7 27.3 A 30.82* sig.

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; * p < .001; n = 300

Category and total strength are calculated to classify performance attributes. They show us

whether or not the categorization is clear. The higher the category strength the more precise is

the classification. Category strength is a result of subtracting the second most frequent answer

from the most frequent answer. As a rule of thumb, the requirement is considered clearly classi-

fied when category strength is greater than 5% (Sauerwein 1999, p. 421; Löfgren/Witell 2005,

p. 13; Lee/Newcomb 1996, p. 16). The classification of the attributes “percentage/price reduc-

tion”, “special offers”, “debit card” and “additional information” is significant (Category

strength >6%). The category strength of the other four categories is lower than 6% and there-

fore, they do not have a significant influence on customer satisfaction (Hölzing 2008, p. 126).

Total strength is the product of the percentages of attractive, one-dimensional and must-be

requirements. It shows whether or not for most of the consumers this attribute is of importance

(Löfgren/Witell 2005, p. 13; Lee/Newcomb 1996, p. 16). The total strength (Tot % > 60) of the

majority of the attributes is satisfied for this empirical investigation (see Table 7).

The customer satisfaction coefficient (CS coefficient) can be applied to classify the attributes in

each category (Tontini 2007, p. 604). The coefficient shows whether satisfaction can be

increased by meeting a requirement, or whether fulfilling this requirement merely prevents dis-

satisfaction. Matzler et al. (1996, p. 13f.) provide a rule of classification for the case when a

certain quality attribute cannot be clearly assigned to any of the various categories. The evalua-

tion rule “M > O > A > I” is useful and basically conservative in classification. When making

decisions about performance attribute development, those features which have the greatest

influence on the requirements have to be taken into primary consideration. Those requirements

must be fulfilled which cause dissatisfaction if not fulfilled. When deciding which attractive

requirements should be fulfilled, the decisive factor is how important they are to the consumer.

The CS Coefficient will be calculated as follows (Sauerwein 1999, p. 421):

The positive CS� (extent of satisfaction) indicates that customer satisfaction will increase by

providing an attribute:

[2] A + OA + O + M + I

The negative CS (extent of dissatisfaction) indicates that customer satisfaction will decrease

when the attribute is not provided:

[3] O + MA + O + M + I × (-1)

The maximum value of CS� and CS is 1 and -1, respectively. The closer the value is to 1 (or -1),

the greater the influence on customer satisfaction. A value of about 0 signifies that a certain

attribute has little influence on customer satisfaction (Löfgren/Witell 2008, 68). Values from .5

and -.5 are of relevance (Sauerwein 2000, p. 48). The two coefficients are plotted in a diagram

divided into halves (see Figure 3),

The category “percentage/price reductions” has a negative CS which is higher than the positive

CS� (CS prime). This indicates that customer satisfaction will decrease if this attribute is not


Table 7: Category and Total Strength (Cat., Tot., CS�, CS)

Performance Attribute A O M I Cat. Cat>6 Tot % CS� CS

Percentage/price 25 31 31 13 O/M 0 87 .56 -.62

reductions

Special offers 27 32 34 7 M 2 93 .59 -.66

Debit card 49 4 .3 46.7 A 2.3 53.3 .53 -.04

Loyalty credit card 15 .7 1 83.3 I 68.3 16.7 .16 -.02

Co-branded credit card 25.7 1 .7 72.6 I 46.9 27.4 .27 -.02

Sales account 13 .7 1.3 85 I 72 15 .14 -.02

Additional information 15 13.3 31.7 40 I 8.3 60 .28 -.45

Special benefits 33.3 29.7 23.3 13.7 A 3.6 86.3 .63 -.53

Preferential treatment 41 25 6.7 27.3 A 13.7 72.7 .66 -.32

A: Attractive, O: One-dimensional, M: Must-be, I: Indifferent; n = 300

provided. According to the evaluation rule M > O, this attribute is therefore classified as a

“must-be” requirement. The “debit card” has a high positive CS� indicating that customer satis-

faction will increase by providing this attribute; the low negative CS indicates that the customer

will not be dissatisfied when this performance attribute is not provided. According to these rea-

sons and the evaluation rule the attribute debit card classifies as an attractive requirement.

Based on a comprehensive data analysis using several tests, we can classify the performance

attributes as follows:

- M(ust-be requirements): percentage/price reductions, special offers

- O(ne-Dimensional requirements): special benefits

- A(ttractive requirements): preferential treatment, debit card

- I(ndifferent requirements): store credit card, co-branded credit card, sales account, additional

information


Figure 3: Customer Satisfaction Coefficients

� .� �� .�� .� � .� � .� .� .� .�

��

��

��

��

��

��

�!�� "��

��

�� " �

Note: n = 300, � CS, � CS�

This results support hypothesis 1 (H1.a to H1.d).

The next step is to make clusters and search for possible category shifts over the course of time.

According to Chen/Su (2006, p. 602f.) an ANOVA can be applied to investigate group effects.

Customers were divided into groups (male/female, credit cardholder/non-credit cardholder,

store cardholder/non-store cardholder). Then the results of the questionnaire items for each

group were listed in a separate Kano table, which shows the performance attributes in terms of

attractive, one-dimensional, must-be and indifferent requirements. To be able to test the differ-

ences between groups, a variable was created where customer perceptions of the performance

attributes were gathered and arranged as: indifferent (1), attractive (2), one-dimensional (3) and

must-be (4) (Nilsson-Wittell/Fundin 2005, p. 161f.). Consequently, this customer perception

variable is the dependent variable and the group variables like gender, credit card and store card

ownership are the independent variables.

The hypothesis that there are no differences in the evaluation of performance attributes between

men and women was tested using ANOVA. There are significant differences in the classifica-

tion of two performance attributes: “additional information” (F = 11.38, p = .001) and “prefer-

ential treatment” (F = 34.98, p = .000). So, hypothesis 2.a is rejected.

With hypothesis 2.b we postulate differences between credit cardholders and customers without

credit cards in the evaluation of cards with payment and credit functions. This hypothesis was

tested by applying ANOVA. We did find significant differences in the classification of the per-

formance attributes “Loyalty card with credit card functions” (F = 4.46; p = .035) and “co-

branded credit card” (F = 65.18, p = .000). This result supports hypothesis 2.b.

Performance attributes seem to be dynamic over time, which means that an attribute can change

from being indifferent, to attractive, to one-dimensional, and finally to a must-be item. The

hypothesis is tested by applying an ANOVA. The requirements percentage/price reductions

(F = 12.48, p = .001), special offers (F = 31.04, p = .000) and preferential treatment (F = 15.88,

p = .000) are significantly different between the groups of respondents with and without loyal-

ty cards. This result supports hypothesis 3.

Income (x2 = 46.57, p = .000; r = .27, p = .000; n = 300) correlates with the intention to use

a loyalty card with payment and/or credit functions. With higher income the intention to use

the card increases. Hence, hypothesis 4.a is confirmed. Education (x2 = 19.39, p = .01; r = .11,

p = .08; n = 274) also correlates with the intention to use a loyalty card with payment and/or

credit functions but only with a significance level of � = .10. Therefore, hypothesis 4.b is reject-

ed. The total amount of loyalty cards owned by a customer (x2 = 31.57, p = .14; r = .05, p = .38;

n = 300) does not correlate with the intention to use loyalty cards with payment and/or credit

functions. Therefore, hypotheses 4.c is rejected.


Loyalty cards with payment and credit functions do have influence on consumer overall satis-

faction. With 4% of respondents satisfaction will definitely increase, with 17% it is likely to

increase and 24% say that satisfaction may increase. From this it follows that there is potential

for a loyalty card with payment and/or credit functions, but the result does not support hypo-

thesis 5. Hence, hypothesis 5 is rejected.

5. Discussion and Implications

The further development of loyalty card programs is an important and vital part of relationship

marketing, especially for the Austrian retail fashion market. But nowadays, a lot of store card

programs are virtually interchangeable. They are lacking in attractiveness and differentiation.

Only loyalty card programs that distinguish a retailer from its competitors can increase cus-

tomer retention and lifetime duration. Therefore, loyalty card programs should offer integral

systems of marketing actions and economic, psychological and sociological rewards. The

results of our study have several important implications for researchers and managers. Further-

more they offer another perspective and identify influencing factors of consumer satisfaction

using Kano’s method.

Price performance attributes (percentage/price reductions, specials offers) could be classified

as “must-be requirements”. Therefore, price performance attributes are important for a loyalty

card program. If these requirements are not fulfilled, the customer will be dissatisfied. As the

customer takes those requirements for granted, their fulfillment will not increase overall satis-

faction. Fulfilling the must-be requirements will only lead to a state of being not dissatisfied.

The customer takes them for granted and therefore does not explicitly demand them. From a

retailer’s perspective, it is important to know that if price performance attributes are offered at a

satisfactory level, an increase in their performance does not lead to an increase in customer sat-

isfaction. But if they are not fulfilled, the customer will not be interested in the card program at

all.

Service performance attributes (special benefits like a gift packaging service or reserved

parking) could be classified as “one-dimensional requirements”. With regard to these require-

ments customer satisfaction is proportional to the level of fulfillment. The higher the level of

fulfillment, the higher the customer’s satisfaction will be, and vice versa. These service per-

formance attributes are usually explicitly demanded by the customer, and consequently it is

important to integrate such features into a loyalty card program. From a retailer’s perspective,

it is important to be competitive with regard to one-dimensional requirements. Furthermore,

service performance attributes can create emotional attachments that enhance a customer’s

commitment.


Psycho-social performance attributes (preferential treatment like pre-sale campaigns and style

counseling) could be classified as “attractive requirements”. These requirements are the crite-

ria, which have the greatest influence on the level of satisfaction for the customer. Psycho-

social performance attributes enhance customers’ perceived value. Consumers appreciate

rewards and it makes them feel like preferred customers and they will identify more with a

store. They are neither explicitly expressed nor expected by the customer. From a retailer’s per-

spective these performance attributes create a wide range of possibilities for differentiation, in

contrast to interchangeable price and service performance attributes.

In general, must-be, one-dimensional and attractive requirements differ in the utility expecta-

tions of different customer segments. An ANOVA was applied to identify the effect of gender

on the performance attributes’ classification. For men the performance attributes “preferential

treatment” and “additional information” are classified as indifferent requirements, while

women classify these attributes as attractive requirements. These performance attributes appear

more important to women because of their higher interest in fashion shopping (Größe-Bölting

2005, p. 104). Furthermore, the difference is strengthened by the fact that “preferential treat-

ment” services are particularly oriented to female needs. By understanding the different effects

on customer satisfaction from different types of performance attributes, companies can develop

more appropriate marketing strategies to increase customer satisfaction. According to Aßmann

et al. (2008, p. 76) increasing their individualization will become more important.

Kano’s theory presumes that successful performance attributes follow a specific life cycle and

change over time. The present study has shown that for respondents without loyalty cards, price

and service attributes are attractive requirements; while for loyalty cardholders they are must-be

and/or one-dimensional requirements. Psycho-social performance attributes are classified as

attractive requirements from store cardholders, while for the other group these are indifferent

requirements. Our results imply that price and service attributes are able to change from being

indifferent to attractive, to one-dimensional, and finally to must-be. From this point of view, a

loyal card program has to be enhanced continuously. Features need to be contemporary and

should satisfy customers’ demands. Furthermore, it is important to create attractive price

requirements to acquire new customers for the card program, as for respondents without loyal-

ty cards their features are attractive requirements.

With a focus on payment and credit attributes the present study shows that Austrian customers

prefer general solutions. Only the performance attribute “debit card” is classified as an attrac-

tive requirement. Consequently, this feature can increase customer satisfaction if delivered, but

does not cause dissatisfaction if it is not delivered. The result is strengthened by the fact that a

co-branded debit card has the benefit that the customers do not need another plastic card what

is seen as an increase in handling and convenience. Also, the control over expenditures can be


improved. Furthermore, credit cardholders identify co-branded credit card as attractive require-

ments. According to Aßmann and Werg (2008, p. 75) customers want to have fewer cards and

for this reason “all-in-one-solutions” including payment functions will become more important.

The disadvantage of this trend is that the store brand disappears from customers’ wallets. Being

in the customers’ relevance set should be the aim of the relationship marketing, not only being

in the wallet. The usage of such cards is related to a number of variables. The empirical study

shows that education positively affects the intention to use cards with payment and credit func-

tions, while income and ownership of a loyalty card does not.

It is of important relevance for marketing researchers and practitioners to know which perform-

ance attributes add value and increase satisfaction and which of them merely fulfill minimum

requirements and minimize dissatisfaction. In this context, Kano’s method can help to explore

requirements that must be fulfilled to be competitive, and which are seen as attractive by the

customer and so increase satisfaction. Hence, the present study identifies important require-

ments for loyalty card programs.

Although our study leads to some precious insights on the benefits of loyalty cards which

include payment and credit functions, there are some limitations that need to be discussed. First,

due to the convenience sample, the generalizability of our study is limited. Secondly, we only

examined the fashion sector in Austria and it would be worthwhile to investigate whether our

findings differ over various other industries and/or countries to enable explicit comparisons.

Finally, the model does not enable us to evaluate the importance of the different requirements,

which would be important for deriving marketing activities. Future research should try to elim-

inate these issues to provide more generalizable and useful results.

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Clustering Customer Contact Sequences -Results of a Customer Survey in Retailing

Sascha Steinmann and Günter Silberer

AbstractWe used a sequence alignment method to cluster customers (N = 132) of a branch of a Germanconsumer electronics retailer according to the sequence of the customers’ contacts with its dif-ferent marketing channels (e.g. store, homepage, newspaper advertising) during the whole pur-chase process. In doing so, we obtained three clusters in a short sequences and a long sequencessegment. Results reveal differences in the customers’ behaviour concerning the customer con-tacts and their functions in the whole purchase process, as well as between the identified cus-tomer segments. Customer segmentation based upon demographic or psychographic variableswould not have been able to enrich knowledge of the customers in this manner.

KeywordsCustomer Contact, Contact Sequence, Sequence Analysis, Customer Segmentation

Sascha Steinmann (corresponding author)Institute of Marketing and Retailing, Department of Business Administration, University of Göttingen,Göttingen, Germany(Tel: +49 551 39 7409; E-Mail: [email protected]).

Günter Silberer Institute of Marketing and Retailing, Department of Business Administration, University of Göttingen,Göttingen, Germany.

Received: August 31, 2009Revised: March 14, 2010Accepted: March 15, 2010

EUROPEAN

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1. Introduction

Knowledge of ones customers is a strategic success factor for any retailer or service provider.

The fundamental elements for the attainment of customer knowledge are the customer contacts

at the different marketing and distribution channels of the retailer’s multi channel marketing

(Payne/Frow 2005). Not only are the number, kind and function of the customer contacts rele-

vant to this but also the sequence of those contacts during all phases of the purchase process.

Contact sequences have been practically ignored in previous practice-oriented and scientific

research projects, especially any to consider the problems of collecting, connecting and analyz-

ing the relevant data from the different marketing and distribution channels to present a single,

unified view of customers (Payne/Frow 2004). However, it can be assumed that customer con-

tact sequences are of great relevance to retail marketing. For example, it can be expected that

different customer contact sequences are accompanied by different product purchases and that

different customers have different contact sequences according to their individual channel

behaviour. Knowledge of these connections facilitates the purposeful control of customer con-

tacts by the retailer and thus extends his/her commercial possibilities to communicate and inter-

act with customers within the bounds of retail marketing. Furthermore, such sequences provide

important insights into potential cross-channel synergies (Verhoef/Neslin/Vroomen 2007).

Therefore, they also facilitate crucial information for monitoring marketing strategy. Hence,

analyzing sequences of customer contacts could provide crucial insights to the retailer into cus-

tomer behaviour in the multi channel marketing and distribution system, as well as their needs

and preferences over time, as their use has become routine in the purchase process (Ran-

gaswamy/Bruggen 2005). Therefore, this article contributes to the body of literature by address-

ing how customer contact sequences can be measured and analyzed. This initial study on cus-

tomer contacts and contact sequences in retailing is also essential to show that such contact

sequences can form the basis for customer segmentation.

2. Literature Review and Conceptual Background

2.1. Customer Contact Points and Customer Contacts in Retail

It is increasingly common for firms to employ online distribution channels alongside their

offline distribution channels and further marketing channels and to rely on these complex com-

binations as sources of competitive advantage to better serve their customers’ needs and prefer-

ences (Geyskens/Gielens/Dekimpe 2002). In such environments, many customers have become

multi-channel users. Contacts between the firm and themselves are realized at different contact

points (e.g. store, agency, homepage) in different phases of the purchase process. Therefore,

there are many opportunities to establish contacts between a supplier and its customers in the

different process stages.


In retailing, we can differentiate pre-purchase, purchase and post-purchase phases. Further-

more, we can distinguish the variety of contact points (personal, semi-personal and impersonal

contacts) (Silberer/Steinmann/Mau 2007). Payne and Frow (2004) define these categories of

customer contacts as a continuum of forms ranging from the physical to the virtual. According

to Daft and Lengel (1984) customer contacts can be distinguished by the relative richness of

information they provide, from the leanest to the richest. Richness is determined by the medi-

um’s capacity for immediate feedback, multiple cues and senses involved, language variety, and

personalization (Rice 1992). Thus, face-to-face contacts will be the richest contact point, fol-

lowed by telephone contacts, electronic mail and websites; then to different kinds of traditional

marketing measures, like contacts with newspaper or radio advertising.

Customers’ price expectations, the product group, and convenience are regarded as determi-

nants for channel choice (Fox/Montgomery/Lodish 2004). Balasubramian et al. (2005) state

that the goals a customer tries to achieve (e.g. economic goals, self-affirmation, socialization

etc.) during his or her shopping experience affect channel choice. Other factors are the distance

a customer lives from a store (Thomas/Sullivan 2005) or other situational variables, e.g. time of

day and presence or absence of others (Belk 1974; Nicholson/Clarke/Blakemore 2002), switch-

ing costs and risk aversion (Dholakia/Zhao/Dholakia 2005), as well as customer demographics

(Kumar/Venkatesan 2005).

Goff, Bellenger and Stojack (1997) as well as van Dolen et al. (2002) show that contacts

between a customer and the sales staff could enhance customer satisfaction with the retailer.

The results of Bove and Robertson (2005) show the impact of such contacts on customer com-

plaints. Raghubir (2004) demonstrates that in the pre-purchase phase a customer contact with

coupons could have positive effects on the evaluation of product quality and purchase intention.

Further research shows that contacts with retailer advertising has an impact on store traffic and

sales volume (Gijsbrechts/Campo/Goossens 2003), and on patronage intention as well (Day/

Stafford 1997). The findings of Silberer and Mau (2006) show that customer contacts after the

purchase, the advice given, and the price level of the retailer also affect customer satisfaction.

This is only a brief overview regarding past and current research, but the studies mentioned

above are representative of many others published on the effects of customer contacts. The

results show that a single contact between a customer and a retailer can affect customer satisfac-

tion and purchase behaviour.

2.2. Functions and Importance of Customer Contacts

Every customer contact fulfills different functions in the various process phases. Consequently

speech, sales, and service functions can be distinguished (Simons/Bouwman 2004). Therefore,

the functions of customer contacts in different channels range from accessing general and selec-

tive information regarding the desired product or service, price comparisons and purchasing; up

Steinmann, S.; Silberer, G. 99

to using different kinds of customer services, to advisory and complaint activities as well.

Hence, during the contact, not only is purchasing a product of relevance to the customer, but so

are information and communication prior to, during and after the purchase (Wallace/Giese/

Johnson 2004). In the process, according to the media-richness theory (Daft/Lengel 1984), cus-

tomers will subsequently find it easier to establish contact with a supplier in a way that best fits

their needs. This requires the respective channels and their combination to be capable of fulfill-

ing customer needs and preferences concerning the desired functionality in these different

process phases.

According to Payne, Bettman and Johnson’s (1993) concept of adaptive decision making, a cus-

tomer shifts between the pre-purchase to the purchase phase, and from an attribute-based search

to an alternatives-based search, as she/he progresses in the decision making process. Thus, cus-

tomers become less focused on information gathering and more focused on comparing the alter-

natives they have decided to consider. In the case of technically advanced products like notebook

computers, these alternatives are complex bundles of attributes and benefits that a customer will

need to process. In cases where many relevant aspects of the decision cannot be controlled, cus-

tomers seek some kind of help in their decision making, and hence customers are more likely to

realize personal contacts with the sales staff. Furthermore, they will use the desired benefit as

the basis to evaluate the characteristics of the different contact points in the purchase process

(Frambach/Roest/Krishnan 2007). However, there are channel related differences in fulfilling

customers’ needs and preferences across the purchase process, including richness of information

presented (Daft/Lengel 1984) and accessibility or convenience (Ward 2001). For example, on

the internet products cannot be physically examined, which leads to less product information

than in the case of brick-and-mortar stores (Venkatesan/Kumar/Ravishankar 2007). Therefore,

the internet is often considered to be risky for purchasing (Alba et al. 1997). Conversely, offline

channels are characterized by, among other things, richer information on the product (Venkate-

san/Kumar/Ravishankar 2007). The results of Verhoef, Neslin and Vroomen (2007) show that

customers can benefit from channel related differences within the purchase process by using

channels according to their individual channel characteristics (see also Silberer/Steinmann/Mau

2007) because channels differ not only in their functionality but also in their inability to fulfill

individual customer needs to the same extent across the different process phases (Balasubrami-

an/Raghunathan/Mahajan 2005). Hence, the initiation and handling of purchasing processes can

occur in different channels according to the individual channel’s behaviour.

Concerning the purchase of a notebook, we can expect personal contacts in offline channels to

be more likely than semi-personal or impersonal contacts because personal advisors are in the

best position to help the customer identify and explain important aspects in the pre-purchase

and purchase phases. Because of the limited functionality of the mainly impersonal contacts in

online channels compared to the face-to-face contacts of offline channels, many customers

commonly use the internet only as an information source in the purchase process. In the case of


complex products or services especially, customers have come to categorize it in their minds as

an important information source, not as just a shopping resource (Balasubramian/Raghunathan/

Mahajan 2005; Verhoef/Neslin/Vroomen 2007).

2.3. Customer Segmentation

For our study, research regarding different approaches to customer segmentation is of particular

interest. Ruiz, Chebat and Hansen (2004); Sinha and Uniyal (2005); and Ganesh, Reynolds and

Luckett (2007) provide an overview of a large number of empirical studies on this topic. The

procedure for the formation of customer segments can thus be divided into two different

approaches; with demographic variables (e.g. age and gender) on the one hand, and on the oth-

er psychographic variables (e.g. motives or attitudes) are drawn upon for the segmentation. By

doing so, the constituted customer groups reveal who is buying in the stores investigated and

why. The customer’s actual buying behaviour during and after the purchase, however, is hardly

taken into account; i.e. how the customers inform themselves prior to purchase, how the pur-

chase is carried out in the store, and how the relationship between the retailer and the customer

is organized after the purchase.

Only a few studies take behaviour of the customers into account. Kim and Park (1997) classified

the customers of food stores by the frequency of their visits; i.e. related to a certain period, not to

a particular product purchase. They found “random shoppers” and “routine shoppers”. Bloch,

Ridgway and Davidson (1994); Ruiz, Chebat and Hansen (2004), and Sinha and Uniyal (2005) as

well, used behaviour during a shopping trip, i.e. related to a visit in one store or shopping mall; as

a basis to form customer segments. When Bloch, Ridgway and Davidson (1994); and Ruiz,

Chebat, and Hansen (2004) asked shoppers about their behaviours, each identified four different

segments in this way - Bloch/Ridgway/Davidson 1994: “Mall Enthusiasts”, “Traditionalists”,

“Grazers” and “Minimalists”; Ruiz/Chebat/Hansen 2004: “Recreational shoppers”, “Full experi-

ence shoppers”, “Browsers” and “Mission shoppers”. Sinha and Uniyal (2005) observed behav-

iour and derived six customer segments: “Choice optimiser”, “Pre-Mediated”, “Economising”,

“Seeking support”, “Low information seekers” and “Recreational”. Although they had partially

different results in the end, these studies show the usefulness of customer segmentation based on

customer behaviour. There are, however, two essential aspects not taken into account. First, the

specified studies only inspect behaviour in the store or mall. It should be expected that different

behaviour in the store also reflects different behaviour prior the purchase and after the purchase.

The results of Sinha and Uniyal (2000) speak well for this assumption. According to this study

experienced customers act more systematically in the store and are in less need of information,

which had to be a reflection of their behaviour prior to purchase. The second aspect deals with the

variables used in the segmentation analysis. To consider only the behaviour in one specific chan-

nel leads to neglect of other contacts between shoppers and the retailer. But, as was shown by the

studies mentioned before, such contacts are important influencing factors in customer behaviour.


2.4. Customer Contact Sequences

According to Hägerstrand (1970) customer behaviour can be viewed as a sequence of inter-

dependent actions over time. However, customer behaviour in the studies mentioned is most-

ly treated as a chain of independent activities. Thus, the sequential order and obvious relations

of the activities are often neglected. Therefore, Abbott’s (1995, p. 94) statement that, in social

science “we assume intercase independence even while our theories focus on interaction” is

also largely true for marketing research concerning the segmentation of customers with

regard to their individual behaviour across the purchase process. Therefore, in the aforemen-

tioned approaches important aspects reflecting the customer’s behaviour are not addressed.

By tracking behaviour across channels, firms can improve their understanding of their cus-

tomers’ decision-making and develop a basis for creating strong relationships and improving

retention (Dholakia/Zhao/Dholakia 2005). The actual behaviour of the customers over a peri-

od of time is taken into account in the customer segmentation process through the use of cus-

tomer contact sequences. This facilitates a differentiation of the customers which is not possi-

ble on the basis of demographic or psychographic variables. Such insights are an important

confirmation as to the usefulness of customer segmentation regarding the customer contact

sequence.

The sequential behaviour of the customers throughout the purchase process and through differ-

ent channels has barely been taken into account in the formation of segments. For marketing

purposes, Larson/Bradlow/Fader (2005) for example used a sequence-analytical clustering

approach to evaluate the shopping behaviour in a supermarket for the foundation of customer

segments. Bargemann/Joh/Timmermans (2002) analysed the vacation histories of tourists to

develop a typology of vacation behaviour of Dutch customers with a specific sequence align-

ment method. Hay/Wets/Vanhoof (2003) used a sequence analytical approach to mining web

usage to cluster website visitors according to their navigation patterns. Segmentation of this

kind can give a retailer or service provider important insights into the requirements, preferences

and behaviour of the customers over a period of time.

3. Empirical Study: Customer Segmentation Basedupon Customer Contact Sequences

3.1. Measures

The aim of our segmentation process is to identify powerful customer clusters which are very

similar with regard to their individual behaviour. We investigated customer contacts (e.g. adver-

tising, retailers’ homepage, store etc.) their functions (general and selective information, price

comparison, purchase, advisory and complaining) and importance to the customers as well as


the sequence of the customer contact regarding three different phases of the purchase process

- pre-purchase, purchase, and post-purchase - with a branch of a German consumer electronics

retailer. The importance of the customer contacts was ranked on a six-point rating scale ranging

from 1 = entirely unimportant to 6 = very important. To ensure the accurate recording of cus-

tomer contacts and their function and importance in all process phases, only those customers

who had actually purchased a product in one store in the 6 months prior to the study that they

could remember well were recruited.

Customer contacts and contact sequences were recorded in personal interviews based upon a

structured questionnaire. To support the recollection of events dated far back in time a process

was chosen patterend from cognitive psychology (Ericsson/Simon 1980; Anderson 1995). The

questionnaire leads the customer through her/his memories step by step - starting with events

that are most accessible because they are the closest in time to the interview (the post-purchase

phase) - up to those situations that are initially difficult to remember without any support

because they date further back (the purchase and pre-purchase phases). If instead the customer

had been asked first for contacts made prior to the purchase, he/she would have had to recall

those events dated furthest away - an attempt in which he/she might not succeed. In contrast

the events and contacts after the purchase are most clearly recalled - they date back the shortest

period. The first questions were therefore directed to events in the post-purchase phase. Closely

connected with events after purchase are those situations in memory that lie temporally prior,

i.e. during the purchase. If the customer remembers the post-purchase phase, events during the

purchase will be more present. In the second place therefore the customer contacts during the

purchase phase were surveyed. Pursuing the same strategy, customer contacts of the pre-pur-

chase phase were recorded in a third step. The final questionnaire also covered possible determi-

nants (previous customer experience with the retailer, price category, product category, internet

usage, and demographic variables) as well as final variables (customer satisfaction, intention of

recommendation, intention of repeat purchase, trust, and perceived risk) and the sequence of

customer contacts, their functions and importance across the whole purchase process.

3.2. Procedure

A total of N = 132 customers of the retailer took part in the survey. The customers were

approached at the central entrance and exit of the store while they were leaving. In cases where

they were interested in participating in the interview, it was clarified as to whether they could

remember a purchase within the last six months. Every participant obtained non-alcoholic

drinks, chocolates, and other incentives. In the sample, women had a representation of 49.2%.

The average age of those interviewed was M = 31.3 (SD = 12.2) years. About one third (32.3%)

of the customers bought PC hardware and software as well as IT-accessories, electrical appli-

ances and accessories were purchased by 22% of the people in our sample. Other frequently

purchased product categories were sound carriers and DVDs (13.6%), office supplies and


telecommunication (11.4%), consumer electronics (10.6%) as well as digital cameras (6%).

With regard to the price category of the products bought, 53% of the customers in our sample

spent no more than 50 Euros. Slightly over one third (34.1%) in our sample spent up to 500

Euros and 12.9% of the customers paid more than 500 Euros.

4. Results: Customer Contacts, Contact Sequences and Sequence Clusters

4.1. Customer Contacts

Considering all three phases every customer in our sample visited the store at least once in the

purchase process for purchasing. The store was also the most important contact point according

to the customers (M = 5.17; SD = 1.02) and was, besides the purchase function, frequently used

for obtaining general information concerning the different supplies of the retailer (42.4%) and

select information on the products in the evoked set (23.5%) as well as for price comparison

(15.2%). In general, taking all phases of the purchase process into consideration the customer

contacts at different contact points mostly had the function of providing general information

(86.4%) and for price comparison (86.4%). Other often used functions were for selective infor-

mation (76.6%) and advisory functions (94.4%).

Besides this, other frequently realized customer contacts in the whole purchase process are the

personal contacts with the sales staff (64.4%), especially in the purchase phase which were most-

ly realized for selective information (63.5%) and general information (18.8%). Surprisingly, these

contacts were of significantly lower importance to the customers (M = 5.00; SD = 1.06) compared

to those with the store (t = -2.53; p < .05). Concerning contacts with different kinds of the retail-

ers’ advertising in all phases of the purchase process, the customers mostly realized contacts with

newspaper advertising (59.1%), TV-advertising (42.4%) and advertising at the point-of-sale

(39.4%). Regarding the advertising contacts, newspaper advertising was most important to the

customers (M = 4.61; SD = 1.15) and was mainly used for general information (42.3%) as well as

for price comparison (28.2%). The realized contacts with the retailer’s homepage (22%) mostly

had the function of providing general information (35.7%) and for price comparison (28.6%).

These contacts were of significantly lower importance compared to the realized contacts (15.2%)

with other websites (Homepage: M = 2.75, SD = .97; other websites: M = 4.73, SD = .98; t = 3.14;

p < .05). The contacts with other websites mostly had the function of providing selective informa-

tion concerning the products in the evoked set (47.6%) as well as for price comparisons (23.8%).

One could therefore assume that the perceived functionality of the retailer’s homepage is much

lower as compared to that of other websites. Slightly more than one fourth (25.4%) of the cus-

tomers realized contacts with the service staff of the retailer. The service staff was mostly contact-

ed in the post-purchase phase for advise and complaints (97.1%). As expected, these contacts

were of high importance to the customer (M = 1.59; SD = .86).


Table 1 summarizes the frequency of realized customer contacts with all examined contact

points throughout the three process phases. As expected, there are differences in the proportion

of the realized customer contacts across the successive process phases. In the pre-purchase phase

the customers mostly realized a contact with different kinds of the retailer’s advertising (62.1%).

Concerning these contacts, freebie inserts (36.4%) and newspaper advertising (28%) were used

most often. Surprisingly, the store website was visited by only 28.6% of the customers and just

16.7% of our sample realized a contact with the retailer’s website in the pre-purchase phase.


Note: 1100% corresponds to 132 persons interviewed; 2 means that 62.1% of the 132 persons interviewed have noticedthe retailer’s advertising during the pre-purchase phase; 3 means that 23.5% of the 132 persons interviewed stated theyhad noticed the retailer’s advertising on TV during the pre-purchase phase (multiple naming possible).

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Table 1: Frequency of Customer Contacts

1

2

3

During the purchase phase 65.9% of the customers contacted the sales staff for general and

selective information on the desired product as well as for price comparison and consulting. But

nearly three fourths of them (74.2%) also compared the products by themselves. Stated contact

with different kinds of marketing measures at the point-of-sale is surprisingly high (53.8%).

Contacts in the post-purchase phase were considerably low (11.4%). The contacts in this phase

were mostly realized for complaints as well as for advice after the purchase.

4.2. Contact Sequences

In addition to the analysis of individual customer contacts in the various phases of the purchas-

ing process, we can also determine the sequence of the customer contacts using the available

data, namely the sequence of the customer contacts with the different contact points regarding

all phases of the purchase process. First, it is noticeable that the number of customer contacts

with the retailer is very heterogeneous amongst the customers (a min. of 1 contact to a max. of

20 contacts).

In all, it appears that contact with the sales staff was sought most frequently following contact

with the store (76 times). The sequence newspaper advertising and store was entered 50 times.

Other contact sequences which appeared frequently were store and PoS marketing measures, as

well as sales staff and service staff (22 times each). As expected, in consideration of three suc-

cessive customer contacts, the combination of store, sales staff and service staff (17 times) and

the combination of newspaper advertising, store and sales staff (14 times) were named the most

frequently.

To get deeper insights of the customers’ behaviour across all phases of the purchase process we

calculated the proportion of a realized customer contact as a relative size (basis = sequence

length) in relation to all realized contacts of a customer contact sequence. As expected, the

results show that the contacts with the store had the highest proportion in a customer contact

sequence when realized (39.9%), followed by contacts with newspaper advertising and freebie

inserts (38.4%). In this context, contacts with the sales staff had a proportion of 22.7% and the

retailer’s homepage was used in only 13.9% of customer contact sequences realized.

4.3. Sequence Alignment and Sequence Clustering

The Sequence Alignment Method (SAM) was originally developed in molecular biology to

compare DNA or protein sequences (Sankoff/Kruskal 1983; Abbott 1995). The idea of the

SAM is to equalize two different sequences with regard to the operations of insertion, deletion

and substitution. Mostly the weight of 1.0 is assigned to the operations of insertion and deletion,

and for substitutions the sum of the consecutive operations of deletion and insertion (Gusfield

1997; Joh et al. 2002). Usually there are different ways to transfer one sequence to another with


the aforementioned operations, therefore the minimal sum of the weighted operations - the

Levenshtein distance (Levenshtein 1966) - is commonly used as a similarity measure for the

sequences considered.

Within the scope of this study, the customer contact sequence clusters are identified using

the aforementioned Levenshtein distance and the Ward-Method. The advantage of being able

to compare customer contact sequences which are different in length can be, under certain con-

ditions, a disadvantage of the Levenshtein distance. If the distance between two sequences

which differ greatly in length is determined, the result is essentially influenced by the different

number of contacts and the associated operations. The information contained in the sequences

is ignored to a large extent. To avoid such distortions in the segmentation, the whole sample

(N = 132), which is very heterogeneous with regard to the length of the customer contact

sequences (min(length) = 1 to max (length) = 20), was dichotomized with a median split (MD =

5). Consequently, we obtained a segment with “short sequences” (� 5 contacts; n1

= 72) and

a segment with “long sequences” (> 5 contacts; n2

= 60). The customer clusters were then inves-

tigated with the customer contact sequences as constituent variables within both segments

by way of a cluster analysis (Ward-Method) and using the Levenshtein distance. The results

of our cluster analysis show that the differentiation into three clusters in the “short sequences”

segment and four clusters in the “long sequences” segment proved to be the optimal cluster

solution.

A glance at the results of the cluster analyses in both segments shows that only 6 people

comprise a cluster in the “long sequences” segment. A further cluster analysis using the single-

linkage-method supports the assumption that the members of this cluster are possible outliers.

Consequently, these customers are not considered for further analyses.

4.3.1. Description of the Identified Clusters Using Constituent Variables

In order to describe the clusters, the active variables that have entered the cluster analysis are

cited. The clusters identified in both segments are therefore described using the customer con-

tact sequences (centroids) typical for them (see Table 2). For each cluster in both segments the

cited centroid corresponds to a surveyed customer contact sequence.

The typical representative of the first cluster from the “short sequences” segment realized only

one contact, i.e. with the “store”. The people in cluster 2 are more likely to have had their first

contact with the “store”, where their interest was aroused by an item (the offer) and they decid-

ed to make a purchase following consultation with the “sales staff ”. The customer’s attention in

cluster 3 is drawn to the retailer and a particular product through “newspaper advertising”, and

then they go into the store and purchase the desired product after consultation with the “sales

staff ”.


The customers in cluster 1 of the “long sequences” segment sought further information on the

internet after the initial contact with “newspaper advertising”, went into the “store” and spoke

to the “sales staff ” to find out more about the short-listed products. A purchase had not

occurred at this stage. Only after an additional visit to the “store”, combined with a consultation

with the “sales staff ”, was the decision made to buy. The centroids of clusters 2 and 3 differ less

significantly. Both were attracted to the retailer or a particular product by “TV advertising” and

“newspaper advertising” and then found their way into the “store”. While the customers in clus-

ter 2 may have sought consultation with the “sales staff ” and then decided their purchase intent,

the representatives from cluster 3 returned to the “store”, found out more through consultation

with the “sales staff ” and eventually decided to make a purchase. We may assume from the con-

tacts with the “service staff ” in both clusters that the purchased product may have been defec-

tive or support was necessary after purchase due to operational problems.

The initial contact between retailer and customer is particularly significant for the development

of their relationship in the purchasing process. Consequently, we also examined the distribution

of the initial customer contacts over the customer contact points in addition to the centroids: the

majority of the customers from cluster 1 (86.2%) in the “short sequences” segment had the ini-

tial contact with the “store” or “PoS advertising”. None of the customers from this cluster indi-

cated “newspaper advertising” or “PoS advertising” as their initial contact. While the majority

of the customers (83.3%) from cluster 2 entered the “store” as the initial contact, “newspaper

advertising” is the first contact for most customers in cluster 3 (72.0%). None of the customers

from this cluster indicated “newspaper advertising” or “PoS advertising” as their initial contact.

All differences are significant during a chi-square test (p < .05).

In the “long sequences” segment, the most common initial contacts in cluster 1 proved to be

“newspaper advertising” (33.3%) and the “store” (25.0%). In cluster 2, the initial contact above

all took place with “TV advertising” (50.0%) or “newspaper advertising” (33.3%). The same

initial contacts, “TV advertising” and “newspaper advertising”, can also be identified in cluster


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Table 2: Description of the Clusters by Centroid Sequences

3. However, the share of the initial contacts with “TV advertising” was 70.6% in this case and

29.4% for that of “newspaper advertising”.

4.3.2. Description of the Clusters Using Descriptive Variables

For the description of the cluster solutions within the different segments, selected descriptive

variables, such as the overall number of contacts and individual contacts at various customer

contact points (e.g. newspaper advertising, store, sales staff, service staff etc.) are also referred

to here in the different phases of the purchase intent process which differentiate the clusters.

In order to gain an impression of the quantitive meaning of a contact point within a contact

sequence, the contact frequency for every contact point for every person was calculated as a

relative size (basis = sequence length). The medium proportions of the contact frequency per

contact point were then formed in relation to the sequence clusters. The comparison for the

clusters in the “short sequences” segment shows extremely significant differences in the case of

contacts with the “store” (cluster 1: 76.7%; cluster 2: 46.7%; cluster 3: 31.1%; p < .001) and

“sales staff ” (cluster 1: 33.3%; cluster 2: 42.7%; cluster 3: 25.0%; p < .001), and a tendency

towards significant differences in the contacts with the “service staff ” (cluster 1: .0%; cluster 2:

28.6%; cluster 3: 21.0%; p < .1). In the clusters in the “long sequences” segment, significant

differences in the contacts with the “store” (cluster 1: 27.6%; cluster 2: 20.7%; cluster 3:

22.4%; p < .05) and “sales staff ” (cluster 1: 20.8%; cluster 2: 16.4%; cluster 3: 12.3%; p < .05),

and a tendency towards significant differences with the “service staff ” (cluster 1: .0%; cluster

2: 24.8%; cluster 3: 12.3%; p < .1) were also observed. However, these were also observed in

the case of “posters in town” (cluster 1: 17.2%; cluster 2: 13.1%; cluster 3: 11.6%; p < .1).

The functions of the different customer contacts provide important findings regarding the inten-

tion for the contacts during the overall purchase intent process. For the clusters in the “short

sequences” segment, the results did not show any significant differences between them with

regard to the functions “general information”, “price comparison” and “possibility of pur-

chase”. A tendency of significant differences was observed for the function “overview of short-

listed products” (cluster 1: 12.5%; cluster 2: 17.1%; cluster 3: 24.4%; p < .1) and significant

differences for “advice after purchase” (cluster 1: .0%; cluster 2: 5.3%; cluster 1: 3.7%;

p < .05).

With regard to the functions of the customer contacts, the cluster solution of the “long

sequences” segment demonstrated an extremely significant difference in the function “support

after purchase” (cluster 1: .5%; cluster 2: 5.3%; cluster 3: 8.7%; p < .001).

The results in Table 3 describe the clusters of the “short sequences” segment by way of contact-

related variables in the different phases of the purchasing process. The customers in cluster 3

had considerably more contact with the retailer’s advertising in the pre-purchase phase, espe-


cially advertisements in newspapers and advertisers, compared to the customers in clusters 2

and 1.


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Table 3: Cluster Description with Contact-Related Variables (“Short Sequences” Segment)

Note: 1100% corresponds to the total number of persons in the cluster; n.s. = not significant.

However, visits to the retail store were of moderate importance to cluster 3 in this phase com-

pared to the other two clusters. Customers from cluster 2 had the most frequent contact with the

retailer via this contact point, while cluster 1 only displays an extremely small share of such

contacts in the pre-purchase phase. In the purchase phase, customers from cluster 2 sought con-

tacts and/or consultation with the sales staff the most frequently, although the customers from

the first cluster also have a large proportion of contacts with the sales staff. Customers from the

third cluster had hardly any contact with this contact point. In the post-purchase phase, cluster

3 shows the most frequent contact with the after sales service. The contacts in this phase served

primarily to take advantage of support after the purchase. The customers in cluster 2 also had

contact with the after sales service, the proportions distributed equally across the stated contact

points here. Cluster 1 did not have any contacts in this phase.

In the “long sequences” segment, the customers in all three clusters had a high proportion of

contacts in the pre-purchase phase (see Table 4). The customers in clusters 1 and 3 demonstrate

similar behaviour. Above all, freebie inserts and visits to the store are used frequently as contact

points.

Finally, Table 5 characterizes the clusters of the different segments by their size and essential

demographic reference numbers.

1

4.3.3. Determinants of the Contact Sequence and Cluster Membership

As we have already illustrated, different factors can determine contact sequences. In this con-

text, the duration of the purchase consideration, the price of the product and the product catego-

ry are conceivable. Furthermore, the time of day, day of the week, the occasion for the purchase

consideration (e.g. an old appliance is defective, interest in the product etc.) and the reason for

the purchase (e.g. personal use or gift) can be regarded as determinants for customer contacts.


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Table 4: Cluster Description with Contact-Related Variables (“Long Sequences” Segment)

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Table 5: Description of the Clusters by Essential Reference Variables

Note: 1100% corresponds to the 132 persons interviewed and entered into the final cluster analysis; n.s. = not signif-icant.


1

1

However, only the most important differences between the cluster solutions of both segments

are considered more closely here (see Table 6).

4.3.4. Effects of the Contact Sequences and Cluster Membership

In addition to the determinants of the contact sequence and cluster membership, their effects

were also examined within the scope of this study. Consequently, we considered the customers’

satisfaction with the products and prices in the store. The “short sequences” segment displays

a tendency towards a significant difference between the three clusters (Cluster 1: M = 1.8,



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Table 6: Cluster Description Using Possible Determinants

1

SD = .6; Cluster 2: M = 2.4, SD = 1.4; Cluster 3: M = 1.9, SD = .7; p < .1). The customers from

the second cluster were less satisfied than those of the other clusters. No significant differences

could be detected for the “long sequences” segment (Cluster 1: M = 1.7, SD = .8; Cluster 2:

M = 2.0, SD = 1.2; Cluster 3: M = 2.0, SD = .7; n.s.).

4.3.5. Characterization of the Sequence Clusters

In observing the differences of all results, each cluster of both segments can be classed with a

name - even though that is, admittedly simplified: customers of the first cluster of the “short

sequences” segment could be characterized as “spontaneous purchasers” in view of their very

low number of contacts (see Table 3), preferred product category and high proportion of prod-

uct purchases at a low price (see Table 6); the second cluster as “browsers”, as the customers of

this cluster already sought contact in the shop in the pre-purchase phase and also stayed in the

store the longest during the purchase phase (see Table 3).

In view of their high proportion of contacts with offers in newspaper advertising in the pre-

purchase phase, the customers in the third cluster can be referred to as “offer purchasers” (see

Table 3).

The first cluster of the “long sequences” segment could be named “young technophiles”, these

customers distinguish themselves above all through their interest in the various products of the

electronics market. In this cluster, “interest in the product” was stated the most frequently as the

occasion for the purchase consideration (see Table 6). The customers in cluster 2 stated “old

appliance defective” as the most frequent occasion for the purchase consideration and are there-

fore classified as “repeat purchasers” (see Table 6). The customers in the third cluster can be

classed as “fastidious purchasers”. They have the highest proportion of purchases from the upper

price segments. Furthermore, a higher proportion of contacts with the service staff and com-

plaints service in the post-purchase phase is also characteristic of these customers (see Table 4).

4.4. Discriminatory Power of Contact Sequences

We used binary logistic regression on the segment level and discriminant analysis on the cluster

level in each segment to test our proposition that the segment (short sequences vs. long

sequences segment) and cluster membership can be satisfactorily explained and predicted by

the sequencing of customer contacts.

With regard to the differences in the number of realized contacts as well as of the realized cus-

tomer contact point on the segment and on the cluster level, we used the number of the ten most

frequently realized substrings consisting of two consecutive customer contacts as independent

variables in the first binary logistic regression model with the segment membership as depend-


ent variable. In the second logistic regression model we control for further variables which

could be associated with segment membership. Therefore, the second model includes product

related as well as demographic variables. As model 1 in Table 7 indicates, the sequence infor-

mation are strongly associated with segment membership and provide a correct classification of

84.1% of the customers in our sample. The statistical association between the substrings and

segment membership remains robust in general, even though the significance level of parame-

ters decreases, when the control variables are included in model 2. Especially, substrings

including contacts with the store and different kinds of advertising as well as the price of the

product are contributing factors in explaining segment membership. The results of the Hosmer

and Lemeshow chi-square test show an overall good fit for both models (model 1: �2 (8) =

7.364, p = .498; model 2: �2 (8) = 4.858, p = .773) as well as the statistics provided in Table 7

(Hosmer/Lemeshow 2000).


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Table 7: Segment Membership: Binary Logistic Regression Estimates (Long Sequences Segment = 1)

Note: * p < .05, ** p < .01, *** p < .001.

Furthermore, we conducted a discriminant analysis to check the prediction accuracy of contact

sequence information for the three cluster solutions in each segment (Klecka 1980). First of all,

we conducted a stepwise discriminant analysis in the different segments, again using the ten

most frequently consecutive customer contacts of all sequences as well as age, income and price

of the product bought as control variables.

As a result, we obtained coinciding substrings in the discriminant functions of both segments.

The control variables were excluded in the stepwise procedure in both segments supporting our

proposition. To test the individual discriminant ability of the variables included in both seg-

ments, an F-Test was performed. In the short-sequences segment, the store � sales staff, news-

paper advertising � store, store � store, and newspaper advertising � TV advertising were

included in the model. The discriminant functions of the long-sequences segment comprises the

substrings store � PoS-advertising, sales staff � service staff, and like the short-sequences

segment store � sales staff as well as store � store. Therefore, to gain better comparability

between the results of both segments, we included the frequencies of these remaining six sub-

strings for calculating the discriminant functions in both segments. By doing so, we obtained a

hit ratio of 91.7% of the customers in the short sequences segment (see Table 8). The results

also show that the substrings store � sales staff and newspaper advertising � store contribute

with high significance to the differentiation of customers in this segment.


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Table 8: Standardized Canonical Discriminant Function Coefficients Short-Sequences Segment

Note: 191.7% of original grouped cases correctly classified; 2 p < .1, * p < .05, ** p < .01, *** p < .001; b F-Test ofgroup mean differences.

1

i2

i2

In the long-sequences segment 83.3% of the customers were correctly classified (see Table 9).

As in the short sequences segment, store � sales staff contributes significantly to the differen-

tiation of the customers. Other substrings with crucial discriminating power are store � PoS-

advertising and sales staff � service staff. In contrast to the solution of the short-sequences

segment newspaper advertising � store did not account to the discrimination of the partici-

pants.


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Table 9: Standardized Canonical Discriminant Function CoefficientsLong Sequences Segment

Note: 191.7% of original grouped cases correctly classified; 2 p < .1, * p < .05, ** p < .01, *** p < .001; b F-Test ofgroup mean differences.

5. Discussion and Conclusions

The results of our study demonstrate that customers can be classified into different customer

segments with regard to their contact sequences. These indicate differences in the purchasing

process as, for example, our results on differences in the prices or product category between the

individual clusters suggest. Differences regarding the number of contacts with the various con-

tact points and the intention of their use were obtained between the contact sequence segments

identified. Customer segmentation based upon demographic variables would not have been able

to enrich the knowledge of the customers in this manner. Furthermore, the results of the logistic

regression and discriminant analysis show that information of the sequence of all customer con-

tacts can provide a highly satisfactory classification of the customers.

1

i2

i2

This information puts the retailer in a position to adapt the established individual customer con-

tact points to the different customer segments and to guide customers via contacts in the pur-

chase process. Knowledge of these segments lets the retailer anticipate further contacts and

offer suitable measures. If the retailer pursues a particular strategy with regard to the sequence

of contacts, these results provide information on the proportion of customers who behave

accordingly. By tracking customer behaviour across channels, firms can improve their under-

standing of their customers’ decision making and improve retention. This customer-centric

approach (Reinartz/Krafft/Hoyer 2004) will also contribute to systematic and proactive coordi-

nation of the relationship in the whole purchase process. Furthermore, the contact sequences

could also provide crucial insights into potential existing cross-channel synergies. Regarding

the significance of individual contacts, a carefully directed reflection of individual contact

points is also advisable, which includes its functionality and importance to the customers

(Simons/Bouwman 2004; Steinmann/Silberer 2009). In doing so, the supplier would among

other things have to investigate which contacts exert which influence on the customers and how

the customer contacts, as well as their functions, can be controlled by retailers as well as serv-

ice providers. Furthermore, the results show how the contact points differ in their function and

importance to the customers across the purchase process. This knowledge as well as the knowl-

edge of the effects of customer contacts will in any case contribute to an approach towards the

optimal multi-channel mix and also to an effective and efficient CRM. Hereby the retailer could

increase customer satisfaction as well as gain profitable and long-term customer relationships.

There are also important implications for marketing science as individual customer contacts

or parts of the purchasing process have been explained primarily through partial theories in

previous research (e.g. Schoenbachler/Gordon 2002; Steinfield/Bouwman/Adelaar 2002; Bala-

subramian/Raghunathan/Mahajan 2005; Kumar/Venkatesan 2005). However, the differences

identified in the sequences of customer contacts cannot be explained with such approaches. A

comprehensive theory is necessary which ideally integrates all the individual phenomena from

the three purchasing phases and can explain differences between the customers by their contact

sequences. Besides this, our results also imply the application of methods, e.g. Markov-Models,

for predicting customer behaviour based on contact sequences. Concerning our clustering

approach the usage of other cluster algorithms is conceivable. In this context the application of

a medoid clustering method (e.g. k-medoid) would be a suitable alternative to the approach

used, especially when the centroid sequences identified are not observed in the survey (Kauf-

man/Rousseeuw 1987; Larson/Bradlow/Fader 2005). In addition, with regard to the relatively

small sample size the application of nonparametric statistics would be a suitable alternative for

testing the significance of group differences, since they are more robust for smaller sample

sizes (Horowitz 2009). Furthermore, we only analyzed customer contacts and contact

sequences in one branch with one retailer, so there is a lot of research in other branches with

other retailers or service providers necessary to generalize our findings.


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The In-Store Antecedents and Consequencesof Perceived Shopping Value for Regularly Purchased Products

Wolfgang Weitzl and Robert Zniva

AbstractThe study contributes to the knowledge of the complex relationships between store image,shopping value, and key retail outcomes. For the first time, a holistic approach is presented toidentify key in-store image characteristics and their influences on both hedonic and utilitarianshopping value, as well as to investigate the consequences of perceived shopping value on cus-tomer satisfaction and store loyalty. A quantitative survey was conducted and 342 grocery storecustomers of a major Austrian retail chain were interviewed. Results show that the two shop-ping value dimensions (hedonic and utilitarian) are influenced by various store image charac-teristics. Moreover, the study provides evidence that a positive relationship between shoppingvalue and store loyalty exists. This link, however, is fully mediated by customer satisfaction.The impact of the utilitarian shopping value on customer satisfaction was found to be strongerthan the impact of its hedonic counterpart.

KeywordsStore Image, Store Environment, Shopping Value, Customer Satisfaction, Store Loyalty

Mag. Wolfgang Weitzl (corresponding author)Department of Marketing, University of Vienna, Vienna, Austria(Tel: ++43 1 4277 38018; E-mail: [email protected]).

Mag. Robert ZnivaDepartment of Marketing, University of Vienna, Vienna, Austria.

Received: January 31, 2010Revised: March 29, 2010Accepted: April 10, 2010

EUROPEAN

RETAIL


1. Introduction

Recently, modern retailing faces several dynamic trends that influence a firm’s success sub-

stantially and that furthermore affect the ways of doing business in the 21st century. Modern

food retailing is effected by developments in the retailing environment characterized by

increasingly competitive markets. As a result grocery stores are all regarded as similar in the

eye of the consumer (Wakefield/Baker 1998). Product offers and also prices assimilate all

across the marketplace with the result that neither can be seen as a source of competitive

advantage (Groeppel/Bloch 1990). Contemporary retailers, however, still focus on traditional

marketing tools, although recent research shows that consumers’ store loyalty and time spent

shopping has decreased over the years (Reynolds/Ganesh/Luckett 2002). Grocery retailers are

therefore forced to find a new basis for generating an advantageous market position (Zineldin

2006).

The shopping experience itself has become a fertile opportunity for market differentiation. The

aim is to generate an inimitable image which is deeply rooted in the mind of the consumer and

has the ability to distinguish the retail offering from the competitors’ (Baker/Levy/Grewal

1992). Among the advantages offered by a preferably perceived shopping experience is the

store’s capability to elude direct price comparisons, especially in the context of routinely pur-

chased products (e.g. groceries) (Groeppel 1997).

Referring to the practical relevance of the shopping experience, in the center of academic

discourse (e.g. Pine/Gilmore 1999; Annamma/Sherry 2003; Prahalad/Ramaswamy 2004;

Bäckström/Johansson 2006) a growing body of literature is reflecting the importance of the

consumption experience at the POS where shopping preferences lie. Therefore, a considerable

proportion of this research string focuses on the emotional side of the shopping experience, fol-

lowing on the early contributions of Kotler (1973) as well as Donovan and Rossiter (1982,

1994). Numerous approaches were successful in directly relating various in-store characteris-

tics to the individual shopper’s emotional responses to them during the shopping activity (see

Turley and Milliman (2000) for a comprehensive review). This may be an interesting but per-

haps insufficient approach to gain insight into shopping behaviors emphasizing routinely pur-

chased products like groceries. Recent research provides evidence that shoppers are not only

influenced by emotions, but can also be assumed to be more rational when making patronage

decisions, especially in the long run (e.g. O’Curry/Strahilevitz 2001). Therefore, cognitive

reactions must also be considered when evaluating consumer behavior in this context. In order

to respect both of these psychological aspects of shopping, other research attempts took a dif-

ferent route and succeeded in applying marketing’s central concept of value to the shopping

experience (e.g. Babin/Darden/Griffin 1994; Babin/Darden 1995; Carpenter/Moore 2005).

Nevertheless, in the shopping experience evaluation the role of value perceptions is still


obscure. Existing literature reveals a twofold research gap: (1) in previous research less effort is

dedicated to analyzing the unique store characteristics that affect value evaluations in specific

shopping contexts like regular purchasing of consumer goods (Aubert-Gamet/Cova 1999; Cot-

tet/Lichtlé/Plichon 2006); and (2) only a few studies attempt to link different dimensions of

shopping value to a comprehensive group of retail outcomes like customer satisfaction and

store loyalty, leaving an insufficient empirical basis (see Jones et al. (2006) and Carpenter

(2008) for exceptions).

The present study addresses these research gaps by extending our knowledge of the relationship

between store image, shopping value, customer satisfaction and store loyalty to the highly com-

petitive grocery sector. For the first time, a holistic approach is presented to identify key in-

store image characteristics and their influence on both hedonic (emotional) and utilitarian

(rational) shopping value. Furthermore, we investigate consequences of the perceived shopping

value upon customer satisfaction and loyalty intentions and behavior. In line with this research

purpose, the following research question is proposed:

RQ: Which store image characteristics can be regarded as antecedents of perceived

shopping value and how does this value perception impact customer satisfaction and

store loyalty?

The subsequent sections of this article are structured as follows: First, we discuss the shop-

ping value concept and its dimensions. Secondly, we briefly outline store environment as an

integral component of store image and an antecedent of perceived shopping value. Thirdly,

customer satisfaction and store loyalty are introduced as consequences of perceived shopping

value. Thereafter, we describe the research design, methodology, and the approach that we

adopted. After presenting our results and evaluating our framework, we conclude with a dis-

cussion.

2. Literature Review and Hypotheses

Figure 1 shows the proposed conceptual framework. The model focuses on the shopping expe-

rience and its relationship to its in-store antecedents and consequences. To be more precise, it is

proposed that two different forms of shopping value are inherent in the overall shopping expe-

rience. Both of these value dimensions serve as the key constructs of the model. The following

section sheds light on these latent variables before the paper further discusses their relationship

with the store environment as an integral part of the store image. The framework furthermore

proposes that both shopping values have an impact on customer satisfaction and store loyalty as

key shopping outcomes.

Weitzl, W.; Zniva, R. 123

2.1. Utilitarian and Hedonic Shopping Value

In retailing the notion of value has been widely used as a theoretical framework (e.g. Holbrook

1994). Since the 1990s the marketing world has seen the development of a comprehensive

research field which emphasizes the assumption that consumer behavior is better understood

when analyzing human behavior from a perspective of perceived value (e.g. Heskett et al. 1994;

Ostrom/Iacobucci 1995). Value is defined as an overall assessment of subjective worth consid-

ering all relevant evaluative criteria (Babin/Darden/Griffin 1994). Consumers are assumed to

be value-maximizers who evaluate a situation as good, etc. in regard to its underlying benefits

and costs. Therefore, value represents a trade-off of salient “give” and “get” components rele-

vant to the consumer decision making process (Zeithaml 1988, p. 14). According to contempo-

rary research, the shopping experience provides consumers with a combination of utilitarian

and hedonic shopping value which together compose the overall worth of the shopping activity

(e.g. Chandron/Wansink/Gilles 2000; Klein/Ford 2003).

The concept of utilitarian shopping value is based on the assumption that consumers are ration-

al problem solvers (Bettman 1979) or rational “value calculators” understood in the perspective

of the “Homo Economicus” (Rintamäki et al. 2006). Consumers seek utilitarian value in a task-

oriented, rational manner (Blackwell et al. 2001). Therefore utilitarian aspects of shopping are

often equated to rational motives like time, place and possession needs (Chandron/Wanskin/

Gilles 2000). In the case that these functional needs are fulfilled, the shopper in this manner

experiences utilitarian shopping value (Holbrook/Hirschman 1982; Holbrook 1999). Therefore,


Figure 1: In-Store Antecedents and Consequences of Shopping Value

in line with this argumentation, utilitarian shopping value can be defined as an overall assess-

ment (i.e. judgment) of functional benefits and sacrifices of a consumer’s shopping experience

(Overby/Lee 2006).

In contrast, hedonic shopping value represents a shopping experience’s emotional and psycho-

logical worth (e.g. Babin/Darden/Griffin 1994; Roy 1994; Wakefield/Baker 1998). Hereby,

hedonic shopping is often regarded as a positive experience in which consumers receive emo-

tional gratification during their shopping experience along with feelings of satisfaction.

Sources of hedonic shopping value include the joy and/or excitement of shopping, and the

escape from everyday activities provided by the shopping experience itself (e.g. Bloch/Richins

1983; Fischer/Arnold 1990; Sherry 1990; Carpenter/Moore 2005). Hedonic value is therefore

defined as an overall assessment (i.e. judgment) of the experiential benefits and sacrifices of

the shopping experience (Overby/Lee 2006). A shopping activity is evaluated on success factors

which are essentially aesthetic in nature. Therefore, hedonic shopping value is regarded as

being more abstract, personal and subjective than utilitarian shopping value (Holbrook/Hirsch-

man 1982).

Several researchers have demonstrated that both utilitarian and hedonic value can be provided

by the retailer during the shopping experience (e.g. Belk 1979; Fischer/Arnold 1990; Sherry

1990). For example, a shopper might be successful at finding the commodity that stimulated the

shopping trip by consulting friendly store personnel. Utilitarian value would then be derived

from the consumer’s success at quickly finding the product needed, and hedonic value would be

created by the social interaction with the friendly store personnel. Thompson et al. (1990) pro-

pose that utilitarian and hedonic shopping values coexist among shoppers, but one motivation-

al dimension often tends to dominate the other. The authors suggest that the shopper’s personal

characteristics and the shopping situation itself primarily determine the relative influence of the

motives for the consumer’s internal responses and overt behavior.

2.2. Store Image as an Antecedent of Shopping Value

2.2.1. Store Image

Since Martineau’s (1958) classic article emphasizing the idea that stores project a “personality”

to their shoppers, store image is seen as a valuable predictor of consumer behavior and store

performance (e.g. Arons 1961; Lessig 1973; Doyle/Fenwick 1974-75; Bellenger et al. 1976;

Stanley/Sewall 1976; Nevin/Houston 1980; Malhotra 1983; Sirgy/Samli 1985; Osman 1993;

Bloemer/DeRuyter 1998; Grewal/Monroe/Krishnan 1998). In literature, the dominant attitudinal

perspective treats store image as the result of a multi-attribute model (e.g. Bloemer/Oederker-

Schröder 2002). The diversity and multi-dimensionality of store image is impressively shown

by the work of Kunkel and Berry (1968) who reveal that the image of a store is composed of


43 individual image dimensions. Jones (1999) distinguishes two dimensions of store image:

(1) customer factors - store attributes that cannot be controlled by the retailer and are more

closely related to the personal characteristics of the consumer, and (2) retailer factors - variables

that are directly related to the “four Ps of Marketing” (Raajpoot et al. 2008) which

can be controlled by the retailer. Since only the latter provides a potential basis for direct

managerial implications, this article focuses on the retail environment as a key element of

retailer-controllable factors. Based on previous research (e.g. Baker 1986; Sullivan/Savitt 1997;

Wakefield/Baker 1998; Bäckström/Johansson 2006) in-store environmental elements can be

classified as follows: (1) atmospheric (physical) cues; (2) social cues; and (3) merchandise

(assortment) cues.

(Ad 1) Atmospheric cues: Hoffmann and Turley (2002) argue that atmospheric cues are com-

posed of both tangible and intangible elements. Literature (e.g. Baker 1986; Sullivan/Savitt

1997; Baker et al. 2002) suggests that three dimensions of atmospheric cues exist: (1a) Store

design - This includes all sensually perceivable aspects of the physical store environment

(Scheuch 2001). Design factors cover the overall style that is largely expressed through the inte-

rior architecture of the store as well as other factors like interior decoration (e.g. flooring, car-

peting, wall composition, paint, wall paper, ceiling composition, furniture, racks and cases)

(Turley/Milliman 2000). (1b) Store layout - This atmospheric element describes the way in

which furnishings and equipment are arranged within the store, the size and shape of these

items, and the relationships that exist between them. Layout factors include elements like

the width of aisles, space design and allocation, placement of merchandise, grouping of mer-

chandise, work station placement, placement of equipment and department locations (Turley/

Milliman 2000). (1c) Store ambience - This dimension is commonly used to describe the more

intangible aspects of a retail environment. Ambient factors include elements such as music

(Milliman 1982; Areni/Kim 1993; Hui/Dubé/Chebat 1997; Yalch/Spangenberg 2000), odor

(Spangenberg/Crowley/Henderson 1996), colour (Bellizzini et al. 1983; Bellizzini/Hite 1992;

Baker et al. 2002) and lighting (Butler/Biner 1987).

(Ad 2) Social cues: The social dimension of a store is composed of all interactions (i.e. physi-

cal and emotional) that shoppers have with other members of society (Sullivan/Adcock 2002).

According to Baker (1986) social factors include the number, type and behavior of sales per-

sonnel and other customers within the store. (2a) Store personnel - Malhotra (1983) identified

service provided by store personnel as one of several salient characteristics of a store. The qual-

ity of interaction between a store’s personnel and its customers is seen as an important aspect of

shopping (Baker et al. 2002). Shoppers evaluate this store characteristic by assessing their per-

ceptions of how well they are being treated and how well they are receiving prompt and person-

al attention (Huddleston/Whipple/VanAuken 2004). (2b) Clientele - Tauber (1972) notes that

the marketplace has traditionally been a center of social activity. Rubenstein and Shaver (1980)


as well as Westbrook and Black (1985) posit that some shoppers require social support while

shopping to reduce feelings of boredom and loneliness.

(Ad 3) Merchandise cues: A third category of crucial importance for the perception of

store image is a retail store’s merchandise (Lindquist 1974-75; Niven/Houston 1980). Product

assortment is defined as the number of different items in a purchase category (Levy/Weitz

1995). A strong merchandise mix provides shoppers with a wider choice of goods and therefore

enhances a store’s ability to fulfill the shoppers’ needs and wants (Golledge et al. 1966; Hanson

1980).

2.2.2. Relationship Between Store Image and Utilitarian Shopping Value

Prior research suggests that shoppers’ perceptions of monetary as well as non-monetary (psy-

chological) shopping costs can be influenced by the physical retail environment, and therefore

these elements of the store image are seen as being capable of improving utilitarian shopping

value (e.g. Ingene 1984; May 1989; Sherman/Mathur/Smith 1997). For example, store charac-

teristics like prestigious and appealing physical store attributes can compensate for the sacrifice

of time and effort (May 1989). Research on individual store design elements has shown that, for

example, product displays can facilitate the efficiency of the shopping activity by enhancing

utilitarian value through ease of information attainment, price comparison and shopping con-

venience (e.g. Chevalier 1975; Wilkinson/Mason/Paksoy 1982; Gagnon/Osterhaus 1985). Cot-

tet et al. (2006) provides additional evidence that utilitarian shopping value can be derived from

an easy access to information and products. Smith and Burns (1996) found an impact of store

layout on the perception of merchandise and value-for-money. Yalch and Spangenberg (1990)

demonstrate that the kind of music played can influence the time perceptions of the consumer.

In a similar way, music that is perceived favorably by the consumer may influence shopper eval-

uations of the time spent shopping (Baker et al. 2002) and therefore should reduce consumers’

perceptions of the non-monetary shopping costs (Chebat/Filiatrault 1993; Hui et al. 1997). Sim-

ilar results were presented for other ambience factors such as in-store colour which has been

found to impact feelings, store and merchandise images (e.g. product quality), as well as time

spent in store (Bellizzini et al. 1983; Bellizzini/Hite 1992). Based on the previous research we

propose:

H 1.1: Store design cues will positively influence utilitarian shopping value.

H 1.2: Store layout cues will positively influence utilitarian shopping value.

H 1.3: Store ambience cues will positively influence utilitarian shopping value.

Like physical cues, the presence and appearance of store personnel in a retail setting can be

regarded as tangible signals (i.e. cues) of in-store service quality (Parasuraman et al. 1988).


Research provides evidence that the interaction between employees and customers affects con-

sumers’ assessments of the shopping experience (Hartline/Ferrell 1996). Store personnel affect

customer attitudes as well as satisfaction with a store’s offering (Grewal/Sharma 1991; Sharma

1997). Furthermore, store personnel have an important role for customized services because

they represent cues for the assessment of overall service quality (Ang/Leong/Lim 1997). Utili-

tarian shoppers, especially may regard service offerings that improve the efficiency of their

shopping activity as beneficial. Following previous research, we consequently suppose that:

H 1.4: Store personnel cues will positively influence utilitarian shopping value.

The importance of merchandise assortment for utilitarian value perceptions of the shopping

experience is recognized by Eastwick and Feinberg (1999) who state that the utilitarian value of

assortment seeking refers to the value a shopper derives from being exposed to a variety of mer-

chandise. A large variety of merchandise provides the shopper with a large number of comple-

mentary and/or substitutable goods and services. This offers the consumer the opportunity to

optimize his/her time, place and possession needs which are elementary utilitarian motives for

shopping. A large product variety minimizes the perceived costs (e.g. effort) associated with the

shopping experience (Huff 1962; Golledge et al. 1966; Hanson 1980). Because of this reason-

ing the following hypothesis is proposed:

H 1.5: Merchandise assortment will positively influence utilitarian shopping value.

2.2.3. Relationship Between Store Image and Hedonic Shopping Value

Consumers often shop for the appreciation of an experience. Hedonic shopping value is more

subjective and personal because it reflects the emotional worth of a shopping activity

(Babin/Darden/Griffin 1994). This perspective regards shopping as “fun” (Griffin et al. 2000),

rather than as a “task” (e.g. Batra/Ahtola 1991; Babin/Darden/Griffin 1994). Prior research

suggests that hedonic shopping value can be achieved, at least partly, through the store’s envi-

ronmental characteristics (e.g. Cottet/Lichtlé/Plichon 2006). Environmental psychologists

(e.g. Mehrabian/Russell 1974) and their marketing followers demonstrate that spatial environ-

ments can evoke pleasurable emotions and that these psychological reactions influence store

shoppers’ approach and/or avoidance behaviour (e.g. Donovan/Rossiter 1982, 1994; Babin/Dar-

den 1995; Wakefield and Baker 1998; Baker, Levy et al. 1992). Various researchers have

emphasized that some shoppers may derive pleasure and arousal from the sensory aspects of the

retail environment, such as sights, sounds, and smells (e.g. Hirsch 1995; Mitchell et al. 1995;

Bone/Ellen 1999; Eroglu/Machleit/Davis 2005). For example, Wakefield and Baker (1998)

argue that one of the most important roles of the shopping environment is to stimulate excite-

ment by its design and atmospherics. On the basis of this evidence, the following hypotheses are

proposed:


H 2.1: Store design cues will positively influence hedonic shopping value.

H 2.2: Store layout cues will positively influence hedonic shopping value.

H 2.3: Store ambience cues will positively influence hedonic shopping value.

Tauber (1972) states that many shoppers visit a store to gain social experiences outside the

home. People like to shop in environments which they perceive as socially pleasant. Neverthe-

less, there are also negative effects of the presence of other customers within the store. For

example, if shoppers perceive a crowded layout, feelings of stress are experienced leading to

mental discomfort (Harrell et al. 1980; Hui/Bateson 1990, 1991). In crowded conditions, indi-

viduals experience higher levels of hostility and increased anxiety (Zeedyk-Ryan/Smith 1983)

and other negative emotions (Machleit/Eroglu/Mantel 2000; Eroglu/Machleit/Davis 2005).

Research provides evidence that crowding has a negative impact on shopping pleasure (Hui/

Bateson 1991). Therefore it is hypothesized that:

H 2.4: Store personnel cues will positively influence hedonic shopping value.

H 2.5: Clientele cues will positively influence hedonic shopping value.

An early study by Rich and Portins (1964) demonstrate that a large proportion of shoppers

derive their pleasure from shopping by seeing new items and getting new ideas. Strolling

through the store and browsing the merchandise offered provides shoppers with gratification

and pleasure as consumers can vicariously buy desirable products (Hirschman 1981). Addition-

ally, a great product selection provides the shopper with valuable information about the latest

products, fashions and trends. All these aspects can be regarded as central hedonic shopping

motives (Tauber 1972). Therefore, we expect assortment to be a vital aspect in the creation of

shopping enjoyment and hedonic value. We assert that:

H 2.6: Merchandise assortment will positively influence hedonic shopping value.

2.3. Consequences of Shopping Value

2.3.1. Customer Satisfaction and its Relationship to Perceived Shopping Value

Customer satisfaction can be regarded as one of the central concepts in the marketing literature

(e.g. Erevelles/Clark 1992; Oliver 1997). Nevertheless, a lack of consensus regarding an ade-

quate definition of consumer satisfaction is notable. In literature different types of satisfaction

conceptualizations can be identified. Generally, two approaches can be distinguished: One

stream of literature describes customer satisfaction as a process (Hunt 1977; Oliver 1981; For-

nell 1992), whereas the other perceives the construct as an outcome resulting from consumption


(shopping) experience. The first position underlines the importance of an evaluation process

which emphasizes the confirmation-disconfirmation paradigm (Oliver/DeSarbo 1988). There-

fore customer satisfaction can be defined as “the consumer’s response to the evaluation of

the perceived discrepancy between prior expectations (or some other norm of performance) and

the actual performance of the product as perceived after its consumption” (Tse/Wilton 1988,

p. 204). According to the second position, customer satisfaction can be seen as a state of fulfill-

ment which is directly connected with reinforcement as well as arousal (Bloemer/Odekerken-

Schröder 2002). Furthermore, definitions of customer satisfaction are widely influenced by

context and differ depending on whether scholars evaluate consumers’ satisfaction against a

product (Churchill/Surprenant 1982; Swan et al. 1981), a consumption experience (Bearden/

Teel 1983; Fisk/Young 1985; Oliver 1980), or a purchase decision experience (Westbrook

1978). In line with Bloemer and De Ruyter (1998) the authors define customer satisfaction as

the outcome of a subjective evaluation in which the chosen alternative (the store) meets or

exceeds expectations.

Early research on the influence of shopping value on customer satisfaction shows a positive

impact of hedonic and utilitarian shopping value on satisfaction (Babin/Darden/Griffin 1994).

Patterson and Spreng (1997) stressed that the effect of perceived value on repurchase intentions

is completely mediated through customer satisfaction. Following Mano and Oliver (1993) cus-

tomer satisfaction can stem from the performance of a useful function or from intrinsically

pleasing properties, providing evidence for a direct relationship between perceived utilitarian

shopping value, hedonic shopping value, and customer satisfaction. Furthermore, those shop-

ping decisions or shopping situations which foster justification and rationality of choices espe-

cially are more likely to see their utilitarian aspects emphasized (Tversky/Sattah/Slovic 1988).

Thus grocery shopping can be regarded as a facet of a functional (and less hedonic) consump-

tion experience which especially demands a justification of store choice from the shopper. On

the basis of this evidence, the following hypotheses are proposed:

H 3.1: Utilitarian shopping value will positively influence customer satisfaction.

H 3.2: Hedonic shopping value will positively influence customer satisfaction.

H 3.3: Utilitarian shopping value will have a stronger influence on customer satisfaction

than hedonic shopping value.

2.3.2. Store Loyalty and its Relationship to Customer Satisfaction

Today, the retention of loyal customers is regarded as the key to profitability (Christopher/

Payne/Ballantyne 1991) and as a valuable asset in highly competitive markets (Srivastava/Sher-

vani/Fahey 1998). Oliver (1999) declares that store loyalty can be regarded as the most relevant


determinant of retail marketing success and store longevity. Recent grocery retailing studies

have shown that loyal shoppers allocate proportionally more of their budget to their “first

choice store” compared to other customers, and they also spend more on groceries per se than

their fellow shoppers (Knox/Denison 2000). According to East et al. (1995) loyal supermarket

customers spend on average 32% more than other customers. Therefore, loyal shoppers repre-

sent the most profitable core of grocery store customers (East et al. 1994). Investments in the

establishment of long-term customer relationships find favor across many industries, particu-

larly in industries where customers face low switching costs because they are not locked in by a

contract (Shapiro/Vivian 2000). This is especially true for the retailing industry. According to

Huddleston et al. (2004) food retailers have to create and maintain a loyal customer base in

order to survive in today’s competitive markets.

Research on store loyalty has emphasized different approaches to conceptualize and measure

loyalty. The majority of studies prefer the behavioural approach, which defines loyalty as a ten-

dency of consumers to purchase repetitively in a certain period of time. Store loyalty is hereby

measured by purchase ratios, repetitive purchase behaviour or purchase frequency (Bustos-

Reyes/Gaonzález-Benito 2008). However, an important distinction involves the difference

between attitudinal loyalty and repeat purchase behaviour (Jacoby/Kyner 1973). The key refer-

ent of distinction is that attitudinal store loyalty involves a psychological commitment and con-

stitutes a personal preference to the retailer, whereas repeat purchase behaviour does not neces-

sarily involve a psychological commitment (Carpenter 2008). Various authors have therefore

accented the importance of considering both behavioural and attitudinal aspects of loyalty and

describe store loyalty as the favorable attitude and repetitive purchase behaviour of consumers

(e.g. Pritchard et al. 1992; Dick/Basu 1994). In line with Bloemer and De Ruyter (1998, p. 500)

the study at hand defines store loyalty as “… the biased (i.e. non-random) behavioural response

(i.e. revisit or repurchase), expressed over time by some decision making unit with respect to

one store out of a set of [stores], which is a function of psychological (decision making and

evaluative) processes resulting in brand [or store] commitment”. Store loyalty is therefore

expressed as an attitude and overt behaviour. “Customer commitment”, understood as “the

pledging or binding of an individual to his/her store choice” (Bloemer/De Ruyter 1998, p. 500),

is in this context a necessity of “true” store loyalty.

Research demonstrates a positive link between satisfaction and loyalty (e.g. Oliver 1980;

Cronin/Taylor 1992; Fornell 1992; Macintosh/Lockshin 1997; Reynolds/Beatty 1999; Reynolds/

Arnold 2000; Jones et al. 2006; Carpenter 2008). For example, Fornell et al. (1996) as well as

Anderson et al. (2004) point out that customer loyalty is determined to a large extent by cus-

tomer satisfaction. Satisfaction influences purchase intentions and positive word-of-mouth

which are both regarded as indicators of store loyalty (Boulding et al. 1993; Taylor/Baker 1994;

Zins 2001). In line with these findings, Cronin et al. (2000) state that a satisfied consumer tends


to become a loyal customer who exhibits repeat patronage behaviour and intention. Therefore,

it is hypothesized that:

H 4: Customer satisfaction will positively influence store loyalty.

To summarize the proposed relationships, the theoretical framework is shown in Figure 2.


Figure 2: Conceptual Model

3. Methodology

3.1. Measures

To test the proposed relationships, an empirical study was conducted. Measures were developed

on the basis of an extensive literature review and additional interviews with experts from the

shop fitting industry [1]. A major proportion of the measures used were adopted from estab-

lished scales. English measures were translated to German using a “Forward-Backward

Method”. Nevertheless, additional items seemed to us to be necessary for the grocery store con-

text. Therefore, additional measures were incorporated which resulted from a rigid and iterative

scale development process (Churchill/Iacobucci 2005). The research instrument was pre-tested

before undertaking a full-scale quantitative survey.

Measurement of store image. The store environment was conceptualized by the following

dimensions: (1) store design; (2) store layout; (3) store ambience; (4) store personnel; (5) clien-

tele; and (6) merchandise assortment. After scale purification 37 items were used to assess the

store environment. Store design items originated from Wakefield and Baker (1998) and

Schnessl (2005). Items representing store layout, store ambience, store personnel, clientele and

merchandise assortment were taken from Bost (1987), Hightower et al. (2002), Gruber (2004)

and Schnessl (2005). Additional items originated from a series of expert interviews with store

design experts which served as basis for scale development. All items were measured by using

a seven-point Likert scale (from 0-I totally disagree, to 6-I totally agree). In order to assess

validity of the constructs an exploratory factor analysis (PCA, varimax rotation, eigenvalue cri-

terion) was performed. Validity of the six factors was supported as all indicators showed high

correlation with their corresponding store environment component and low correlations with all

other store dimensions. In total, the extracted factors explained 65% of the variance. Reliabili-

ty analysis was conducted for each construct based on the Cronbach’s alpha test of internal con-

sistency. All reliabilities (except for store ambience with .61) were between .81 and .90 - above

the required cut-off level (Nunnually 1978). Item-to-total correlations were above the cut-off

level of .40 and therefore acceptable.

Measurement of utilitarian and hedonic shopping value. Items measuring the utilitarian and

hedonic shopping value were taken from Babin et al. (1994) and Schnessl (2005). Additional

items were derived from interviews with retailing experts. Respondents used a seven-point Lik-

ert scale (from 0-I totally disagree, to 6-I totally agree) to indicate perceived value derived from

the shopping experience. Validity was assessed by an exploratory factor analysis (PCA, varimax

rotation, eigenvalue criterion) on the 12 scale items. Two factors emerged with eigenvalues

greater than one which together accounted for 67% of the variance in the data. As expected, all

scale items loaded highly on their respective factors and had low loadings on the other factor.

Cronbach’s alpha values above the .70 cut-off level and adequate item-to-total correlations sup-

port reliability of the two scales.

Measurement of customer satisfaction and store loyalty. Three items were used to evaluate a

shopper’s degree of satisfaction. In line with prior research (Groeppel-Klein 1997; Spieß, Hesse

et al. 1997; Mattila/Wirtz 2001) customer satisfaction was assessed through the evaluation of a

shopper’s satisfaction with (1) the purchase itself; (2) the shopping experience; and (3) the

store. Respondents indicated their degree of satisfaction on a seven-point rating scale (from 0

- very dissatisfied, to 6 - very satisfied). Three items were used to assess story loyalty: (1) the


time the shopper was loyal to the store in the past; (2) the intention to visit the store again; and

(3) the intention to make future purchases. This satisfaction measure was adopted from Bost

(1987) and Spangenberg et al. (1996). Respondents rated prior patronage on a six-point rating

scale (0 - first time visit, 5 - over five years) and future shopping intentions on a seven-point rat-

ing scale ranging from 0 - very unlikely, to 6 - very likely. To confirm reported validity of both

shopping outcomes’ dimensions, an exploratory factor analysis was implemented. As expected,

two factors emerged with eigenvalues greater than one and together accounted for 72% of the

variance. Cronbach’s alpha values (above .71) and item-to-total correlation (above .42) provide

evidence for both measures.

3.2. Sample

Data collection was done by personal interviews using a standardized questionnaire as the

research instrument. The study was conducted in a major Austrian city with a population of

more than one million citizens. As for research location, two different grocery stores of the

same retail chain were selected. These supermarkets were similar with regard to their general

store layout, size (between 400 and 600 square meters) and merchandise offering (about 4,000

different grocery articles), reflecting a typical grocery store. Significance tests for differences

of means in the evaluation of the store environment between the two stores did not show

major differences; nevertheless, store design of one store was evaluated more positively

(Store 1: M = 4.07, SD = 1.06; Store 2: M = 3.52; SD = 1.07; p < .05). This result can be

explained by a recent architectural make-over of the better rated store. The location of both

stores was downtown and both supermarkets were within one kilometer apart. Both stores

served the needs of an upper-level clientele with a demand on high quality groceries and fan-

cy food. The study respondents were taken from a convenient sample of supermarket shop-

pers. The data collection was part of an undergraduate extra credit exercise in marketing

research. Twelve students trained and instructed in data collection procedures were used as

interviewers. Customers were intercepted in the store after checking out, close to the exit

where the respondents had no direct possibility of examining the interior of the store. Every

third shopper was approached and asked to participate in a ten-minute interview. A screening

question was used to evaluate that potential respondents who were just “passing through” the

store were omitted. Approximately 800 respondents who met the criteria for inclusion were

intercepted. Of these, 342 agreed to participate and provided data for the analysis. The relative

low response rate (43%) is a result of a time-constrained shopping situation, especially during

rush hour, which is typical for supermarkets. Shoppers were approached in the second and

third week of December, 2009. Data collection took place on five days of the week (Monday-

Friday), from 8 a.m. till 6 p.m. The demographic characteristics of the respondents are sum-

marized in Table 1.


Of the total number of usable responses, 64% were female, and 36% were male. Hardly any

grocery shopper was above the age of 70. The respondents in the sample were quite well educat-

ed and had an income level that is above the average. The composition of the sample therefore

reflects the demographic situation of an inner-city research site.

3.3. Results

Hypotheses 1 and 2. The hypotheses were tested using a multiple regression analysis with the

shopping value dimensions serving as dependent variables and store environment components

as independent variables. All constructs were formed by averaging the measurement items.

Tests for linearity, heteroscedasticity, multicollinearity and normal distribution indicated no

violation of assumptions of regression analysis.


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Table 1: Demographics of the Respondents (N = 342)

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Hypothesis 1 predicted a significant positive impact of store design (H1.1), store layout (H1.2),

store ambience (H1.3), store personnel (H1.4) and merchandise assortment (H1.5) on utilitari-

an shopping value. Empirical results are displayed in Table 2 and support hypotheses H1.2,

H1.3, H1.4, and H1.5. Store design, however, showed no significant impact on utilitarian shop-

ping value. Hypothesis H1.1 was therefore not supported. Overall, merchandise assortment had

the strongest impact on perceived value, followed by store layout. Results show that the store

environment can evoke utilitarian value with several of its components. Nevertheless, the

impact of the individual in-store elements varied substantially. Atmospheric as well as social

cues had a positive impact on the functional evaluation of the store. Primarily, however, these

results provide evidence that merchandise assortment can be regarded as a key determinant of

utilitarian shopping value.


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Table 2: Multiple Regressions of Shopping Values on Store Environment Components

Note: Significant at * p < .05; ** p < .01; *** p < . 001

Hypothesis 2 proposed a significant positive effect of store design (H2.1), store layout (H2.2),

store ambience (H2.3), store personnel (H2.4), clientele (H2.5) and merchandise assortment

(H2.6) on hedonic shopping value. Results are also presented in Table 2. H2.1, H2.2 and H2.6

were supported by empirical evidence. The strongest impact was found for store design fol-

lowed by store layout. However, store ambience as well as both social dimensions had no signif-

icant influence. Therefore, hypotheses H2.3, H2.4 and H2.5 are not supported. Results show

that the aesthetic elements of the store environment seem to play a crucial role for perceived

hedonic shopping value. In contrast, social aspects of supermarket shopping are of secondary

importance and do not seem to be adequate value antecedents in this shopping context.

Hypothesis 3. The hypothesized relationships between both shopping value dimensions and cus-

tomer satisfaction were tested using a multiple regression analysis. Hypotheses H3.1 and H3.2

were supported as both utilitarian shopping value (�s = .502; t = 11.585; p < .001) and hedonic

shopping value (�s = .303, t = 6.985; p < .001) exhibited a highly significant positive impact on

customer satisfaction: the higher the hedonic value of shopping, the more satisfied the individ-

ual consumer; and the greater the utilitarian value, the higher the consumer satisfaction. There-

fore, one can say that both value dimensions evoke the satisfaction of the supermarket customer;

however, the influence of the utilitarian value is more important. This result shows that the func-

tional aspects of the store are of critical importance for food shopping. Utilitarian shopping val-

ue was hypothesized to have a stronger impact on customer satisfaction when compared to the

influence of hedonic shopping value (H3.3). A general F test supported a stronger relationship

(F = 127.354; p < .001; Adj. R2 = .432). Hypothesis H3.3 is therefore supported.

Hypothesis 4. A regression analysis was carried out to test the relationship between customer

satisfaction and store loyalty (Adj. R2 = .106; F = 40.740; p < .001). A significant positive rela-


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Table 3: Review of Hypotheses

tionship was observed (�s = .330; t = 6.383). The more satisfied shoppers were, the higher was

their loyalty towards the stores. Therefore, hypothesis H4 is supported. Table 3 summarizes the

results of the hypotheses tests.

4. Discussion and Implications

This study provides insights into the complex relationship between store image characteristics

with customer satisfaction as well as store loyalty as key shopping outcomes. By doing this, the

mediating role of shopping value has been accentuated.

Results show that various store image characteristics affect both shopping value dimensions.

All three shopping dimensions - (1) environmental cues; (2) social cues; and (3) merchandise

cues - were found to influence value perceptions of the shopping experience to varying degrees.

Merchandise assortment showed the strongest impact on utilitarian shopping value: the better

the shopper perceives the variety of merchandise offerings, the higher her/his perceived utilitar-

ian shopping value will be. This means that product availability plays a central role for the eval-

uation of the successful fulfillment of the shopping task in the grocery context. This perspective

is supported by earlier research by Cottet et al. (2006). This study, in contrast, was able to iden-

tify additional, store image components contributing to the functional value of shopping: store

layout, ambience and store personnel. Each have been found to impact this value dimension;

however, their influence seemed to be weaker compared to the product-related factor. Regard-

ing the hedonic side of shopping, the study at hand presents a different picture. Here, store

design contributes foremost to the hedonic shopping experience, emphasizing the importance

of the aesthetics of the shopping environment. Furthermore, layout factors and merchandise

assortment can also be considered important drivers of hedonic shopping value. Surprisingly, a

positive relationship with ambient conditions was not indicated. Generally, the study provides

some evidence that the social dimension of shopping in general plays a relatively minor role in

grocery shopping. This is especially true of the presence of other customers who in this context

do not seem to have an influence on either shopping value dimension. These results punctuate

the findings of Cox et al. (2005) who noted that relatively few consumers visit a store to mingle

with other shoppers. An explanation for this finding may be the nature of the shopping activity

itself. Especially in the grocery context, the majority of shoppers are task-oriented and want to

do their shopping in an effective and efficient manner.

The study furthermore extends previous research contributions on the main effects of value on

satisfaction (e.g. Cronin/Brady/Hult 2000). The grocery shopping experience is capable of

evoking not only utilitarian value but to also stimulate the hedonic side of consumption. Both

value dimensions were shown to be important for feelings of satisfaction; however, in the con-


text of frequently purchased products the emerging assumption that both shopping values play

nearly equal roles in predicting shopping outcomes (e.g. Batra/Ahtola 1991; Babin/Attaway

2000) can be questioned. This reinforces other authors who propose differential effects of utili-

tarian versus hedonic shopping value on satisfaction (Patterson/Spreng 1997; Woodruff 1997;

Cottet/Lichtlé/Plichon 2006; Jones/Reynolds/Mark 2006). Utilitarian value seems to be a better

predictor of customer satisfaction than the hedonic counterpart. It appears that shoppers turn to

the grocery market in order to fulfill primarily functional, product-related shopping goals.

In addition, results demonstrate that a positive relationship between shopping value and store

loyalty exists, but this effect is to a large degree mediated by customer satisfaction with the

shopping experience. This finding gives empirical support to the relevance of the satisfaction-

builds-loyalty framework in the grocery shopping context. It is likely that shoppers who have

been successful in fulfilling their shopping task remember the shopping experience positively

and are likely to visit the retailer again in the case of similar shopping needs.

From the managerial perspective it is worth noting that the store image characteristics are capa-

ble of influencing perceived in-store value which has a further impact on customer satisfaction

and store loyalty. Especially in grocery retailing, where the utilitarian side of shopping is the key

determinant of a positive perception of the shopping experience. Even so, store aesthetics are

also able to influence shopping experience and major shopping outcomes, and retailers are well

advised to enhance their stores’ functional aspects. Grocery shoppers seem to prefer a great vari-

ety of different products and brands. However, only a store that grants a quick orientation, rapid

access to the products and fast checkout enhances the quality of the shopping activity.

5. Limitations and Future Research

The study concentrates its efforts on the evaluation of grocery shopping and is therefore not in

the position to translate the findings to other retailing sectors. It is very likely that shopping

motivations and values differ in other retail formats like apparel and electronics. There, the

impact of hedonic shopping value on customer satisfaction might be stronger. That proposition

needs to be tested empirically in future studies. The results of the study at hand may have been

influenced by the distinct demographics of the sample, which was drawn from downtown super-

market shoppers. Nevertheless, there exists some heterogeneity among the sample - most par-

ticipants showed typical inner-city demographic profiles (i.e. high level of education, etc.).

Further research should overcome this restriction and should investigate the effects of demo-

graphics in further detail. Future research should also investigate additional types of shopping

values. The authors assume that a dichotomy of shopping values exists. More recent bus-limit-

ed research provides some evidence that other dimensions like the social aspects of shopping


should be taken into consideration when evaluating shopping activities and their value (Diep/

Sweeney 2008). Research emphasizing the dimensionality of shopping value would be benefi-

cial for a better understanding of shopping outcomes.

Some results of the study at hand demand further analysis. It might be considered surprising

that ambience factors had a significant positive impact on utilitarian shopping value but no

effect on hedonic shopping value. A qualitative study could provide a deeper understanding of

this observation. From a methodological perspective, all constructs were measured with reflec-

tive items in line with prior research. Some store environment components (like, for example,

store ambience) might also be viewed as being formed by different characteristics (such as tem-

perature, scent, etc.) suggesting a formative measurement model. Future research might take a

closer look at this distinction.

Finally, all relationships in the model were tested with a series of regression analyses. Future

research should use advanced methodologies (such as structural equation modeling) to compre-

hensively examine the proposed framework. Such an approach would allow researchers to test

mediation effects, too.

Notes

[1] Measurement items are available upon request from the authors.

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Strategic Differentiation in the Japanese Convenience Store Business.The Example of Lawson’s Format Variation

Ari Huuhka, Nobutoshi Shimizu and Martti Laaksonen

AbstractIn the Japanese convenience store business Lawson has applied format variation (the creationand development of branded sub-formats) most intensively and is now implementing multi-for-mat strategy. Until the change of governance in 2001 Lawson’s strategy focused on store loca-tions and market expansion. Since then Lawson has introduced format variation and sought thestrategic fit between the offering of the store format and new customer segments. Lawson’sstrategy differs from its competitors in many ways. Lawson has differentiated the offering of thestore formats in terms of location, price, product and service mixes, and has created novel cus-tomer value propositions and responses to emerging customer needs. Lawson’s strategy has alsoinvolved the creation of active business alliances and networks. In this paper we show howLawson’s strategy has been conditioned by competition, market conditions and the company’ssearch for new strategic direction. We show also how Lawson uses store format as a strategicinnovation.

KeywordsStrategy, Differentiation, Store Format, Format Variation, Japanese Convenience Store Business

Ari Huuhka (corresponding author)Department of Marketing, University of Vaasa, Vaasa, Finland(Tel: +35863248555; E-mail: [email protected]).

Nobutoshi ShimizuUniversity of Marketing and Distribution Sciences, Kobe, Japan.

Martti LaaksonenDepartment of Marketing, University of Vaasa, Vaasa, Finland.

Received: August 31, 2009Revised: January 15, 2010Accepted: January 16, 2010

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1. Introduction

Convenience stores, the concept of which originates from the United States, have become part

of the retail structures in Europe and in many international markets (Kotler 1988, p. 165;

Ahlert/Blut/Evanschitzky 2006). In Japan the convenience store (CVS) format emerged as a

retail institutional innovation in the early 1970s. Since then the CVS format has evolved to have

many distinctive features. In Japan convenience stores have come to epitomize the lifestyle of

young urban people. They are popular especially among the young male consumer segment.

The typical Japanese CVS, or “konbini”, has about 100 square meter sales space with about

3,000 items. The majority of CVSs in Japan are open 24 hours. They are located - often many

stores close to each other - in densely populated urban areas in easy-to-get to, high-traffic loca-

tions where they supply consumers within walking distance of the stores (CCRRCA 2007,

p. 28). The sales mainly consist of fast food and processed food products, also non-food items

and several services (Seiders/Berry/Gresham 2000, p. 82; Rapp/Islam 2006). Japanese CVSs

are known for their frequent introduction of new product innovations and their ability to quick-

ly alter the product mix in standardized stores according to local demand patterns (Stalk/Web-

ber 1993, p. 98; Reinmoeller 2002, p. 41).

The market leader is Seven-Eleven Japan (SEJ), the pioneer and innovator of the archetypal

Japanese CVS format. Its store format together with its efficient business model based on a

franchising system is regarded as the retail industry’s benchmark and the standard for efficient

and profitable CVS operations (Reinmoeller 2002, p. 41). Many of SEJ’s innovations in store

format, merchandising, logistics and systems development have been copied by the other major

chains, including the second largest chain, Lawson, the third largest chain, FamilyMart, and the

many mid- and small-size regional chains. As a result, the Japanese CVS chains have become

famous for their know-how in the strategic application of retail technologies to enhance the

store format’s competitiveness in the marketplace (CCRRCA 2007, p. 28; see also Rapp/Islam

2006, p. 187). Besides, the chains (especially through the model and standards set by SEJ) are

renowned of their high operational efficiency that comes from the effectiveness of the total sys-

tem, including the integration of supply management (e.g. the physical distribution, supply

chain design, etc.), demand management (e.g. the item-by-item control) and information tech-

nology systems (Larke 1994, p. 149; Takeda/Matsuo 2002).

For a long time the Japanese CVS chains benefited from continuous market growth. That led to

the proliferation of stores, saturation, and heavy competition for the best store locations in

mature markets. The major chains have nearly identical store formats and compete with each

other in the same market segment. They carry similar strategic product categories with relative-

ly high, non-discounted prices and offer similar kind of services. Lawson, the second largest

chain, is the rare exception in this sense. It was first company in the Japanese CVS business that


introduced format variation. It is also the only company that operates CVSs nationwide in every

prefecture in Japan.

Lawson began to employ its current strategy that emphasizes format variation in 2001. At pres-

ent Lawson operates and develops four types of CVSs targeted to different customer segments.

In addition to the standard, mainstream “Lawson” CVS format that is targeted to the young

male segment, Lawson operates the following format variations or sub-formats: The “Natural

Lawson” store format for the young female with a healthy lifestyle segment, the low-price

“Lawson Store 100” store format for the price-conscious consumer segment, and the “Lawson

Plus” store format for the housewives and aged persons segment. With this strategy Lawson has

been able to create new markets and to operate stores in such geographic regions and locations

where SEJ and other competitors could not run their stores profitably. Although Lawson’s cur-

rent strategy is still in progress, it is, however, the first clear divergence from both the dominant

mode of intra-format competition and the SEJ’s or other Japanese CVS companies’ more con-

ventional store development strategies.

The fragmentation of the format landscape and the emergence of more specialised store formats

has been recognized as an emergent trend in food retailing in Asia, especially in the mature and

low-growth markets such as Japan (CCRACA 2007, p. 16). In the Japanese CVS business,

Lawson’s format variation is an example of this phenomenon. Also Lawson’s competitors, SEJ

and FamilyMart, have experimented, piloted and are currently running a small number of stores

that are variants of their major store formats. Lawson, however, has developed and applied

format variation the most intensively and progressed the farthest in its pursuit of a long-term

multi-format strategy.

In this paper we aim to contribute to the discussion of how retail companies use store formats as

strategic innovations to differentiate their store offerings from competitors in the highly com-

petitive and mature markets. Lawson’s use of store format variation in the Japanese market is an

illustrative empirical example of retailers’ strategic differentiation. We propose, by referring to

the concept of strategic innovation (Reynolds et al. 2007; Markides 1997; Govindarajan/Trim-

ble 2004), that, in the context of Japanese CVS business, Lawson’s new store formats can be

regarded as strategic innovations with which Lawson is seeking to change, in the long run, the

dominant mode of competition.

The paper focuses on examining Lawson’s format variation in the Japanese market. The

purpose of the paper is twofold, first to describe how Lawson’s began to employ its current

strategy emphasising format variation, and second, to analyse how Lawson’s store development

activities have been conditioned by competition, market conditions and the company’s search

for new strategic direction. The paper has three objectives. The first objective is to provide a

conceptual framework for understanding the use of store formats in strategic differentiation.

Huuhka, A.; Shimizu, N.; Laaksonen, M. 151

The second objective is to describe the competitive setting and the development of the Japanese

CVS business. The third objective is to identify the major events and changes in Lawson’s store

development activities and to analyse how Lawson’s current strategy and its store formats differ

from those of its closest competitors, SEJ and FamilyMart.

The structure of the paper is as follows. This introduction is followed by the conceptual frame-

work part of the paper focusing on the conceptual foundations of the strategic use of store for-

mats. It provides the literature review and discussion on the concept of store format, format

strategies and format variation, strategic positioning with store formats, and store formats as

strategic innovations. The third part presents the outline of the Japanese CVS business in its

competitive setting. The fourth part describes the central elements of the market-leader SEJ’s

business model with its archetypal Japanese CVS format. The fifth part focuses on describing

Lawson’s store development activities and format variation. The description is based on second-

ary data such as annual reports, articles in business magazines, newspapers and other such doc-

umentation. The paper ends with conclusions.

2 . Strategic Use of Store Formats

2.1. Defining the Concept of Store Format

As pointed out by González-Benito (2005, p. 458) and Reynolds et al. (2007, p. 648) there is in

the retailing literature no commonly agreed definition of the term retail format. However, retail

formats have been the central concept in the broad array of theoretizations concerning retail

institutional change (Brown 1987). At the highest level of analysis and abstraction, a particular

retail format such as a convenience store could be regarded as a retail institution that is subject

to retail institutional change in the context of a given retail structure. However, in this paper we

are especially interested in strategic use of the store formats and store formats as strategic inno-

vations. We regard a store format as a strategic concept and build our view of the concept of a

store format on the ideas and definitions put forward by Dawson (2004, 2006), Goldman

(2001), and Reynolds et al. (2007).

Dawson (2004, p. 121-126) analysed the trends and structural changes in the UK food retailing

sector and pointed out the strategic move by food retailers to develop the concepts of format and

formulae. These two concepts are closely related, yet distinct. According to Dawson (2004,

p. 121-126) a sales format is a sales outlet that has been standardized to meet the needs of a

particular consumer segment (Dawson 2004, p. 121; compare Coopers/Lybrand 1996, p. 113).

Formula is a format that it adjusted and branded by an individual firm to represent their own

brand; formula is the retail company’s operational interpretation of a format (Dawson 2004,

p. 123; 2006, p. 55). Dawson (2004, p. 123) maintains that the idea of format requires the iden-


tification of customer segments, each of which can be targeted by a particular combination of

marketing mix factors.

Goldman (2001, p. 223) in his study of the strategy of the international retail format transfer has

made the distinction between the offering part of the format and the know-how part of the format

(see also González-Benito 2005, p. 458). The offering part of the format consists of the external

elements of the store format (e.g. the aforementioned combination of marketing mix factors) that

according to Goldman (2001, p. 223) deliver the functional, social, psychological, aesthetic and

entertainment benefits that attract consumers to stores. The know-how part of the format refers

to the know-how needed to operate the format: it determines a retailer’s operational strength and

strategic direction, and consists of the retail technology dimension and the retail culture dimen-

sion (Goldman 2001, p. 233). According to Goldman (2001, p. 233) the retail technology dimen-

sion contains the systems, methods, procedures and techniques that the retailer uses, whereas the

retail culture dimension contains the repertoire of concepts, norms, rules, practices and experi-

ences. The retail culture dimension enhances retailers’ ability to evaluate situations, identify

trends and opportunities, and deal with problems (Goldman 2001, p. 233).

In their recent research on the retail format innovations in UK retailing, Reynolds et al. (2007,

p. 648) found that retail practitioners’ conceptions of retail formats were concerned more often

with the current specific offer of the format to consumers than the underlying strategy and oper-

ation of the format. However, for Reynolds et al. (2007) the retail format is more than merely

the retail offering that retailers seek to differentiate. They define a retail format “as the physical

embodiment of a retail business model: the framework that relates the firm’s activities to its

business context and strategy” (Reynolds et al. 2007, p. 648). According to this view the format

differences (or similarities) are attributable to different (or similar) business models. They

maintain that “the business model sets out how a retailer defines and differentiates its products

and range, promotes itself, finds and keeps its customers, uses its resources, arrives at key

processes and obtains a profit or return on investment” (Reynolds et al. 2007, p. 648).

According to our view the central aspects of store formats from the strategic differentiation

point of view are the offering being recognized as differentiated by the targeted customer seg-

ment and as providing benefits and value for them; and the know-how and the business model

that is needed to develop, operate and replicate the store format and its brand. The strategic dif-

ferentiation involves decisions about the overall format strategy of the company, the degree of

format variation needed for the competitive positioning of the format in the existing retail struc-

ture and in the minds of potential customers. Besides, the strategic differentiation concerns the

search and creation of the strategic fit between the offering of the store format and the targeted

customer segment. The strategic fit is relative to other customer segments and competitors’

positions in the market structure.


2.2. Retailers’ Store Format Strategies and Format Variation

The increase of the variety of store formats especially in food retailing has been noted in many

studies (Ahlert/Blut/Evanschitzky 2006, p. 289; Colla 2004; González-Benito 2005, p. 458;

CCRRCA 2007). Store format decisions belong to the critical long-term strategic decisions of

retailers (Gauri/Trivedi/Grewal 2008, p. 256). The store format decisions have an important role

in retailers’ growth and market coverage strategies (González-Benito 2005, p. 60) and in inter-

nationalization strategies (Burt et al. 2008, p. 90). Basically, a retail company can choose to

employ a single-format strategy (operations with one core format only) or a multi-format strat-

egy (operations with multiple formats). International grocery retailers, for instance, have

employed internationalization strategies involving multi-format operations (Burt et al. 2008, p.

87). From that point of view, and in that context, the multi-format strategy can be understood as

a retailer’s strategy to develop and operate two or more distinct store formats (e.g. hypermar-

kets, supermarkets and convenience stores). Besides, as shown next, the creation of format vari-

ation can also be viewed as a multi-format strategy.

Retailers’ strategic use of store format also involves decisions about the possible introduction of

format variation, the development of branded formats (formulae) as the response to changes in

the retail environment. In his analysis of the structural changes in European retailing, Dawson

(2006, p. 49) pointed out that many of the retailers’ managerial decisions are a response to both

the local culture of consumers and the local culture of consumption in Europe. He argues that

the dynamic local cultural environment requires responses from retailers, or “the close match-

ing of their operations to consumer requirements” (Dawson 2006, p. 49). Retailers’ strategies

- the aforementioned responses - are executed through the formats and formulae that the retail-

er creates (Dawson 2006, p. 49).

The creation of format variation (i.e. formulae development and the introduction of sub-formats)

can take place in many ways and (at least in theory) with infinite variation. The offering of the

existing store format can be adjusted to have a new combination of marketing mix factors for the

targeted customer segment. The existing or adjusted store format can be re-branded or re-formatted

and operated under a new store brand name or fascia, with or without the retailer’s brand. Accord-

ing to Dawson (2004, p. 126.), in European retailing the branding of the format emerged during the

1990’s as a major strategy of large retailers such as Tesco and Sainsbury which developed multiple

formats each carrying the corporate brand name and a formula name (e.g. Tesco Extra and Sains-

bury Local; compare the store brand names of Lawson’s sub-formats, e.g. Natural Lawson and

Lawson Plus). Dawson (2004, p. 126) maintains that “the logic behind this branding exercise is the

belief that in respect of marketing activity the ‘store’ is the ‘product’ of the retailer”. Burt et al.

(2008, p. 90) have pointed out that new retail formulae have emerged also as a result of internation-

al retailers’ “renewal” programmes that have involved the segmentation of existing formats to

include new formulae (for a strategic segmentation see Cravens/Piercy/Baldauf 2009, pp. 42-44).


In particular market conditions, the creation of format variation by retailers can lead to the blur-

ring of the boundaries of competing store formats (Fox/Sethuraman 2006, p. 200; Reynolds et

al. 2007, p. 648). The blurring can take place, for instance, when some key aspects of store for-

mats (such as strategic product categories) overlap between different store formats (Fox/Sethu-

raman 2006, p. 200). Besides, the introduction of unique format variations, twists, and hybrids

due to retailers’ increasing efforts to differentiate their offering to satisfy the particular dimen-

sions of customer needs can lead to format fragmentation (Coopers/Lybrand 1996, p. 113;

Dawson 2004, pp. 120-122).

As a result, retailers seek novel ways to respond to customers’ diverse needs and emerging cus-

tomer values. Studies on customers’ store choice behavior have shown that customers patronize

multiple formats and that customers’ needs and wants vary depending upon a range of factors

such as time, shopping occasions and shopping experience (Colla 2004, pp. 48-49;

Reutterer/Teller 2009, pp. 695-696; Messinger/Narasimhan 1997, p. 2). This is reflected in the

introduction of different formats and format variation. Thus, as pointed out by Dawson (2006, p.

54), “the formula design has moved beyond the traditional variables associated with the market-

ing mix factors”. Examples of this kind of new sources of customer value are formula designs in

which customer value is co-created by the customer and the retailer (Dawson 2006, pp. 54-55).

2.3. Strategic Positioning with Store Formats

The strategic use of store formats also involves decisions about the competitive positioning of

the store format as a part of the retail market structure, consisting of similar and different store

formats. By creating format variation, store formats and formulae with differentiated offering

and customer value propositions, retailers can seek to better reach the targeted consumer seg-

ments, and to avoid competing on the same dimension with competitors (Porter 2008, p. 86). As

pointed out in many studies on the competitive interaction among store formats, the competitive

dynamics of a given retail market structure results from the competition between stores of the

same store format (intra-format competition) and from the competition between different store

formats (inter-format competition) (Miller/Reardon/McCorkle 1999, pp. 107-108; González-

Benito 2001, pp. 64; 2005, pp. 457-459; González-Benito/Muñoz-Gallego/Kopalle 2005, pp.

59-60; Fox/Sethuraman 2006, p. 193-194). Besides, depending on market conditions, the com-

petitive dynamics can arise also from inter-category competition (competition between retailers

carrying similar merchandising) (Miller/Reardon/McCorkle 1999, pp. 108) or from the inten-

sive rivalry between retailers (Furrer/Thomas 2000, p. 629; Porter 2008).

In addition to competitive positioning in relation to intra-format and inter-format competition,

the strategic positioning with store format can also take place due to the company’s needs to

seek a new strategic direction or for the renewal of its existing strategy (for renewal strategies


see Chakravarthy/Lorange 2007, p. 4). In their study on the new strategic alternatives available

to retailers that operate in highly saturated markets in the United States, Werner/McDermott/

Rotz (2004, p. 10-11) argued that retailers should abandon strategies involving “the geographic

expansionism, that ironically, created their original success”. As an alternative they propose

management strategies based on profit-driven product selection and customer targeting, the

application of which requires not only changes in the company’s culture, operations, strategy

and finance but also the development of capabilities to successfully execute the change of

strategic direction (Werner/McDermott/Rotz 2004, p. 10-11). Among the central aspects of

Werner/McDermott/Rotz’s (2004, p. 10-11) view of strategic change is “the increasing cus-

tomer value” as the company’s strategic aim. It calls for the understanding of customer prof-

itability, the targeting of desired customers, and the management of customer value (Werner/

McDermott/Rotz 2004, p. 11).

The implementation of any major strategic change, the divergence from a retailer’s existing

strategy to create new markets and to seek long-term growth, requires changes both in the offer-

ing part and the know-how part of the store format. The offering part of the store format must

be adjusted to fit the targeted customer segment, whereas improvement of the operational

strength might demand capabilities (Werner/McDermott/Rotz 2004, p. 10) or distinctive com-

petencies (Chakravarthy/Lorange 2007, p. 4) that are new to the company. Besides, the strategic

positioning with store formats, as in all strategic decision-making, concerns risk-taking and the

efficient and effective use of a company’s resources. Thus retailers’ strategic decision-making is

above all conditioned by the interlinked efficiency and effectiveness of business operations. As

pointed out by Achabal/Heineke/McIntyre (1984, p. 114), “efficiency by itself never assures

effectiveness” since “being ‘efficient’ relates only to using resources in the best possible way

for a given organizational strategy. But whether a given strategy is the ‘best’ one is a different

manner”. They maintain that “efficiency is a necessary but not sufficient condition for effec-

tiveness” (Achabal/Heineke/McIntyre 1984, p. 114). Effectiveness concerns the company’s

long-term goal achievement (Goodman 1985, p. 77; Achabal/Heineke/McIntyre 1984, p. 114).

In the context of the strategic use of store formats, effectiveness can be viewed as the company’s

long-term goal to achieve the strategic fit between the offering of the store format and the tar-

geted customer segment. Thus effectiveness concerns the elaboration of the offering part of the

store format whereas efficiency concerns the internal operational efficiency related to the

know-how or the retail technology part of the store format. The Japanese CVS companies are

especially renown for the efficiency of their business operations.

2.4. Store Formats as Strategic Innovations

It is an imperative for any retailer to develop and improve the both the offering part of the store

format and the retail technologies and underlying systems needed in retail operations. While


some of these often incremental operational improvements can be regarded as “operational

innovations”, some of them belong to the realm of “good business development practice”

(Reynolds et al. 2007, p. 652). “Operational innovations” are typically continuous and incre-

mental and characterised among other things by their short innovation cycles (ibid.). Retailers’

store development activities can also include the development and introduction of “strategic

innovations” (e.g. incremental improvements of the business model by introducing new sub-

brands) which are more clearly guided by the company’s long-term goals and/or strategic plan-

ning processes, and which have more strategic importance to the company (Reynolds et al.

2007, p. 651-652).

In certain conditions strategic innovations can change the conventional ways in which compa-

nies in a given industry define the business, markets and the dominant logic of competition.

Thus in certain conditions strategic innovation can result in a major divergence from the main-

stream. According to Markides (1997, p. 12), “strategic innovation occurs when a company iden-

tifies the gaps in the industry’s positioning map, decides to fill them, and gaps grow to become

the new mass market”. In Markides’ (1997, p. 12) view the gaps are related to strategic level

who-what-how questions. The Markides idea of strategic innovation can also be applied to con-

ceptualize the idea of store formats as strategic innovations. According to Markides (1997, p. 9),

“the trick is not to play the game better than the competition but to develop and play an altogeth-

er different game”. In the context of the strategic use of store formats this would mean that (1)

the offering of the store format is targeted for emerging customer segments or existing customer

segments that the other competitors have neglected, (2) the offering of the store format is able to

serve emerging customer needs or existing customer needs not well served by other competitors,

and (3) that the business model, or the know-how part of the store format, provides new ways of

producing, delivering or distributing existing or new products or services to existing or new cus-

tomer segments (Markides 1997, p. 12-13). A similar kind of idea of strategic innovation was put

forward by Govindarajan/Trimble (2004, p. 69) who maintain that strategic innovation is a cre-

ative and significant departure from historical practice in at least one of the following areas: (1)

value-chain design, (2) conceptualization of delivered customer value, and (3) identification of

potential customers. According to our view both Markides’ (1997) and Govindarajan/Trimble’s

(2004) ideas of strategic innovation are applicable to elucidate retailers’ strategic use of store for-

mats to create new markets and to seek new strategic direction for their business.

3. Outline of the Japanese Convenience Store Business

The convenience store business has grown vitally in the Japanese retailing sector in the last

quarter of a century. At the beginning of the 1970s, several companies started to introduce

CVSs as a new business by cooperating with or imitating CVSs in the United States. However,


because of the differences of market conditions, Japanese CVS companies were confronted

with lots of difficulties in tracing the American way. Some CVS headquarters decided to create

original systems by themselves and they have innovated lots of efficient and effective methods

of CVS operation.

At present, the CVS business is one of the major sectors in the Japanese retail industry (see Fig-

ure 1). Its scale of sales is nearly ahead of department stores which have a more than 100 year

history in Japan, having sold many expensive items in big buildings. However, it should be

pointed out that the Japanese CVS market is already getting saturated as the very low current

growth rate of this sector shows.


1998

(a) sales of department stores

the share of (a) in whole retailsales

the share of (b) in whole retailsales

the share of (c) in whole retailsales

(b) sales of supermarkets (c) sales of convenience stores

.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

(trillions of Yen)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

.0%

Figure 1: The Sales Value of Japanese Large-Scale Retail Stores and CVS

Source: METI (1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008), [1].

Generally each CVS has around 100 square meters of sales space which deals in about 3,000

items, and the majority of stores are open 24 hours all the year round. Sales mainly consist of

food products which appeal to lots of young males, the main customers of Japanese CVS, who

do not cook and prefer fast foods or ready-to-eat dishes. Additionally, non-food items and serv-

ice products are strategic assortments because many consumers would visit CVS whenever they

want to buy necessities or need to pay bills (see Figure 2). As a general rule, Japanese CVS do

not discount items. The advantage is that they can provide consumers with lots of conveniences

without price slashing.

4. Seven-Eleven Japan as the Pioneer, Innovator, and the Model for theArchetypal Japanese CVS Format

Seven-Eleven Japan (SEJ) is the leading CVS company in Japan. At the beginning, Ito-Yokado

Co. Ltd (the parent company of SEJ at the time) made an agreement of business activity with

Southland Corporation which had operated Seven-Eleven stores originally in the USA. SEJ

opened their first store in Tokyo in 1974. In those days several retailers and wholesalers also

launched their own new CVS businesses. However, they all struggled to establish profitable

store formats in the Japanese market because retail business conditions and consumer behav-

iour are very different than in the USA. Some companies then realized that it was important

they should create the Japanese-style CVS themselves.

In this respect, SEJ has been a pioneer of the Japanese CVS format from the start. They built up

sophisticated operational systems by pursuing lots of incremental operational innovations in all

aspects of the CVS business. This is reflected in the market position of SEJ as a leading compa-

ny in Japan (see Figure 3). SEJ also adapted their systems successfully to revive Seven-Eleven


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1998

sales of services (e.g. photocopies, home delivery service, ticket services, DPE)

Non-Foods (e.g. sundries, cosmetics, magagines, stationary items)

Processed Foods (e.g. snacks, instant noodles, bevarages, liquor, seasoning items, frozen foods)

Fast Foods & Daily foods (e.g. rice balls, sandwiches, box lunches, deli foods, dairy goods, fresh sweets)

.00

3.00

2.00

1.00

4.00

5.00

6.00

7.00

.22.25

.29 .33 .35 .34 .32 .32 .29 .31.32

8.00

9.00

(trillions of Yen)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Figure 2: The Itemized Sales Value of all Japanese CVS Stores in 1998-2008

Source: METI (1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008), [2].

stores in the USA, which had been operated by Southland Corporation and were facing a bank-

ruptcy crisis (Bernstein 1994, 1996; Kotabe 1995; Ogawa 2002; Yahagi 1997).


2002

sales amount of SEJ stores

total number of SEJ stores

sales amount of LAWSON stores

total number of LAWSON stores

sales amount of F-Mart stores

total number of F-Mart stores

0 0

4,000

2,000

6,000

8,000

10,000

12,000

.5

1

1.5

2

2.5

3

(trillions of Yen) (stores)

2003 2004 2005 2006 2007 2008 2009

Figure 3: The Value of Sales and Stores of the 3 Largest Japanese CVS Chains

Source: Annual reports of each company. All values are based on the data of each fiscal year for domestic businessonly. ‘F-Mart’ is FamilyMart, the 3rd largest CVS chain in Japan.

The strengths of SEJ are described in many research studies. Yahagi (1997) emphasized that the

key strategy of SEJ is ‘economies of speed’ to realize a unique product assortment in a small

sales floor space. Each store’s staff sends out orders everyday considering the daily circum-

stances of their trading areas, and several types of small-sized trucks deliver ordered items to

each store just in time. Stores can stock only good sellers on shelves and they do not need to

maintain a large space for storage.

Accurate ordering and delivery is supported by sophisticated information systems, including

point-of-sale (POS) data collection systems, replenishment-ordering systems and so on with

up-to-date devices and communications networks (Ogawa 1998, 2000). SEJ has continued to

upgrade their information systems frequently, and have used the 6th-Generation Integrated

Information System since May, 2006.

Demand is varying and changeable depending on the characteristics of each trading area and dai-

ly circumstances. This means that all store staff should deeply consider which items will be pre-

ferred by their near-future customers. Ogawa (2002) describes the ‘Hypothesis-Testing-Ordering

System’ executed at Japanese CVSs, an especially thoroughgoing policy of SEJ. It differs from

simple replenishment ordering and automated ordering systems. Each store person in charge of

ordering should formulate hypotheses about demand and test them through an actual assortment

of items on the selling shelves. The accumulation of such efforts leads to appropriate stocks

which avoid sold-out risk and elevates the attractiveness of stores. This operation is supported by

POS data analysis and advice provided by headquarters, but it also requires the experience and

skill of each person to exploit local (analog) information and their own intuition.

Matsuo/Ogawa (2007) analyzed SEJ’s product innovation method. SEJ provides customers with

lots of attractive items which are derived from the innovation of content itself, innovative sup-

ply chain management, and the innovation of sales processes at stores. SEJ has tight relation-

ships with material suppliers and manufactures and they collaborate to introduce differentiated

new products at appropriate opportunities based on such ‘Holistic Innovation’.

5. Lawson’s Store Development Activities and Format Variation

These factors of CVS operation have been exhaustively benchmarked and imitated by other fol-

lowers, and as a result, the format of the Japanese CVS has been formed. This fact has several

consequences. From the consumers’ point of view, they can find lots of similar CVS stores

everywhere in Japan. They understand what the CVS is, how they behave inside stores and what

kind of benefits they could gain by visiting a CVS. On the other hand, many consumers may

have considered that every CVS chain is almost the same and not differentiated.

From a business perspective, it seems that the market position of SEJ is absolutely secure.

Many CEOs and executive officers of competitors consider that it would be difficult to catch up

with SEJ if they continue to operate their business in a similar way to SEJ. It might be the

advantage of the first-mover into the innovation frontier. SEJ always challenges itself to

improve its own systems, so it can establish partnerships with excellent suppliers and manufac-

turers (Matsuo/Ogawa 2007) and can apply the most advanced information technologies to their

ordering and communications networks (Ogawa 1998).

Lawson has basically followed in a similar way as have other CVS chains, but there is one differ-

ent side of their strategy. Lawson has developed their stores in accordance with unique policies.

The history of Lawson concerning store development, described in Figure 4, is divided into two

strategic phases. The first phase is the period before 2001. At the beginning of 2001, the Mit-


subishi Corporation, one of Japanese major trading companies (Sogo-shosha), became the

largest stockholder of Lawson, Inc. The former parent company was Daiei Inc., which had once

been the largest retailer in Japan for over a quarter of a century.


Figure 4: The History of Lawson Concerning Store Development Activities

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Source: website of LAWSON, INC. and several articles of magazines.

The store development activities are conducted under decisions about store location and store

format. In the first phase (until 2001) Lawson had a definite strategy for store locations, and in

the current phase (from 2001 to the present day) they have been challenged to get the unique

multi-format strategy off the ground.

5.1. Store Location Strategy in the First Phase (until 2001)

SEJ has expanded its store network steadily under their solid policy on the ‘market-dominance

strategy’. When they decide to advance into a new region, they would allocate a sizable number

of stores in a fixed spatial area at the same time. This realizes efficient and frequent delivery of

ordered items from their distribution centres to each store by small-sized trucks. Their manu-

facturing partners would establish exclusive factories in such areas, and then customers could

enjoy very fresh foods. Many residents in such a high store density area might recognize SEJ as

the leading retail brand.

Conversely, Lawson pursued nation-wide store locations from the beginning stage of their busi-

ness. The total number of stores has never exceeded SEJ’s but Lawson had established their

stores in all 47 prefectures in Japan by 1997. Table 1 shows the situation in fiscal 1999 [3].


Table 1: The Number of SEJ and Lawson Stores in Every Prefecture

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Source: Konbini (October 2000, pp. 163-164).

Lawson seemed to place special emphasis on the economies of scale at that time. They expand-

ed their nationwide store network rapidly, in some cases by absorbing existing regional CVS

chains (see Figure 4). This might have been affected by the ideology of their parent company,

Daiei, which had constructed Japan’s largest supermarket chain and whose overwhelming bar-

gaining power was a strong weapon against suppliers and manufactures. And Daiei had already

operated supermarket stores everywhere in Japan, so Lawson could utilize existing assets such

as distribution centres, information networks and relationships with regional suppliers. Some

analysts also pointed out that a large sales volume was their first priority rather than the prof-

itability ratio, because Lawson was an important breadwinner of cash in the Daiei group [4].

As a result, it is considered that SEJ and Lawson developed their stores in different ways within

each regional area. For example, as shown in Table 2, Lawson operated a variety of store types in

every location, and we could notice that SEJ might have some standards for store development.

Note: Grey cell means that the number of stores is the largest in each prefecture. Originally SEJ started their businessin Tokyo and Lawson had their former headquarters and first store in Osaka prefecture. The names of prefectures onthis table are arranged according to geographical order from the northeast to the southwest of Japan.

5.2. Strategy Emphasising Format Variation (from 2001 to the Present Day)

Because of seriously bad financial matters, Daiei decided to list the stocks of Lawson on Japan-

ese major stock exchange markets in 2000. After buying the majority of stocks, Mitsubishi Cor-

poration became the largest stockholder of Lawson and started to govern their management

from fiscal 2001.

Mr. Takeshi Niinami was sent from Mitsubishi to Lawson as its new CEO. He and other

executive officers have been dramatically challenging themselves to differentiate Lawson from

other retailers or service businesses. In the beginning they concentrated on rebuilding their

product development process and reform the efficiency of the stores network by closing unprof-

itable stores or reshuffling locations. At the same time, they also launched several CVS formats

experimentally, such as Hospital Lawson in general hospitals, Postal Lawson as hybrids

of CVSs and post offices, Natural Lawson targeting urbane young ladies, and so on (see

Figure 4).


Table 2: The Classification of SEJ’s and Lawson’s Store Locations Within Setagaya Ward

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Note:

Source: Ishizaki (1998, p. 61) [5].

After repeated trial and error, they officially announced (in May, 2005) the launch of two new

sub-formats of Natural Lawson and Lawson Store 100, which stock perishable foods in addition

to the regular food products and sell all the items at one price (100 yen - a single coin). These

formats are independently operated by subsidiary companies, and each format targets con-

sumers in specific market segments which standard CVSs have failed to capture. In addition,

Lawson absorbed Ninety-nine Plus Inc., the pioneer and largest retail chain of mini-supermar-

ket type CVSs by acquisition, consolidating them with Lawson Store 100s [6].

In 2007, one more sub-format, Lawson Plus, was launched as a conversion format from existing

standard Lawson stores. There are also other types of experimental stores, but currently these

three new formats and the standard Lawson are the main businesses (see Table 3).


Table 3: Lawson’s Main CVS Formats

Source: 2020AIM, June 2005, pp. 56-60; Weekly Toyo Keizai, 2nd July 2005, pp. 62-65; Weekly Diamond, 27th Octo-ber 2007, pp. 142-145; Lawson, Inc. Annual Report 2009.

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5.3. Conditions and their Influences on Lawson’s Strategy

From 2001, Lawson, under the leadership of a new CEO, Mr. Niinami, began to seek strategic

differentiation by introducing format variation. In interviews with the business media, Mr.

Niinami has expressed his strong confidence for the progress of the company’s unique multi-

format strategy. Actually, other companies have also made attempts to launch new CVS formats

but so far, only Lawson is facing the challenge of a multi-format strategy in earnest.

But the market-leader SEJ does not follow this trend at all. Mr. Toshifumi Suzuki, the Chairman

and CEO of SEJ, has devoted his energy to the penetration of their successful policies, and as

mentioned earlier in this paper, through every person in the company. When he gives interviews

to journalists, he always criticizes the altering of the basic CVS format [7]. If one company

operates several CVS formats simultaneously, it would be difficult to implement the market-

dominance strategy efficiently and effectively. Besides, the multi-format operation would lose

the economies of scale. After all, if the Hypothesis-Testing-Ordering is carried out at every

store appropriately, the Japanese CVS format would be able to deal with all customer demands

in every trading area even with a single format [8].

However, we consider it unsuitable to evaluate Lawson’s multi-format strategy from the per-

spective of SEJ’s position of strength. This strategy is not conducted by any fresh entrepreneurs,

and Lawson has already managed its CVS business for more than 30 years. They have been able

to reconstruct better business systems under their particular conditions.

For example, there were already lots of Lawson stores nation wide when Mr. Niinami became

its CEO. As we considered in the previous section, it was a consequence of the ideology and

intention of the former parent company. Compared with SEJ’s orthodox market-dominance

strategy, the distribution of Lawson stores was neither efficient nor effective. Some Lawson

stores had overlapped trading areas with each others and there were lots of unprofitable stores,

the penalty for hasteful store allocation in the past.

In these conditions it would be a reasonable decision to operate plural formats. They would be

able to convert several stores into other formats in areas where there were excessive numbers of

stores. Those stores of unique formats would be used by different types of shoppers in the same

geographical area. And it would be suitable to operate a new format in rural areas where the

proportion of elderly persons is relatively high, because standard CVSs target the young male.

The change of governance would have promoted the multi-format strategy. Lawson could aban-

don the intention for excess expansion affected by the former parent company. Besides such

negativity, Mitsubishi Corporation provided Lawson with various opportunities to find new

locations. Because Mitsubishi Corporation, as a major Sogo-shosha, has plenty of business

connections with various companies and associations and also manage lots of real properties in

city centers, it is feasible to cultivate new locations favourably. In addition, Lawson could pro-

vide quality items of perishables and low-cost private labels with the support of the Mitsubishi

group. These opportunities would be the fruit of synergy.

Considering the saturated condition of the CVS market, the multi-format strategy has the poten-

tial to create new customer segments. Now CVSs have already penetrated into the lives of the

Japanese, almost all consumers know CVSs. In addition, they might hold such a stereotype that

CVSs are the retailer for mainly males of the younger generation. Even if each store offers

assorted items appealing to young ladies, aged persons, thrifty housewives or green consumers,


people might not notice such efforts because of their own stereotypes. However, if companies

would operate fine-tuned formats for every market segment and they could express that with

unique store brand names, proper symbol colors or distinguishable signboards and façades, new

customers would be attracted (see Figure 5).


Figure 5: Conditions and their Influences on Lawson’s Strategy

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Lawson’s multi-format strategy is now in progress, so it is difficult to find out the results on

their financial statements. However, some magazine articles report that the sales of new format

stores have been improved dramatically and they seem to obtain the targeted customers success-

fully. And so far, Lawson could accumulate lots of valuable experiences and skills to launch the

chain operations of every format [9].

6. Conclusions

In this paper we have described and analysed Lawson’s format variation in the Japanese market.

We have described how Lawson began to employ its current strategy and analysed how Law-

son’s store development activities have been conditioned by competition, market conditions and

the company’s search for new strategic direction. In the Japanese CVS business, Lawson has

developed and applied format variation (the creation and development of branded sub-formats)

most intensively and is now also most advanced in implementing its explicit multi-format strat-

egy. Besides, there are several aspects in Lawson’s employment of format variation that make us

propose that Lawson’s store formats can be viewed as strategic innovations in the context of the

Japanese CVS business.

Strategic differentiation in retailing is always context dependent. It is conditioned by numerous

contextual and retail decision-maker related factors. In the case of Lawson, saturation and

intensive intra-format competition both restricted and gave possibilities for Lawson to deviate

from the dominant and conventional modes of competition. In the Japanese CVS business the

young male segment was the main target for all major chains. For Lawson such a dominant con-

dition was a strategic opportunity to introduce sub-formats for other distinct customer seg-

ments. Besides, for Lawson the change of governance in 2001 was the main event that led to

and facilitated Lawson’s “strategic renewal” (Chakravarthy/Lorange 2007, p. 4).

Until the change of governance in 2001 Lawson’s store development activities and strategy

were characterised by intensive market expansion (Werner/McDermott/Rotz 2004, pp. 10-11),

increasing the number of standard-format stores. At that time the strategy emphasized store

location. The second strategic phase began in 2001. Ever since then, the main emphasis in Law-

son’s strategy has been on the creation of format variations and in seeking the strategic fit

between the offering of the store format and the targeted customer segment. As a result, Law-

son’s current strategy differs in many ways from its competitors’ more conventional strategies

and store development activities. According to our view those points of divergence show also

how Lawson is using its store formats as strategic innovation.

The first major difference is that Lawson has differentiated the offering part of its sub-formats

in terms of store locations, price levels, and product and service mixes. By adjusting these

primary marketing mix variables, Lawson has been able to serve new customer segments

(Markides 1997, p. 12: the emerging customer segments). The second major difference is that

Lawson has served the needs of new customer segments with novel customer value propositions

(e.g. healthy lifestyle, reasonable price, hybrid) (Govindarajan/Trimble 2004, p. 69: the concep-

tualization of delivered customer value). The third major difference is that Lawson’s sub-

formats seek also to respond to emerging trends in society and in local conditions (e.g. serving

the needs of aged persons) (Markides 1997, p. 12: the emerging customer needs).

It was argued in this paper that strategic differentiation also concerns, above all, the search and

the creation of the strategic fit between the offering of the store format and the targeted cus-

tomer segment. Unlike SEJ or other companies in the Japanese CVS business, Lawson seemed

to have placed more emphasis on effectiveness than on operational efficiencies. Effectiveness

is, according to our view, central from the strategic fit point of view, since it is more clearly

related to the company’s long-term goal achievement (compare Goodman 1985, p. 77). The cre-

ation of the strategic fit calls for changes not only in the offering part of the store format but

also in the know-how part of the store format. It was shown in the paper how Lawson’s current

strategy has also involved the creation of active business alliances and networks, and the devel-

opment of new delivery and distribution methods and systems to support the operation of the

sub-formats (Werner/McDermott/Rotz 2004, p. 10: the development of key capabilities; Chak-

ravarthy/Lorange 2007, p. 4: the development of distinctive competencies). Also the aforemen-

tioned aspects of Lawson’s strategy are inherent in Markides’ (1997, p. 12) and Govindarajan/

Trimble’s (2004, p. 49) conceptualization of strategic innovation.

Lawson’s multi-format strategy is in progress. The creation of format variation has not been

predestined by the strategic planning process but involved trial and error, piloting and experi-

menting with store format variants (cf. Reynolds et al.’s 2007, p. 652-653) notion concerning

“emergent strategy” approach to format innovation process; see also Mitzberg/Waters 1985).

Will Lawson’s multi-format strategy some day become the dominant mode of competition in

the Japanese CVS business? At least the main competitors have awakened and begun to imitate.


Notes

[1] This survey was conducted by the Industrial Statistics Office, Research and StatisticsDepartment, METI (Ministry of Economy, Trade and Industry). In this survey, METI sentout questionnaires to the headquarters of major CVS chains which operate more than 500stores in Japan. According to another survey conducted by the editorial department of Kon-bini (a major CVS magazine in Japan), 12 companies fulfil this condition in 2008.

[2] In 2008 the sales value is estimated to be pushed up by special procurement for cigaretteproducts. A new regulation which prohibits buying cigarettes without certificate cards atvending machines went into force from this year, since then many smokers visited CVSsbecause they do not need to show the cards at person-to-person selling counters. Theywould purchase cigarettes and simultaneously buy additional items together at the CVS.

[3] SEJ still has not advanced into 10 prefectures (as of July 31, 2009). FamilyMart establishedstores in all prefectures in 2006. The latest numbers and distribution of stores areannounced at their websites. (Cf. http://www.sej.co.jp/english/company/n_stores.html,

[3] Lawson: http://www.lawson.co.jp/company/e/corporate/store.html,FamilyMart: http://www.family.co.jp/english/investor_relations/stores.html)

[4] cf. Nikkei Business, December 8, 1986, pp. 46-50; Nikkei Business, June 23, 1997, p44;Ekonomisuto, February 29, 2000, pp. 59-62; Gekiryu, May, 2001, pp. 76-80; Nikkei Busi-ness, September 25, 2006, pp. 70-73.

[5] Setagaya ward is one of 23 in the Tokyo metropolitan area and the population is around800,000. This ward mainly consists of well-known residential areas for families and popu-lar commercial regions for young people. There are lots of schools and universities. These7 types of store merchandising and 5 types of locational characteristics are classified byapplying factor analysis and cluster analysis with the data of GIS and the author’s originalsurvey in the spring of 1994.

[6] In the current phase, Lawson actively made contracts of business alliance or for absorbingexisting stores with several companies such as Japan Post Holdings, Shinsengumi HonbuCorporation and MatsumotoKiyoshi Holdings. Shinsengumi Honbu had operated CVSsequipped with kitchens. MatsumotoKiyoshi is Japan’s largest drugstore chain. It is thoughtthat Lawson would be aiming at obtaining partner’s experiences in different retail business-es and for gaining opportunities to establish new store formats, not aiming to have thelargest store networks. (cf. Keizaikai, April 3, 2007, pp. 56-57; Gekiryu, January, 2009, pp.20-22.)

[7] cf. Ekonomisuto, February 29, 2000, pp. 56-58; Nikkei Business, August 8, 2005, p. 42;Nikkei Business, September 4, 2006, pp. 46-48.

[8] Actually SEJ has recently started to operate a new type of store which has a small salesspace in buildings, gas stations and so on. But the store brand name and the design of itsfaçade is the same as standard SEJ stores. FamilyMart has another store brand, “Famima!!”,which targets urban residents and they have a different image colour, façade or item assort-ment, but there are only 17 stores (FamilyMart Annual Report 2009, p. 27). They startedthis business in 2003.

[9] cf. Gekiryu, October, 2006, pp. 23-28; Keizaikai, November 28, 2006, pp. 42-45; WeeklyToyo Keizai, May 26, 2007, pp. 72-76; PRESIDENT, July 2, 2007, pp. 146-151; WeeklyDiamond, October 27, 2007, pp. 142-145; Weekly Toyo Keizai, December 6, 2008, pp.106-108; Gekiryu, January, 2009, pp. 20-22.


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Retailing in the United Kingdom - a Synopsis

Steve Burt, Leigh Sparks and Christoph Teller

AbstractThis paper illustrates the structure of, and trends in, the retail market of the United Kingdom(UK). This industry analysis describes the retail environment compared to continental Europeand considers the regulatory issues which have helped form this retail environment. By usingsecondary data we describe concentration and consolidation tendencies and explain specificfeatures of the UK retail market. Major trends are identified and discussed, concluding with anoutlook on future developments.

KeywordsUnited Kingdom, Retail Structure, Industry Analysis

Steve BurtInstitute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland,United Kingdom.

Leigh SparksInstitute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland,United Kingdom.

Christoph Teller (corresponding author)Institute for Retail Studies, Stirling Management School, University of Stirling, Stirling, Scotland,United Kingdom(Tel: ++44 1786 46 6454; E-mail: [email protected]).

Received: January 1, 2010Revised: April 22, 2010Accepted: April 22, 2010

EUROPEAN

RETAIL


1. Introduction

1.1. Retailing in the United Kingdom and Europe

In a number of ways retailing in the United Kingdom of Great Britain and Northern Ireland [in

the following United Kingdom (UK)] appears to operate differently from the general pattern in

continental Europe. Some may see this as yet another example of UK’s unwillingness to

embrace the European Union, but as with all retailing, the sector merely reflects the context

within which it operates and the norms of behaviour that have developed in the domestic mar-

ket. In this brief paper we highlight the distinctive features of the UK’s retail market and illus-

trate how these have shaped the nature of competition in the sector.

Any attempt to understand the UK retail scene should start by recognising the distinctive fea-

tures of this market (Mintel 2010). The United Kingdom is a compact island market of more than

60 m people living in circa 25 m households and with the third highest density of population in

Europe after Belgium and the Netherlands. It is the sixth largest economy (Gross domestic prod-

uct 1,808 bn EUR) worldwide and third largest in Europe after Germany and France. The total

consumer expenditures are the second highest in Europe (1,096 bn EUR) after Germany (1,367

EUR) and 7th highest per capita in Europe (17,851 EUR in 2008). The UK is ranked 4th in terms

of total retail sales (318 bn EUR) and 12th in terms of retail sales per capita (5,184 EUR). Urban

centres are relatively close together and although decentralisation of large retail stores to the

urban periphery has occurred, planning policy has attempted to maintain a strong retail presence

in the urban core of most major towns and cities (BCSC 2006; Guy 2007).

As occupants of mainland Europe know all too well, Britain can perhaps best be described as

“in Europe, but not European”! General attitudes towards the European Union amongst the

majority of the population can be described as ambivalent, as illustrated in the strong desire to

retain the national currency. Despite this somewhat ethnocentric view, the UK market is an open

economy, and a large number of non-national retailers operate in the market. At the same time,

UK retailers are increasing their presence outside the domestic market.

1.2. The Retail Environment in UK

Government intervention in retailing has generally been directed at de-regulation and the pur-

suit of a free market economy. For example most restrictions on opening hours were removed in

1994; resale price maintenance in the book trade disappeared in 1995; and rules on pharmacy

licensing were amended in 2004. Where intervention has been restrictive, like elsewhere, it has

primarily been in response to fears about the growing power of large operators. Store location in

Britain is managed through zoning procedures in general land use planning policy i.e. it is the

land use itself that receives the permission and not the user per se. From the mid 1990s there has


been a clear emphasis on protecting and reviving town centres, rather than allowing further

expansion on the periphery i.e. the so-called town centres first’ policy. Guy (2007) summarises

retail land-use planning and regulation in the United Kingdom into four phases. Whilst the pol-

icy framework differs in timescale and to some degree in approach between the constituent

countries/parts of the United Kingdom (Scotland, Wales, Northern Ireland and England), the

broad dimensions of these four phases holds true across the constituent countries:

- 1960s/1970s - early days of retail regulation with initial resistance to new retail forms e.g. out

of town shopping centres, hypermarkets;

- 1980s - a loosening up of regulation to more approach a market led system allowing an expan-

sion of new forms e.g. superstores, retail warehouses, regional shopping centres, outlet centres;

- 1990s - the gradual tightening up of policy as cumulative effects from retail decentralisation on

town centres became more noticeable e.g. the development of the ‘town centres first’ policy;

- 2000s - the continuation of the ‘town centres first’ policy which has redirected off-centre

developments to, and focus attention back on, town and city centres.

As can be noted from the brief policy descriptions of these phases, policy has tended to switch

between restrictions on new forms of development to encouragement of such developments (as

in the ‘planning-free’ Enterprise Zone experiment of the 1980s - see Dawson and Sparks 1982;

Sparks 1987), and then back to more restriction. This switching of land-use policy has been

driven essentially by the outcome of debates at particular times over the social versus econom-

ic requirements from retailing and the question of the degree of impact on existing retailers and

existing centres (e.g. Guy 1998b; Guy/Bennison 2002). More recently these issues have been

overlain with debates about the environmental impact and sustainability of various forms of

retailing as for example in terms of productivity (e.g. Sparks 2005).

At the same time as there has been this policy regulation over land-use, there has also been peri-

odic concerns about the continued growth of large retailers. These concerns have generally been

couched in terms of competitive impacts of large retailers on smaller independent retailer oper-

ations and ‘small shops’ and on impacts on suppliers and producers of products, particularly in

the food arena (e.g. Clarke 2000; Clarke et al. 2002). In the early 1980s, the decline of the small

shop/independent retailer and the relationships between large retailers and suppliers were inves-

tigated by the Monopolies and Mergers Commission (MMC 1981). They found that whilst such

concerns were justified, the evidence suggested that consumers were benefiting overall in terms

of lower prices and as such there was no need to intervene in the market. This finding was con-

firmed in a follow-up study by the Office of Fair Trading (OFT 1985).

With the relaxation of restrictions on new retail forms in the 1980s, large retailers began to

exploit a cycle of growth which saw considerable increases in scale and concentration. Existing

large retailers continued to get bigger and concentration ratios continued to grow. In the early

Burt, S.; Sparks, L.; Teller, Ch. 175

1990s, academic concerns about abuses of market power began to be raised (e.g. Wrigley 1991,

1992a, 1992b, 1993) particularly in food retailing, and were picked up by the media especially

in terms of price comparisons with overseas markets. This price comparison issue was taken up

by politicians, notably by the Labour Party, before and after its election success in 1997 (Sparks

2002). The basic claim was that the market had ceased to operate fairly and that large (food)

retailers were making excess profits and abusing their market positions. Some of this perceived

abuse was put down to individual ‘greedy’ firms, but there was also a concern over the opera-

tion of the market as a whole and the potential for collusion amongst companies. As power in

food retailing continued to concentrate in the hands of a smaller number of retailers, so these

concerns grew louder (e.g. Marsden et al. 1998; Dobson/Waterson 1999; Dobson et al. 2003),

eventually focusing on the dominant position of Tesco (Burt/Sparks 2003). Whilst impact

on town centres and small independent retailers has remained a topic of concern, the scale of

the largest retailers, especially in food, has been seen as causing a competitive problem for the

market as a whole.

The UK had in many ways in the 1980s had a more laissez-faire approach to retail development

than elsewhere in Europe (Davies 1995; Guy 1998a). This came to an end in the early to mid

1990s when regulation was tightened primarily on the basis of competitive impact on town cen-

tres, the continuing growth of large retailers and the stirrings of environmental concern (e.g.

BDP et al. 1992; CB Hillier Parker et al. 1998). Decentralisation of retailing as a consequence

began to alter in form and to slow (Schiller 1986, Hallsworth 1994; Wrigley 1994; Fernie

1998). The tightening of land-use regulation constrained development and altered the trajectory

of retail development in the UK (Wrigley 1994, 1998a, 1998b; Pal et al. 2001; Guy 2002). This

is not to say that the concerns over scale and impact have gone away. Indeed large retailers have

proved adept at reacting to the new situations (e.g. Wood et al. 2006; Thomas 2006; Guy/Benni-

son 2007). The continuing increases in concentration and corporate scale, and the ability of

some retailers to continue to expand floorspace, have brought retailing, and especially food

retailing, much closer attention from regulatory authorities. In particular there has been a

sequence of investigations by the Competition Commission into the grocery market and its sup-

plier relationships and competition (Sparks 2008a):

The culmination of the media and political campaign in the mid-1990s over retail prices was an

investigation into supermarkets in 1999/2000 (Competition Commission 2000). The bid for

Safeway by Morrisons in 2003 led to another investigation as competing bids for Safeway were

all examined together (Competition Commission 2003). When Morrisons were permitted to

buy Safeway (the other leading food retailers were not, on the basis of subsequent concentration

levels), some stores had to be sold off due to concerns over local market shares, which produced

a further report (Competition Commission 2005). Then in 2006 another full investigation into

the market position in food retailing was announced as a consequence of continuing concerns


(Competition Commission 2006, 2007a). Most recently, the Competition Commission has even

begun to investigate the proposed purchase of a single store by Tesco (Competition Commission

2007b). These investigations have generally found that the market is competitive but that some

practices towards suppliers are not as good as they might be. As a consequence there are now

proposals for a Grocery Ombudsman to regulate such relationships.

The context within which retailing in UK has developed is therefore as a relatively large and

compact market, with close proximity of major urban centres; a traditional “inward looking”

focus on developing the domestic market; and a relatively un-regulated legislative system

allowing for operational flexibility. Whilst it is true that the restrictions have been greater in

recent years, large firms have not really felt too constrained and new formats and developments

have occurred in many towns and cities (e.g. Guy 2010).

2. Characteristics of the UK Retail Market

Within this context, there are a number of distinctive features of the UK market which have

influenced the evolution of the retail sector over the past twenty years. These provide an impor-

tant contrast with the general pattern observed in mainland Europe.


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Figure 1: Development of Number of Businesses, Outlets and Employment (2003-2007)

Source: based on Mintel (2009, 2010).


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Table 1: Major Food Retailers’ Operations in the UK

Source: Mintel (2009, 2010).

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Figure 2: Sales of Leading Retailers

Source: based on Mintel (2009, 2010).

Note: Caption: 1, excl. sales tax; 2, includes Tesco (Superstores): Supermarkets (448 outlets), Tesco Metro: Highstreet supermarkets (174 outlets), Tesco Express: Petrol forecourt (961 outlets), Tesco Extra: Hypermarkets (177 out-lets), One Stop Stores: Convenience stores (512 outlets); 3, includes Budgens: Multiple grocer, convenience stores(183 outlets), Londis: convenience stores (1,861 outlets), others: Multiple grocer, convenience stores (487 outlets)

2.1. Size, Structure and Major Players

In the UK, the retail sector constitutes an important part of the economy, contributing 16% of

GDP and is worth 285 bn GBP. It employs around 3 m people or 1 in 9 of the workforce and

involves over 300,000 retail premises (see Figure 1). Retail property dominates UK institution-

al investment, accounting for over half of the capital value of direct property assets held by


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Table 2: Major Non-Food Retailers Operating in the UK

Source: based on Mintel (2010).

Note: Caption: 1, excl. sales tax; 2, total UK sales; 3, does not include Directory sales; 4, Sales include turnover fromstores in Ireland and Germany; 5, includes turnover from overseas stores and is for a 66 week period due to a changeof year end; 6, including Currys (519 outlets; sales: GBPm 2,658), PC World (161 outlets; sales GBPm 1,245); 7,including B&Q (DIY superstores, 322 outlets, sales GBPm 3,800), Screwfix (DIY stores, 138 outlets, sales GBPm479); 8, HMV (Music/video goods, 272 stores, sales GBPm 314), Waterstone’s (bookstores, 314 outlets, sales GBPm548); 9, Superdrug (Drugstores, pharmacies, 900 outlets, sales GBPm 1,074); Savers Health & Beauty (Drugstores,241 outlets, sales GBPm 180)

institutions and property companies. The UK’s retail sector is enormous and influential. It con-

tains however massive contrasts. It is operated through many single shop entrepreneurial busi-

nesses, mobile shops and virtual shops. Retailing is a local affair with local demands: But some

retailers are increasingly international and indeed ‘global retail brands’ such as Tesco. Retail

sales are increasing although the number of outlets is falling and their format is changing. Low

employee pay characterises much of the sector, but managerial pay is above average and all

members of the Tesco main board receive over 2 m GBP per annum.

As in other European retail markets the concentration tendency is quite remarkable. In the

last ten years every third pound is generated by one of the five most powerful players in the

market, i.e. Tesco, Sainsbury, Asda, Wm Morrison and Marks and Spencer (Mintel 2009, 2010).

Figure 1 shows this increasing market concentration.

Parallel to this trend the number of businesses and the number of employees steadily decreases

whereas the number of outlets rises gradually. As Figure 2 shows, a clear consolidation trend

can be observed which is also representative for other European retail markets.

Table 1 and Table 2 provide overviews of the major players in the UK markets. The largest kind

of businesses is food retailing in terms of outlet, sales, employees or capital expenditures.

Whilst the leading players in each sector are mostly represented by UK retailers, some highly

successful international retailers can be identified in all sectors, e.g. Aldi (Germany), Primark

(Ireland), IKEA (Sweden) or Amazon (United States).

2.2. Sustained and Steady Growth in Retail Sales Volume

Over the past twenty years, the UK retail sector has operated and evolved in a market exhibiting

sustained growth in retail sales volume. UK retail sales emerged strongly from the 1989-1992


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Table 3: Retail Sales (2004-2008)

Source: adapted from Mintel (2010).

2004-08

recession, reinforcing a similar strong pattern of growth in the 1980s. The availability of con-

sumer credit is cited as the driving force behind this sales growth, allowing customers to take

advantage of the changing retail offer made available by shorter market lead times, more fash-

ion cycles and the improved merchandising and marketing activities of retailers. Whatever the

driving force behind these trends, unlike most of mainland Europe over this period, most retail

sectors in the UK evolved against a background of steady and sustained growth in retail sales

volume (see Table 3). Most recently however the ‘credit crunch recession’ of 2008 onwards has

seen retail sales fall and stagnate and many businesses close shops or shut down totally (e.g.

Woolworths).

2.3. Stock Market Ownership

Although the last few years has seen a number of high street clothing retailers move into private

ownership, the majority of UK retailers have a long history of raising finance on capital mar-

kets. The involvement of external stakeholders in this way places increased pressure on man-

agement, and focuses attention on financial measures of performance. The problems of retail

icons such as Marks and Spencer and J. Sainsbury in the mid1990s and 2000s respectively, and

the fate of senior managers at these companies, illustrate the power of the “city” and institution-

al shareholders in monitoring performance and raising expectations as critical stakeholders. A

further implication of a listing on the stock exchange is that it makes companies vulnerable to

takeover (at the right price) and contested acquisitions are not uncommon as companies seek to

grow market share. Tesco in the 2000s grew its convenience market share through acquisitions,

Wal-Mart was able to snatch Asda from an agreed deal with Kingfisher in 1997 and the Mor-

risons/Safeway merger of 2003 only came about after a Competition Commission investigation

as to which company should be allowed to buy Safeway amongst all the leading food retailers.

2.4. Cost Structures

A cursory glance at the financial accounts of UK retailers (particularly grocery retailers) sug-

gests that the market generates high net margins. However, direct comparison with similar com-

panies in mainland Europe is dangerous as differences in financial accounting procedures,

especially in the treatment of items such as depreciation and goodwill distorts direct compar-

isons. Cost structures within UK retailing are however different and as such influence operating

policies and behaviour. Property and labour cost structures illustrate some of these differences.

Land and store fitting out costs are high, and shop rents are not linked to turnover, but often to

regular Upward Only Rent Reviews, which means that rental charges generally increase irre-

spective of market performance (although the recent recession has challenged this approach).

Labour cost structures are also different, not necessarily in respect of the overall cost of labour,

but in the management of labour. Part-time labour is the dominant form of shop-floor employ-


ment in Britain. Nearly 60% of all retail employees are part-time, and 64% are female - 70% of

whom work on a part-time basis. This provides opportunities for cost savings in some of the

social costs of labour, but more importantly it allows a high degree of labour flexibility provid-

ing retailers with considerable scope to match labour with peak periods of activity, and thus

improving labour efficiency. Reynolds et al. (2005) show how such differences feed into

aspects of international productivity and other comparisons.

2.5. Internationalisation

UK retailers are involved in global sourcing and retailing activities. The global success of UK

retailers is enhanced by a positive retail environment within the UK. Table 4 shows that almost

every retail sector contains a powerful international player based in the UK.


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Table 4: Major UK Retailers with Foreign Operations

Note: 1, exclusive sales tax; 2, DSGi has since exited its operations in Poland, Czech Republic and Hungary

The arguably most successful retailer in UK - Tesco - can serve as a show case of successful

internationalisation of UK retailers (see Figure 3). Tesco has turned from a company dominated

by UK food superstore retailing to one where the sales floor space outside the UK is greater

than that inside the UK, store number growth is focused internationally and profit and turnover

growth is faster internationally than in the UK (Seth and Randall 2005).

However, it needs to be noted that internationalisation is not always easy and successful. Indeed

failures and market exits are suprisingly common (Burt et al. 2004), even with high profile UK

retailers. E.g. Marks & Spencer endured a torrid exit from various markets in the early 2000s

(Burt et al. 2002).

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2.6. Loyalty Card Schemes

There are large loyalty card schemes across the UK. Boots the Chemist’s Advantage Card

has almost 15 m active cardholders and is used in 70% of sales transactions in the company.

The Tesco Clubcard scheme (Humby et al. 2003) has probably 13 m members and has been

credited with helping the retailer reach its current dominant market position. The information

received on purchase patterns has been vital in adjusting the product, store and other offers and

in targeted and micro-marketing activities. The data to some extent is the heart of the business

strategy.

Other retailers have not been so convinced by the idea or practice of loyalty cards. Their argu-

ment is that it is an expensive way to learn about consumer behaviour, provides only partial data

and does not really engender loyalty per se. Businesses such as Sainsbury, Asda and the Co-

operative Group have at different times switched their views on the value of such schemes.


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The evidence however would seem to point to loyalty schemes being successful when managed

and integrated fully with the business. The consumer focus that a loyalty scheme can bring

allows retailers to track mobile consumers as they shop in different ways across the company.

Thus for example as Tesco have developed their various formats and channels (e.g. Metro,

Express, Extra, Direct, Homeplus, Telecoms, etc.; see Table 5) so the Clubcard can be used as

the connective mechanism to track consumers and their patterns of shopping. Such data, whilst

somewhat problematic in both privacy and practical terms at the individual level (e.g.

Smith/Sparks 2004) does allow a strong degree of segmentation and a fuller understanding of

actual and potential behaviours. It also allows store specific and individualised merchandising

and marketing.

3. The Nature of Competition

Faced until recently with an operating environment with natural growth in retail sales, fuelled in

part by consumer credit and a consumer willing to spend; strict taskmasters in the form of city

investors requiring continued growth, financial performance and returns on investment; and

cost structures allowing a service based focus in the retail offer, the nature of competition in the

UK market has taken a particular form, with a strong emphasis on non-price based competition,

and control and replication of a branded retail offer.

3.1. Centralised Management and Procedures

Management systems and operating procedures in UK retailing are highly centralised. This

reflects investment in technology based control systems to improve efficiency and control

costs, but also a management philosophy based upon control and conformity. Localised mer-

chandising and marketing activities do take place, but these are company managed and sup-

ported rather than the outcome of store level entrepreneurial activity. One example of cen-

tralised management systems providing scope for operational efficiencies, cost savings, and

general improvements in quality standards and service levels is the investments made by UK

grocery retailers in managing the supply chain - initially through the adoption of centralised

distribution systems and third party distribution services, and latterly through EDI and ECR

initiatives. Figure 4 provides the example of the impact upon Tesco’s inventory levels over this

period. The 1960s to 1980s were characterised by manufacturer organised direct to store deliv-

eries. Retailer controlled centralisation and composite centre development in the 1980s pro-

duced major costs savings and service benefits. Recent complications to the business e.g.

global operations, internet sales, non-food growth, catalogue sales, have added complexity, but

the operation continues to be world leading (Smith/Sparks 2009). In a broader context, the

strong central control exercised over operations also provides corporate discipline and unifor-


mity in the customer offer; a consistency which has enhanced the potential to develop strong

private brand ranges.

3.2. Channel Leadership

Concentration at the level of the firm has occurred in every retail sector. The growth of retail

power in the channel is a universal phenomenon, but the way that this power is used differs from

market to market. In Britain, market power, and information power provided via scanning and

EPOS systems has been used not just to improve trading terms with suppliers but in a proactive

way to manage and develop product categories. This does not mean that retailers have not

sought improved terms, but there has also been an emphasis on growing channel margin not just

taking a larger share of channel margin. Reductions in payment delays (typically under 28 days

in grocery), investments in supplier capabilities and supply chain efficiencies, and more intense

developmental cooperation with a reduced number of key suppliers, characterise this way of

operating. Leading retailers now talk of a demand rather than supply channel, which reflects the

emphasis on responding to customers and providing innovation in products and services, rather

than supplying existing products and services.


Figure 4: Tesco - Inventory Levels 1961-2007

Source: Sparks (2008a)

3.3. Specialised Format Development

With a few exceptions, there has been less cross-product market diversification in Britain than

in mainland Europe, with the major chains inclined to focus on their core business activity. This

is also seen in the tendency to develop “specialised” formats rather than multi-line generalist

formats. Although product range extensions are now starting to blur these clean distinctions,

historically the UK market has evolved with specialist retailers serving specific segments. This

is perhaps most evident in the grocery sector. Until relatively recently, all the major grocery

retailers were effectively developing and operating a single format - the superstore. Britain did

not have any true hypermarkets in the continental sense. This trend towards “specialisation”

further embraced an operating approach based on quality environments, merchandising and

service rather than price. Tesco serves as an illustrative example of this ‘specialised format

development’ (see Table 5). The development of Tesco Metro and Tesco Express stores in the

early 1990s were the first steps to focus on the urban centre and convenience customers. The

1980s had been almost entirely focused on developing out-of-town superstores, but this

approach was limiting in terms of the types of shopping trips that could be serviced. By re-

entering high streets and locating Tesco Express stores as convenience outlets often on petrol

forecourts, Tesco began to capture those other shopping trips both from new and existing cus-

tomers. As UK land-use planning tightened to reduce out-of-town opportunities so these differ-

ent formats and locational types became more important (Wood et al. 2006).


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Table 5: Tesco’s Format Development in the United Kingdom

Source: Sparks (2008b).

Overall in grocery, this development also encouraged in-store segmentation (via private brand)

rather than format based segmentation. In non-food markets, high street based fashion retailers

similarly focused their offer, but in this case specialisation took the form of branded store offers

aimed at distinctive consumer segments.

3.4. Retailer Brands

A distinctive feature of UK retailing, particularly grocery retailing, is the nature of and role

played by private brand ranges. UK retailers have used the private brand concept not simply as

a price tool but to build and develop consumer trust and to portray the retail company as the

innovator and guarantor of product quality. As grocery retailers have taken a larger share of

the market and assumed channel leadership, they have used their increased power, not to extract

further margin from suppliers, but to grow product categories and enact a demand chain

approach - albeit under the retailer’s brand name. In the grocery market around 39% of sales are

through private brand ranges, although this varies by product group.

The clarity, consistency and performance of the retail offer obtained by strong centralised man-

agement control has allowed retailers to adopt a marketing orientation to activities and start to

unlock the value in the retail brand name. The role of innovation and product packaging in con-

veying brand trust has been understood, and retailers have taken a holistic view of retail brand-

ing linking the corporate, store and product brand and recognising the potential to become

brands in their own right. The importance of the store in creating and projecting brand identity

for retailers has been recognised. From the traditional private label (low price copy-cat product)

position in the late 1970s and early 1980s, retailers have managed product choice, shelf alloca-

tion and pricing policies within their stores to reposition the private label as a retailer brand


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- this has seen a change in the private brand offer from low quality to superior quality; from low

price to competitive price; from me-too (copy) products to new innovative products; and from

an alternative product to an alternative brand (Burt 2000). Most grocery retailers now offer a

range of private brand options supported by segmented product options aimed at specific cus-

tomer needs as shown in Figure 5.

The recent recession has seen a stronger interest in price and thus in retail brand options, espe-

cially in food. Even high-end retailer Waitrose has introduced an Essentials retailer brand to

strong effect, and Tesco has produced a range of discounter brands to compete against Aldi and

Lidl especially.

3.4. Store vs. Non-Store Retailing

In the run-up to 2000 there was both spectacular hype and then the equally spectacular fall of

many internet or ‘e’ retail operations. Both the hype and the fall were probably overdone. Prof-

itable Internet retailers exist and the sector continues to develop strongly. Two of the most visit-

ed UK retail Internet sites are Tesco and Argos, both of whom have added e-retailing to their

existing channels of operations, enabling them to increase their product and customer range.

Some specialist operators, including quite small and local businesses, are doing well e.g.

Asos.com. The movement of Dixons to become an Internet-only operation is another signifier

of the expansion and acceptance of the channel. Indeed many retailers would now describe

themselves as multi-channel. Whilst there seems to be an appetite in the UK for the Internet as

a shopping medium, the true extent to which it will eventually challenge or complement exist-

ing retailing remains open to question.

One of the reasons why the impact of e-retailing is as yet undecided is that there remain issues

about the form and functions that need to be performed and the costs of these. Some began by

developing pure Internet-based operations on the back of existing activities, but with specialist

picking facilities (e.g. Sainsbury). Tesco however chose to add the Internet channel to their

existing store-based operation and to initially focus picking of orders and delivery from local

stores. With the expanded ranges now provided online, they now also use their distribution net-

work for picking and delivery of non-store carried products. These different models may be

suitable in different circumstances, though concern in all cases remains about the mechanistics

of delivery and whether huge volumes of home delivery is actually economically or environ-

mentally desirable (Foresight Retail Logistics Task Force 2000). Sainsbury eventually moved to

a store-based picking operation, but recently Tesco have begun to operate internet-only stores in

urban areas of high internet sales volumes and density.

The Internet is becoming a core factor of shopping and retailing in the UK. Internet retail sales

in the UK according to Mintel (2008) reached 12.7 bn GBP in 2007 and had thereby increased


by 33% from 2006. Between 2003 and 2007 the increase of sales was 220% mainly driven by

the above mentioned multi channel strategy e.g. of Tesco and Argos, the growth of Internet-only

retailers, multi-award winning Asos.com e.g. the rising demand for digitalised products, the

increasing number of click and collect type offers and the online sales of other distance retail

businesses like mail order providers (Mintel 2008; see Figure 6).


14,000

12,000

Total online retail sales12,700

Other e-commerce8,100

Mail order e-commerce4,600

4,095

Mail order catalogue

1,600

2,370

3,970

5,616

Year forecast

Sa

les

(e

xc

l. V

AT,

GB

Pm

illi

on

)

10,000

8,000

6,000

4,000

2,000

2003 2004 200720062005

0

Figure 6: UK Online Retail Sales

Source: Mintel (2008).

Nevertheless, it should not be forgotten that the increase rate has to be interpreted with respect

to the low online sales level in 2003. Furthermore, the online sales for 2007 are only 5.1% of the

total retail sales (compare also with Table 2). Nonetheless the internet market continues to grow

and evolve into a recognisable channel of retail operations.

4. Outlook

The UK retail market has generally evolved with an emphasis upon service based non-price

competition over the past twenty years. Certain features of the UK market have encouraged - or

at least not hindered - this approach. The major challenge over the past few years has been how

to incorporate a more price sensitive focus within the retail offer, particularly after the onset of

the credit crunch recession. The price issue has come to the fore in a number of ways. The

arrival of discounters (Aldi, Lidl, Netto, Costco and Wal-Mart) in the 1990s drew attention to

pricing and margin strategies of grocery retailers. This compounded the underlying feeling of

price disparities with continental Europe and North America from the experiences of customers

visiting these markets (a perception compounded by the strength of the pound), and a press

campaign based on the “rip off Britain” theme. Whilst Aldi and Lidl have done well in the

recession in the UK, there remains UK suspicion over aspects of pricing and the relationship of

low price to low quality. In food this has been based around both issues of food safety and

scares e.g. BSE, but also increasingly about concerns over environmental welfare. In non-food

however fast fashion and price based retailers such as Primark, New Look, Top Shop etc. have

been hugely successful, with little concern shown by the public over sourcing issues.

Retailers in all sectors have responded, and government statistics show retail price deflation in

most product markets. In the grocery sector a blurring of product lines has occurred as fast

moving (and higher margin) key non-food lines are added to the offer to maintain performance

whilst grocery prices are adjusted. In non-food, sourcing from low cost countries has increased,

and fast fashion principles have been embraced. The challenge however, is that the UK con-

sumer has become accustomed to a retail sector offering quality shopping environments and

high service levels and will expect these to be maintained whilst prices are reduced. This must

be achieved in a system with relatively high cost structures. As always the best retailers will

adjust and prosper, but it is evident that some previously lauded as market leaders eg Marks and

Spencer and Sainsbury have found the transition much more painful.

Retailing in the UK is thus a successful and a significant sector of the economy. It contains

major corporate and co-operative entities. The impact of these large businesses is perhaps the

main concern currently in regulatory terms, as aspects of their power are seen negatively by

some consumer groups, sections of the media and some suppliers. Whilst there is a rising con-

cern to ensure retail diversity, there is as yet no consensus on what this means and how to

achieve it. For some, even the evidence is unclear (Wrigley et al. 2009), whereas for others sup-

posed remedies to local competition are simply recipes for further concentration (Hughes et al.

2009).

An interesting development in recent years however, and symptomatic of the scale and potential

role of retailers, has been the attempt by government to capture their assistance in changing

consumer behaviours. There has been enacted regulation on control of smoking displays, alco-

hol sales and descriptions of product contents e.g. healthy living. Government is seeing large

retailers as potent forces in combating some of the health problems of consumer society. Some

might see this as odd, blaming the retailers for the problems in the first place, but government is

increasingly realising that getting large retailers to work for positive ends could bring big bene-

fits. Retailers are thus seen as a social force.


At the other end of the scale spectrum, though linked in a topic sense, there has been a major

revival of local production and sales. Famers’ markets have expanded enormously in number

and local community focused stores and farm shops have added to the range of store choices.

Increasing concern with traceability, sustainability and localisation of food promises to be a

recurring theme in food retailing in the coming years.

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The Danish Retail Market: Overview and Highlights

Jesper Aastrup, Mogens Bjerre, Niels Kornum and Herbert Kotzab

AbstractThis paper presents an overview of the Danish retail market. A detailed picture of the Danishgrocery sector is provided, and we highlight issues from the specialty sectors of fashion andDIY as well as patterns of internationalisation among Danish retailers. We further profile theDanish consumer in terms of consumption patterns and demographic changes as well as somespecific consumer tendencies with a special emphasis on sustainability issues. E-commerce istaken up as a special theme, both profiling the consumer side and the retailer side. This part isexemplified with books and groceries. Finally, we present the state-of-the-art of retail logisticsin Denmark and analyse the impact on retailing of law on planning and law on opening hours.

KeywordsDenmark, Retail Structure, E-Commerce, Retail Logistics, Planning

Jesper AastrupDepartment of Marketing, Copenhagen Business School, Frederiksberg, Denmark.

Mogens BjerreDepartment of Marketing, Copenhagen Business School, Frederiksberg, Denmark.

Niels KornumDepartment of Marketing, Copenhagen Business School, Frederiksberg, Denmark.

Herbert Kotzab (corresponding author)Department of Operations Management, Copenhagen Business School, Frederiksberg, Denmark(Tel: ++45 3815 2931; E-mail: [email protected]).

Received: November 27, 2009Revised: February 15, 2010Accepted: February 16, 2010

EUROPEAN

RETAIL


1. Introduction

Denmark is the smallest of the Scandinavian countries with a population of approx. 5.5 m

inhabitants. The country is a constitutional monarchy with a parliamentary system of govern-

ment and a market capitalist economy linked with a large welfare system, guaranteeing one of

the world’s most equally distributed income levels amongst the population.

The country is not well known for the outstanding contributions of Danish companies which

hold leading positions in their relevant industries. Denmark is the home of the largest container

shipping company in the World, A.P. Møller Mærsk; the largest insulin producer of the world,

Novo Nordisk; the largest windmill manufacturer, Vestas; and of probably the most well

known toy manufacturer, Lego. Amongst the largest manufacturers of food and beverages are

Carlsberg Breweries; the Swedish co-owned dairy company, Arla Foods Amba; and the meat

producer, Danish Crown Amba.

In this paper we will provide insights into Danish retailing as we present a profile of:

- The Danish retail sector in section 2, where we present a detailed picture of the Danish gro-

cery market with its major store formats and players, highlight some successful textile and

DIY-retailing companies, and present the internationalization paths taken by Danish retailing

companies.

- The Danish consumer in section 3, where we show the socio-demographic development of

the Danish society, specific consumer trends that drive the retail development, and discuss the

affinity of Danes towards sustainability.

- Danish e-commerce in section 4, with statistics on online purchase categories and tendencies

as well as a more in-depth elaboration on the impact of online business in book and grocery

sectors.

- A look behind the scenes of retail logistics in Denmark in section 5, which includes a presen-

tation of the state-of-the-art logistic systems that have changed the way logistics is performed

in the sector.

- Planning and regulations in section 6, with an emphasis on opening hours and urban planning

issues.

2. A Profile of the Danish Retail Sector

The total retail turnover in Denmark (2007) is worth 280 bn DKK (Statistics Denmark 2009a,

2009b). Danish food retailers hold about 36.6% of the Danish retail turnover. Grocery retailers

and kiosks cover 32.9%. Only 3.7% are specialty food retailers, and here the bakery sector


alone accounts for 1.4%. The non-food sectors then hold the remaining two thirds of the retail

turnover. The major non-food sectors are: Department stores (14.8%); Textiles (7.7%); Pharma-

cies (5.2%); Furniture stores (4.2%); DIY (3.8%); HiFi, TV and Music (2.8%); and Electronic

household equipment (2.3%).

2.1. Grocery Retailing

2.1.1. Store Formats, Market Share and Number of Stores

Danish grocery retailing is dominated by three groups; i.e. Coop Denmark, Dansk Super-

marked Gruppen, and Dagrofa which altogether control about 87% of the grocery turnover

(kiosk sales not included). The remaining market is largely shared between Reitan Distribution

and the hard discounters, Aldi and Lidl. A static overview of the Danish grocery sector by 2009

in regards to the major retail chains and formats is presented in the following table, Table 1.

Aastrup, J.; Bjerre, M.; Kornum, N.; Kotzab, H. 197

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Table 1: An Overview of Danish Grocery Retailing

Note: *Market Share in %/number of stores.Source: Retail Institute Scandinavia (2009a).

As Table 1 demonstrates, the Danish grocery sector is still dominated by the supermarket for-

mat, holding about 40% of the turnover. Large store formats (hypermarkets and low price ware-

houses) and the discount format also hold a significant share - about 30% each. However, as

Figure 1 below shows, the discount sector, especially, has increased its market share over the

last 20 years, mainly at the expense of the small supermarkets. Ten years ago discounters held a

market share of about 22%, but presently they hold just under 30% and are predicted to make

even further gains. Small supermarkets (below 1,000 m2), on the other hand, have decreased

from a share of about 36% to about 23% and are predicted to decrease further, to about 13%.

(.3/37)

The large supermarkets and the hypermarket/low price warehouse formats show market share

gains over the last 10 years, but at a slower pace than the discounters.


Figure 1: Format Development in Danish Grocery Retailing

Source: Retail Institute Scandinavia (2009a, 2009b) and DLF (2009).

Hence, the winning format in Danish grocery retailing has been first and foremost discount, but

the large formats (large supermarkets and hypermarkets) seemed to increase their market shares

in these years, while smaller supermarkets and neighborhood stores are declining - however to

some extent they have been replaced with soft discount retailers who claim to be the new neigh-

borhood stores (see section 2.1.6.).

2.1.2. A Profile of the Most Important Players

As mentioned previously, Danish grocery retailing is dominated by three retail organizations

which control approximately 87% of the total turnover. These three retail organizations howev-


Figure 2: Turnover, Number of Stores and Sales Area for Different Grocery Sectors

Source: Retail Institute Scandinavia (2009a); DLF (2009).

er represent different ownership structures, where COOP ultimately owned by the members/

shoppers through local coops; Dansk Supermarked, a centrally owned and controlled system;

and the independent sector struggling with the historical influence of their store owners, evolv-

ing nonetheless towards more centrally controlled systems. The development between the major

retail organizations since 1995 in terms of turnover, number of stores, and sales area - all rela-

tive to market totals is presented in Figure 2.

The figure shows an increasing market share of Dansk Supermarked from 20% in 1995 to

31.4% in 2008 (mainly accountable to the expansion of the Netto chain). This has mainly hap-

pened at the expense of the independent sector (now concentrated under Dagrofa and Reitan

distribution) that have gone from almost 40% market share in 1995 to 27.4% in 2008 with pro-

jected further loss in market share (DLF 2009). COOP Denmark has retained their dominating

market share at about 36-38%.

Looking at the share of stores and the share of sales area, we can see an overweight in the rela-

tively small formats especially in the independent sector (38.2% of the stores accounting for

only 28.9% of the sales area); COOP has 37.1% of the stores, accounting for 39.1% of the sales

area; On the contrary Dansk Supermarked are dominated by large formats having only 15.4%

of the stores, accounting for 24.2% of the sales area. Looking at sales area compared to market

share says something about sales efficiency. Here Dansk Supermarked ‘leads’ by obtaining

31.4% market share from their 24.2% of the sales area. The independent sector and COOP are

slightly below their ‘fair share’ (COOP having 39.3% of the sales area and 36.6% of turnover,

and the independent sector having 28.9% of the sales area and 27.4% of turnover). It is notica-

ble that Aldi/Lidl despite the significant growth in shares of both number of stores (from 4.2%

in 1995 to 9.2% in 2008) and sales area (from 3.6% in 1995 to 7.6% in 2008) has not been able

to increase market share at a similar pace (from 4.3% in 1995 to just 4.7% in 2008).

2.1.3. Coop Danmark

The largest grocery retail group is Coop Danmark. It was founded in the late 19th century as

‘Fællesforeningen for Danmarks Brugsforeninger’ (FDB) as a cooperative between the local

coops established over the previous 30 years with the aim of getting better and cheaper gro-

ceries to the poorer social classes. This was based on joint purchasing as well as its own produc-

tion of groceries (e.g. coffee and confectionary) to be sold to the local coops owning and run-

ning the stores.

Throughout the 20th century FDB grew. Becoming one of the country’s largest firms, the

Brugsen stores dominated grocery retailing. From the 1960s FDB started to develop from a

wholesaler and producer into a retailer first by starting up the Kvickly chain in 1961, then

merging with Hovedstadens Brugsforening (HB) in 1971, then buying the Irma chain in 1982


and the Fakta chain in 1987. The original Brugsen brand was split into larger supermarkets

(SuperBrugsen) and smaller supermarkets (DagliBrugsen and LokalBrugsen) in the early

1990s.

In the late 1980s the factories were sold off rounding out the transition from a wholesaler/pro-

ducer into a retailer. In the early years of the new millennium the coops of Denmark, Sweden

and Norway formed Coop Norden (with FDB owning 38%) in order to create a large Nordic

retail firm. However, in 2008 this Nordic cooperation was reduced with purchase consolidation

through Coop Trading, whereas the retail business of Coop Denmark became again fully owned

by FDB.

Today, Coop Denmark dominates with chains in all parts of the grocery retail sector: in the

hypermarket segment with Kvickly and Kvickly Xtra; in the large supermarket segment with

market share leader SuperBrugsen; with the market share leader in smaller supermarkets

(DagliBrugsen); Irma in the upscale/high quality supermarket sector; and with Fakta, the sec-

ond largest discounter in the market. Coop Denmark had problems with profitability for a long

period of time but in recent years has developed itself into profitability and surplus.

2.1.4. Dansk Supermarked

Closely following in market share in the Danish grocery industry is Dansk Supermarked. The

origin of Dansk Supermarked dates back to 1906 with the opening of Ferdinand Salling’s first

store. But it was from the initiatives of Herman Salling, his son, that in the 50’s and 60’s Dansk

Supermarket developed into its present form. In the late 50’s Herman Salling, based on his

international traveling experiences, developed his vision of centrally controlled chains of stores

selling foods and non-food. A year later in 1960 Jysk Supermarked was formed and the Føtex

(high quality hypermarket) chain was established.

In 1964 Herman Salling partnered with the A.P. Møller firm, took over 50% of the shares and

changed the name to Dansk Supermarked. The first Bilka stores (the name is short for the Ger-

man word Billiges Kaufhaus) were opened in 1970 as low price warehouses, and in 1981 the

first Netto discount store opened in Copenhagen as a response to Aldi’s penetration of the Dan-

ish market. The Netto chain has since been expanding fast - to about 400 stores in Denmark.

Netto is also the only exported Danish grocery retail concept with about 620 stores in Germany,

England, Poland and Sweden. Its first stores abroad opened in 1990.

Today Dansk Supermarket is two thirds owned by A.P. Møller-Mærsk A/S. It, F. Salling A/S,

and the three main grocery chains Bilka, Føtex and Netto dominate the warehouse/hypermarket

as well as the discount sector but are not present in the supermarket sectors. Dansk Supermar-

ket has shown over the years to be the most profitable of the major grocery retail players in


Denmark with a 1.8 bn EUR result in 2008 (about four times larger than the COOPs). Yet it is

worth noticing the historical differences between the two firms. Coop (previously FDB) was

established to serve the rural areas with affordable high value products and therefore estab-

lished shops in nearly every village, whereas Dansk Supermarked has focused on hypermarkets

and discount stores primarily located in larger city areas. This makes for their widely different

logistics costs and explains some of the profitability differences.

2.1.5. Dagrofa and the Independent Sector

The independent sectors have played a very important role in Denmark. The history of the

independent sector is largely one of continuous concentration in wholesale and retail chains.

15 years ago several wholesalers existed serving independent stores within different areas and

categories of groceries. These wholesalers have merged and a few years ago only Supergros

(Dagrofa) and Edeka (now Reitan Distribution) had any significance as wholesalers for

independent stores. Dagrofa was established in 1983 in a merger between Dagros A/S and

Brdr. Justesen A/S - both firms dating back almost 250 years. Dagrofa has since made several

acquisitions in order to consolidate the independent sectors and increase buying power and effi-

ciency.

Similarly when it comes to retail chains, development has decreased the number of chains.

SuperBest (the dominating independent chain today) was established in 1997 and has continu-

ously merged with and included preexisting chains, e.g. the Prima and Favør chains, and more

recently the ISO and Dreisler chains.

The Edeka group has functioned as a wholesaler for a number of small independent chains.

Since 2003, Reitan has been a part owner of Edeka and has put an emphasis on the discount

chain Rema 1000 and the kiosk sector (7-eleven, YX energy, Q8). Quite recently the Reitan

ownership was increased to 85%, the name was changed to Reitan Distribution and the smaller

chains of independent stores (e.g. AktivSuper and Merko) have been closed. Most of these

stores have been included in the Dagrofa chains.

Hence, the sector merges into fewer units both regarding wholesale and retail chains. Even

within the independent sector there is a tendency towards becoming more centrally controlled

and managed. The chains of independent stores are becoming more and more centrally man-

aged as well as relying more and more on own stores or franchise-like setups (e.g. Rema 1000

and Kiwi). Hence what we experience is a deterioration of the independent sectors, both in its

loss of market share as well as the fact that the independent sector itself develops towards ‘less

independence’. In 1995, the independent sector accounted for almost 60% of the stores and

almost 40% of the turnover. The sector has however heavily lost its significance in the Danish

retail sectors with an estimated 21% market share in 2014 (DLF 2009).


2.1.6. The Danish Discount Sector - the Dominance of Soft Discount

With a projected 50% share of stores and 34% market share, the discount sector in Denmark is

quite competitive. A characteristic of the Danish discount sector is the dominance of so-called

‘soft’ discount.

Aldi was established in Denmark in the late 1970s, followed by Netto in 1981. In 1987 Fakta

was included in Coop; Rema 1000 started up in 1994; Only recently in 2005 Lidl opened in

Denmark and last year (2008) KIWI started up. Hence all retail organizations now have their

own version of a discount chain. The hard discounters, Aldi and Lidl, control about 16% of the

discount turnover, whereas the soft discounters, Netto, Fakta, Rema 1000 and KIWI control

84% of the discount turnover. Netto is the absolute market leader with about 41% of the dis-

count turnover.

The critical success factors of Danish soft discounters have been:

- Becoming the shopper’s local choice. Danish discount stores are relatively small (about

500 m2) and often function as neighborhood stores. Lidl is the exception with an average size

of 1,000 m2 and has locations relating to main commuting corridors.

- Wide discount assortments with well known brands and popular weekly promotional papers.

The soft discounters carry a wide range of well known brands (less emphasis on private labels

compared to Lidl and Aldi); They have as discounters relatively wide assortments (up to 3,000

SKUs in the case of Rema1000 and Kiwi); and they produce popular weekly promotional

papers.

- Perceived wide range and good quality of fresh food. One of the consumer-perceived ‘risks’

of discount is fresh food quality. The soft discounters have successfully worked with their

fresh food categories (e.g. meat, poultry and fruit and vegetables). Kiwi for example launched

a fruit and vegetables freshness guarantee, and generally soft discount has managed to close

the perceived gap in these categories compared to supermarkets.

- Softer discounters have successfully managed to include organic products in their assort-

ments.

- Danish discounters have successfully included non-fixed spot items in their assortments. This

however does not differentiate the soft and hard discounters.

2.2. Specialty Retailing - Textiles and DIY

Specialty retailing, i.e. not fast moving consumer goods (FMCG) retailing, constitutes approxi-

mately 50% of the total turnover in the Danish retail sector. The total overview over sectors and

numbers of stores are shown below in Figure 3.


From Figure 3, the textile sector and the DIY sector come out as the largest sectors. However

these two sectors are very diverse, as the DIY sector is dominated by few multiples, each with a

limited number of very large outlets, whereas the textile sector is characterized by many small,

and often independent stores co-existing with large retail multiple organizations such as Best-


Figure 3: Danish Specialty Sectors Larger than 2 Billion DKK in Turnover

Source: Retail Institute Scandinavia (2008).

Seller. Furthermore the DIY sector only shows limited growth in the number of stores, whereas

the textile sector has been quite affluent over the past few years.

The DIY sector in Denmark is traditionally dominated by national players where most of them

are voluntary chains. The sector has witnessed a sharp decrease in the number of trademarks on

retailer facades, reflecting several mergers and acquisitions over the past five years. This result-

ed in a concentration with a few dominant players such as STARK (formerly Dansk Trælast),

focusing on the professional customer (and now operating in Scandinavia as well); XL Byg

(a merger between Dendek and Ditas); and finally Silvan, primarily focusing on the private

consumer. Discount also plays a role in this retail sector, e.g. Jem & Fix and Harald Nyborg.

Although these stores are quite small compared to Bauhaus, the influx of Bauhaus has increased

competition and provided an international dimension.

The Danish textile retail sector is much more varied, with the highest number of chains in any

retail sector. But even largest actor in the Danish textile sector, Bestseller (operating several

retail brands: Vero Moda, Jack & Jones, VILA, ONLY, SELECTED FEMME/HOMME, Pieces

accessories, Object Collectors Item, mama•licious, and OUTFITTERS NATION) does not

match the turnover (in Denmark) of textiles by the hypermarket chain Bilka. This sector is by

far the most active in terms of exporting retail concepts, however. These concepts are the results

of vertical integration, as they typically have been developed by manufacturers such as IC Com-

pany, Bison, Cha Cha, REDGREEN, etc.

Multiples, especially voluntary multiples, have been a unique way of combining the independ-

ent small retailer with the benefits of the large, integrated retail operation. Voluntary multiples

come in various forms, and can be described in the following steps (Bjerre 1990):

- The purchasing multiple

- The marketing multiple

- The integrated multiple

Over the past few years we have seen a development in which different business formats were

mixed - even within the individual retail organization - combining voluntary multiples with

franchise based operations and even fully-owned. For example the furniture chain Idémøbler,

has expanded with a franchise based model abroad. Even in the FMCG sector this is a way for

COOP to handle the mix between fully owned stores (labeled B stores) and the voluntary parts

(called A stores). It is obvious that this combination offers experience and insights into multiple

management formats, and so far, the Danish experience is that they “cross-fertilize” each other,

and in the future all management formats will be able to incorporate best practice from the

other formats.


In 2007 and 2008 we witnessed voluntary multiples being sold and converted to fully owned

retail operations. One of the most noticeable examples of this was the acquisition of Matas (a

national chain of personal care products) and Imerco (a national chain of tabletop hardware

merchandise). Matas dominates its sector with a market share of approximately 90%, and

Imerco had a market share of approximately 40%. In both cases most of the - former store

owners - were offered 3 year contracts as store managers to ensure continuity and retail man-

agement competence.

2.3. Danish Retailers and Internationalization - Some Highlights

Looking at grocery retailing, we can identify Netto as a Danish ‘export article’. From 1990 Net-

to has opened a total of 620 stores in Sweden, Germany, Poland and UK. However, it has been

necessary to adjust the Netto concept to the local markets. Further, COOP Denmark entered

into a Nordic alliance with COOP Norway and COOP Sweden, primarily focusing on purchas-


2003 2004 2005 2006 2007

Bestseller 1,500 1,750 1,750 1,800 1,800

Jysk 689 900 1,100 1,110 1,290

Bang & Olufsen 599 600 702 700 700

Netto 419 501 547 623 652

Ecco Sko 335 353 457 551 637

IC Companys 269 182 189 221 221

BoConcept 122 138 149 160 218

B-Young 194 181 181 207 207

Flügger 167 176 176 176 176

Synoptik 191 223 134 156 156

BR Legetøj 49 66 85 97 134

SKORINGEN 79 106 116 127 132

Bianco Danmark 57 80 84 84 122

Flexa Møbler 55 54 70 94 110

Kvik A/S 21 24 40 40 73

Noa Noa 18 62 86 72 61

Wagner 10 27 58 59 59

Blen+BlendShe 60 62 75 80 54

Change 0 0 0 47 47

Hi-Fi Klubben 27 27 35 35 41

Table 2: Top 20 Danish International Retailers by Number of Foreign Stores

Source: Retail Institute Scandinavia (2008).

ing and private label development. This alliance was cancelled in 2007, and the three countries

are now cooperating in a number of areas, but are no longer a joint entity.

Within specialty retailing and especially textiles, the use of franchising, primarily trademark

franchising, has been the main vehicle for exporting the concepts. There are few very success-

ful concepts like those of Bestseller and Bianco Shoes.

Table 2 gives a snapshot of the foreign franchise operations of Danish retailing companies.

The total foreign franchise network includes 1,772 units and a total turnover of 2.3 bn. Hence,

so far Danish retailer’s internationalization seems to be lacking an export strategy and the

choice of countries seems to be randomly driven.

On the other side, retail store formats have been successfully imported in FMCG (7-Eleven,

Aldi, Lidl, Rema 1000), in textiles (H&M) and furniture (IKEA, Natuzzi). Aldi, Lidl and Rema

1000 have all stated that being competitive in the Danish market would mean that they could

compete in any market. The background for this statement seems to be an acknowledgement of

the low average net profit in the Danish FMCG sector. However, there were also a number of

failures as well (Lindex, Guldfynd, Decathlon). It seems to be quite difficult to explain why

some of the retail operations were successful and others were not, but it is remarkable that suc-

cess in one’s home country is not a sufficient precondition.

3. A Profile of the Danish Consumer

3.1. Changing Consumption Patterns and Demographics

When it comes to consumption patterns there is an overall tendency for household consumption

to change in relative terms from food, beverages and tobacco towards household expenses (due

to, among other things, the increasing prices of property and energy). Figure 4 shows how the

consumption expenditures of Danish households have developed since 2000.

For retailing it seems important that the expenditures for food are still increasing (despite a

slight fall in relative share of consumption). Also, clothing and footwear as well as home equip-

ment, furniture and household services show an increase in consumption value (despite a slight

decrease in relative share). The expenditures for leisure, entertainment and traveling are

increasing in both value and relative share as does the category ‘other goods and services’ that

covers mainly restaurants, cantinas, hotels and camping, and insurances.

Despite the changes in consumer patters, we can also observe changes in the demographic

structure of Denmark. Since the 1990s, the Danish population is experiencing changes in its


demographic age profile as it goes through increases in the post-working age group (65+). This

is going to be enhanced over the coming 10 to 20 years. The group of 20 to 34 year olds has

decreased over the last 10 and 20 years but will be to a certain degree outweighed by the

increasing group of 10 to 19 year olds (Jensen/Levinsen 2008).


Figure 4: Changes in Household Consumption

Source: Statistics Denmark (2008).

3.2. Specific Consumer Tendencies that Drive the Danish Retail Development

3.2.1. Convenience as a Value Creator

Consumers and shoppers feel increasingly pressured about time. Many consumers, especially

families with children, experience the daily functional shopping as a stress factor. A general

tendency towards longer working hours as well as increasingly important ideals about value and

for quality leisure and family time makes convenience an important value creator in this type of

non-hedonic shopping. Thus, convenience is an important driver in Danish retail sectors, espe-

cially those dealing with non-hedonic shopping. Convenience is also the driver for e-commerce,

as evidenced by the dominant arguments of consumers for shopping online related to the con-

venience motive - i.e. time savings, no closing hours and home delivery (Konkurrencestyrelsen

2006). However, we have not (yet) in Denmark seen a significant increase in and development

of grocery e-commerce, despite this business opportunity’s potential as a convenience creator

for grocery consumers. This is largely ascribed to the fact that the major grocery providers have

not yet developed home delivery systems (cf. section 4).

Physical stores and concepts also develop due to issues of convenience. In Danish grocery

retailing we see several up and coming convenience formats, especially in urban areas. The dis-

counters Fakta and Netto both have developed smaller formats, FaktaQuick and DøgnNetto

(‘24hourNetto’). Irma developed their smaller IrmaCity format based quick quality meal solu-

tions as their designated category. This was based on the insight that many urban consumers in

the late afternoon do not know what to prepare for dinner, but they still value a quality meal.

Recently, a new soft discount format, KIWIminipris opened. Among other things it is posi-

tioned on being open late (until 10pm in the evening which is unusual in Denmark). Hence,

opening hours and meal solutions are parameters that drive new as well as existing grocery con-

cepts in Denmark.

3.2.2. Value Emphasis - Saving and Splurge

Aside from the worldwide financial crisis that presently restrains the economy, there is the

longer-term trend of a steady increase in consumption. Over the last 30 years, private consump-

tion has increased in Denmark by an average of 2.6% per year (Jensen/Levinsen 2008). With

this larger consumption comes the tendency of dichotomizing consumption into discount and

luxury, also termed ‘saving and splurge’ (Jensen/Levinsen 2008; IBM 2004).

On the one side there are commodity purchases, i.e. purchase categories where consumers per-

ceive a high standardization, few differences between products and chains, and where they

experience a high degree of transparency regarding prices. Here it is very difficult for retail

strategies to differentiate their offerings or services and legitimize a price premium. Quality is

perceived as homogenous and relatively high, and shoppers go for value (i.e. functional quality)


and low price. This has affected sectors such as consumer electronics and groceries. The Danish

success of (soft) discount in groceries, described in section 2, is largely ascribed to this phe-

nomenon.

On the other hand there is a tendency to buy more hedonic and self-expressive items, i.e. luxu-

ry items, unique products, experiences and products to spoil oneself, and a consumer willing-

ness to pay price premiums and spend a larger part of the budget. The term ‘experience and

desire economy’ describes this. These issues of ‘splurge’ take several forms, e.g.:

- Experience products: Pine and Gilmore (1998) coined the term ‘experience economy’, stat-

ing that future consumption and value propositions are about staging and selling memorable

events. We can see that from the consumption statistics (see Figure 4) in the increased share

of consumption going towards leisure and travel as well as related areas such as restaurants,

hotels and camping. Many providers of experiences appear on the Internet, as well as in

physical stores where general merchandisers and lifestyle related stores take experience cat-

egories into their assortments - wine tasting, weekends of wellness, etc.

- Storytelling and unique products: Another way out of ‘commodity hell’ is by offering unique

versions of products or attaching storytelling to products. A few years ago, Danish Supermar-

ket Group launched a private label called Princip which emphasized high end quality and ori-

gin over a range of daily food products such as sausage, cheese, salt, seafood, chips, pizza and

chocolate. All emphasized the origin of the basic input in an attempt to add high end quality

and uniqueness to everyday products.

- Luxury brands: Luxury brands, luxury products and exclusivity in general have experienced

growth. Brands such as Burberry have grown more than the clothing market in general. These

premium products are expected to decline during the financial crisis; however, after this, the

demand is expected to be even higher (Bahr 2008).

Hence, this saving and splurge dichotomy affects retail sectors on the one hand by providing a

success criterion for retail strategies aiming to provide value for money in perceived commodi-

ty categories, e.g. discount. On the other hand this dichotomy also provides a rationale for retail

strategies emphasizing luxury, leisure, wellness and unique products; i.e. more hedonic and

self-expressive needs.

3.2.3. Danish Consumers and Sustainability Issues

In the Danish retailing sector greening and sustainability were already initiated by the Coop

movement as early as the beginning of the 20th century, securing healthy and affordable food

products for the average citizen, especially worker families and small farmers in the country-

side. More recently, specifically in the beginning of the 1990s, Coop Denmark (then called


FDB, the Association of Danish Cooperative Outlets) initiated a development that now gives

Denmark the highest per capita sales of organic food in the world. Also in recent years ethical-

ly or Fair Trade product sales have increased rapidly. CO2 emission concerns are also beginning

to get a foothold. Recently, Coop has introduced a plan called ‘1-4-40’ with a stronger focus on

the environment, ecology, health, climate and ethical trade. This development can be seen as a

symptomatic return to the values on which the firm was founded - yet unfolded in a contempo-

rary context.

From the consumer perspective the introduction of organic and fair traded products in the broad-

er grocery retailing context have given a far better and broader assortment from which to choose,

yet the often-contradictory demands between different aspects of sustainability have, at the same

time, significantly increased the complexity of the consumers’ decision-making process.

One remarkable development is the rapid growth of organic food sales in Denmark [1]. Before

the beginning of the 1990s organic products were sold primarily via direct sales from producers

or via weekly marketplaces, but had barely any impact on national grocery sales statistics. This

changed when Coop Denmark kick-started the development in 1993 by lowering prices on

organic milk and later for other produce like carrots and potatoes. This gave rapidly increasing

sales and spread throughout the entire sector during rest of the 1990s. The first years after 2000

saw stagnating sales due to an international downturn but grew afterwards, increasing 65%

from 2005 to 2007.

In the year 2007, 1,500 new organic items were introduced resulting in a total assortment of

4,400 items. Danish Retailing has thereby obtained the world largest organic share growing

from 4.6 % of total food sales in 2006, to 5.5 % in 2007, and finally to 6% in 2008 (9% if meas-

ured only in categories where organic alternatives are available). In many grocery categories it

is widespread to have organic or green alternatives, e.g. around 20% of milk sales is organic.

Danish grocery chains often use organic products and themes in their promotions. Most heavi-

ly profiled for its organic and green products is the COOP-owned grocery chain of Irma (see

section 3). Thus, in 2006 18% of Irma’s food sales were organic: 85% of milk sales, 71% of its

eggs and 29% of its fruit & vegetables. By 2009 Irma had 1,000 organic items in their assort-

ment: 67% of its breakfast cereals and 50% of rice, flour, butter and pasta sales were organic.

More or less all Danish grocery chains (see section 3) apply the theme in assortment and week-

ly promotions, generating growth in organic sales also for these retailer chains. For instance

COOP’s Super Brugsen chain gained 35% in 2007; the Spar Group chains, Super Spar (33%)

and Spar (29%) also in 2007. Even smaller specialty retailers selling only organic foods have

emerged, e.g. Aarstiderne.com and Egefeld founded in 2006 (the only purely organic grocery

shop), however by 2009 consisting of only two shops. Lastly, it is worth mentioning that the

Coop group has launched a very popular green and organic private label (Änglamark). Hence,


organic and green products are profiled in certain chains, but in most it is more or less a market

condition to use the theme in category assortment and weekly promotions.

A more recent trend is the mainstreaming of fair traded product in the sense that, like organic

products, fair trade was primarily sold via alternative channels and shops in its early days and

therefore had an extremely low share of national sales. By 2006 the global sales of fair traded

products were 1.6 bn. The growth from 2005-2006 was 41%, but this growth differed by prod-

uct: cocoa (93%), coffee (53%), tea (41%) and bananas (31%). In Denmark in 2006 there was a

50% increase in sales and every Dane spent 20 DKK out of 14,000 DKK on fair traded food,

which amounts to .14% out of 95 bn DKK in grocery sales. Fair trade is therefore estimated to

represent 18 m, averaging 1.1% of global fair trade sales. In 2009 every Dane spent 69 DKK on

fair traded products representing a 245% increase in sales in this period and is the third highest

per capita in spending globally. In the same period the Danish fair trade assortment has

increased from 200 to 400 items, and the price of fair traded products is around 25% higher

than comparable products.

Despite the global recession Danish fair trade sales have continued to grow 12% in the first half

of 2009. In the same year 76% of Danes knew the Fair Trade label, compared to 2007 where

only 58% knew the label. All retail formats seem to have had increases in sales. In 2007 Coop

had a 30% increase in medium sized towns compared to only 20% in the largest towns. Dansk

Supermarked (i.e. Føtex) the same year had a 50% increase in fair trade coffee and a 20%

increase in sales of the rest of the fair trade assortment, which represented the highest growth

rates of their entire assortment.

4. Denmark - a Country of E-Consumers?

Denmark has a high penetration of Internet access in private households, having increased

between 2001 and 2009 from 54% to 86%. In 2008, 93% of households also have a mobile

phone, out of which 43% use some form of mobile Internet access (Statistics Denmark 2008).

90% of the households’ Internet access is via broadband. That makes Denmark, together with

the Netherlands, the country with the highest level of broadband access in the EU (Statistics

Denmark 2008). Thus, retailers operating in Denmark should have good opportunities to reach

their customers online.

In 2008, the number of persons who had bought goods via the Internet within the last three

month was 47% - right after the UK (49%), and nearly double as much as the EU average (25%)

(Statistics Denmark 2008). When asked in 2009, 64% of the Danish population aged between

16 and 74 have bought goods via the Internet during the last year, primarily theatre tickets or

airplane tickets or holiday bookings (see Table 3).


Compared to 2002 many of these categories have had significant increases in the percentage of

users buying specific product types on the internet. For instance, in 2002 tickets amounted to

46%, travel 30%, clothes 21% and furniture 5%, whereas groceries have only risen from 7% to

9% (Hansen 2003).

These increases in Internet purchases mirror similar tendencies globally. The clothes category

especially has seen significant growth, from 20% in 2005 to 36% in 2008. The percentage of

people buying groceries is also rapidly rising globally, although from a low level - 6%, to 14%

(ACNielsen 2008). Denmark has seen slower growth in this area, which among other things is

due to the fact that none of the large players have yet launched a home delivery system (Kor-

num/Bjerre 2005; Kornum/Bjerre 2007; Vangkilde 2008).

The total market for e-commerce sales in Denmark has been estimated to be between 21 and 25

bn EUR (by 2005) and around half of this volume is generated in the domestic market. In terms

of a BTB-BTC ratio, 10% of the sales are to private consumers (ITST 2006). BTC e-commerce

has been estimated to have grown from 1 bn EUR in 2004 to 4 bn EUR in 2008. Still, other

sources estimate the retail e-commerce sales in Denmark in 2006 to be between 530 and 660 bn

EUR out of a total retail turnover of 40 bn EUR (Sørensen 2007). This indicates that these iden-

tified figures should be considered as very rough estimates until more direct evidence can be

provided. No general statistics are available on the specific product categories, but examples

can be given in two categories - books and groceries.


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Table 3: Percentage of Internet Purchasers Having Bought in Specific Categories Last Year(2008-2009)

Books sold online represented 20% of the total sales of books (261 m EUR) in Denmark in

2008, which involve an increase of its relative share, up 4% from 2004 - a 69% growth in Inter-

net based sales of books during that period. At the same time the number of books sold via

supermarkets has risen in the same period from 5% to 9% of its relative share of total book sales

The growth of supermarket based sales have risen dramatically, 119% in the same period, where

the total market increased by only 18% (Olsen 2005, Svane 2009). However, industry reports

indicate that the statistics do not include all sales to supermarkets and so this figure may be sig-

nificantly higher (Dagbladet Information 2009). Although offline book dealer and book club

sales still represent around 70% of the market, the total impact of increasing supermarket and e-

commerce book sales is that the offline part finds itself under pressure because, among other

things, the internationally and nationally bestselling books that earlier were an important part of

their profit are now sold primarily via the alternative channels just mentioned. Thus e-com-

merce is beginning to have a major contributing impact on the development of the entire book

sales sector.

This is far from what can be said of the impact of home delivery in the grocery sector. As

already noted grocery e-commerce has rudimentary sales in absolute figures and a very slow

growth rate in Denmark because the major players like Dansk Supermarked and Coop have not

yet chosen to offer home delivery as an option (Kornum/Bjerre 2007). An estimate would sug-

gest that the grocery/food home delivery in Denmark by 2009 represents sales of around 49 m.

Aarstiderne.com who sells organic vegetables and fruit boxes by subscription represents 60% of

the market; whereas SkagenFoods.com and Torvet.dk each represent 10% of the market [2].

Torvet.dk offers an assortment of around 2,500 items and 25% of its food items are organic.

Skagen Foods delivers fresh fish and vegetable boxes to the homes all over Denmark. The rest

of the market consists of smaller local or regional supermarket home delivery systems and food

producers selling foods directly to consumers.

It is in total quite difficult to estimate this remaining part of the market because it is a very

broad mixture of various SME’s. Examples of regional or local e-supermarket operators are Yel-

lowman.dk, e-supermarked.dk, Osuma.dk and a number of food producers with home delivery

(see for instance these three lists consisting of food producers where some of these offer home

delivery, some covering one selected area [3]).

As the total Danish retail food grocery market in 2007 represents 13.7 bn EUR, home delivery

sales correspond to only .4% of the total market - hardly a figure that will give the large grocery

retailers in Denmark a nightmare. Also, the share of grocery e-commerce will probably not take

off to any significant extent before the three large retail conglomerates Dagrofa, Dansk Super-

marked and Coop begin to compete directly in this area (Kornum/Bjerre 2005; Kornum/ Bjerre

2007; Vangkilde 2008).


5. A profile of Danish Retail Logistics

Logistics is one of the core competencies of retailers (Gudehus/Kotzab 2009) and Danish retail-

ers have recognized the need to use the power of logistics as a critical success factor for their

operations. From a logistics point of view Denmark is quite an interesting location, as logistics

has to serve mainland as well as island locations, which sometimes require regional distribution

center structures. Especially in the last decade, a lot of logistics investments into fully automat-

ed central retail distribution centers have been made, ushering in the era of modern retail logis-

tics (Kotzab/Bjerre 2005). In this section an overview of the current developments in the field

of logistics of the leading Danish retailers is provided.

5.1. Supply Chain Management at Coop

The largest Danish grocery retailer, Coop, has structured the supply chains for its several store

formats into seven logistics systems: fresh goods, bread, frozen goods, meat/fish/poultry, dairy

products, dry goods and non-food. The total supply chain operation includes several logistics

centers which are either run by Coop itself or are outsourced to distribution partners or suppli-

ers (see Table 4; Coop 2009).


Table 4: Coop’s Logistics

Coop Logistics Centers

In-house Outsourced

Type of center Location Type of center Location

Fresh food Hasselager, Brøndby Fresh food terminal Hobro, Ishøj,

(operated by Arla) Slagelse, Christians-

feld

Dry food Aalborg, Fakta Center Bread terminal Vejle, Rødovre

Vest, Vejen, Fakta (operated by

Center Øst, Albertslund Schulstad)

Specialties Albertslund Frozen food (operated Kolding, Avedøre

by Fricoscandia)

Nonfood Odense Meat terminals Kolding Ringsted

Transport group Risskov, Brøndby

The operative costs for Coop’s supply chain activities are more than 50% of the Coop’s total

operating costs. Logistics is supported by an IT department in which 180 people are employed.

The flow of information is managed by more than 1,000 servers and more than 5,000 PC’s

which are connected with more than 4,000 EPOS terminals in approximately 1,200 stores.

More than 900 suppliers are connected with EDI.

5.2. The Netto Distribution Center in Køge

The largest Danish discounter, Netto, has operated its 52,000 m2 distribution center that is

based on state-of-the art technology since 2003. At the time, the investment of 67 m in startup

costs was the highest ever made in Denmark (Denman 2003). The expected annual savings were

expected to be more than 6 m. The characteristics of the distribution center are presented in

Table 5:


Table 5: Characteristics of the Netto Distribution Center in Køge

Feature Description

Location Køge, Sealand

Size 52,500 m2

Number of articles 1,000, representing fresh food, frozen food, dry food,

beverages, textiles and spot articles

Warehouse technology and type 25 m high automated high bay racks

23 storage machines (robots)

Pallet capacity More than 20,000

Number of truck loads to be handled daily 700

Number of employees 330 (250 distribution center, 80 administrative)

Warehouse technology allows the commissioning of orders from 56 stores at once. Only the

loading and unloading of the goods from and onto the trucks is done manually. The distribution

center serves 80% of the demand from all the 400 Netto stores in Denmark. The remaining 20%

are delivered directly to the store. In 2009, Netto invested in a new order assembly system for

produce (vegetables and fruits) which allows it to decrease the internal lead time as well as opti-

mize the pallet and transport capacity and to reduce its CO2

emissions. Each robot is capable of

serving 600 × 400 packaging units. In peak times a manual line assists in commissioning.

5.3. Supergros A/S

The wholesaler of the Dagrofa system is Supergros A/S. Supergros is the largest wholesaler in

the grocery retail market in Denmark. Supergros A/S operates six distribution terminals all over

Denmark which serve different types of products (see Table 6; Supergros 2009).

Since 2009, Supergros A/S has run an additional warehouse in Ringsted. The new operation is

built based on clad rack construction and includes nine aisles with more than 20,000 pallet loca-

tions and approximately 2,000 storage sites in the commissioning zone with an automated pal-

let sorter and a sorting transfer vehicle. The order assembly is based on pick-by-voice technol-

ogy which allows the staff to process several orders simultaneously.

5.4. The JYSK Central Warehouse in Uldum

JYSK is a Danish furniture and bedware store (‘sleeping and living’) and operates more than

1,500 stores in 32 countries all over the world. With a total sales volume of approximately

2 bn EUR, JYSK is one of the largest Danish companies and is still wholly owned by Lars

Larsen. In 2007, JYSK started to build a new central warehouse in Uldum, which replaces the

six decentralized warehouses spread around Denmark. Since 2009, the warehouse has been ful-

ly operational. The characteristics of the warehouse are documented in Table 7.


Table 7: Characteristics of the JYSK Central Warehouse in Uldum (Jysk 2009)

Feature Description

Location Uldum, Middlejutland

Size 64,000

Building technology Clad rack

Number of employees and shifts 250 people on two shifts

Warehouse technology and type Three 40 m automated high bay racks on 7,800 m2 each

controlled by computer-forklift;

Two separate fully automated box storage

Packaging station with a peak capacity of 100,000 cases

(= 5,500 pallets and 150 truck loads)

Pallet capacity 45,000

Table 6: The Supergros A/S Distribution Terminals

Vejle Ringsted Ringsted Herning Brøndby TåstrupRefrigerated/ Refrigerated Groceries Groceries Groceries Groceries

frozen

Refrigeratedgoods × ×

Frozengoods ×

Fresh meat ×

Fruits andvegetables × ×

Groceries × × ×

Wine andspirits × ×

Confectionary × × ×

Nonfood ×

Transit goods ×

The Uldum-warehouse serves 170 JYSK stores in Denmark, Norway, the Netherlands and the

UK as well as approximately 100 franchise stores all around the world. The total investment in

the central warehouse was expected to be around 100 m. It is the first clad-rack warehouse to be

built in Denmark.

6. Planning and Regulation Perspective

There are two areas of Danish legislation which have gained attention over the recent years in

relation to retailing, i.e. the law regulating opening hours and the law regulating planning and

location of stores.

Thus, considerations and concerns regarding the city center and the availability of commodities

and pharmacy/postal services in rural areas are the main political drivers of retail regulation.

The law on opening hours is being more and more liberalized these years, whereas the parts of

the planning law regarding store sizes and location is being more tightly regulated.

The law regulating store opening hours (Law no. 606 of 24th of June 2005) is balancing con-

cerns mainly between allowing structural changes and securing the availability of stores and

accessibility of daily commodities and other services in smaller cities and rural areas where

retail stores face a difficult competitive situation. Smaller retailers, especially, compete there

against larger store formats whereby it is observed that the smaller the city, the smaller the aver-

age size of retail stores and their turnover as well as their efficiency measured as turnover

per m2 (Retail Institute Scandinavia 2009b). Therefore services such as pharmacy outlets and

post offices are often integrated into grocery stores in these smaller cities. The law protects

these small stores by making it possible for them to be open every day. Using turnover as a KPI

has made the administration of the law simple. Smaller stores (less than 27.1 m DKK per year)

are allowed to trade every day, all year round.

This makes it possible for smaller stores to use Sundays as a special competitive differentiator

over the larger stores which are more restricted in their opening hours on Sundays (Law no. 606,

2005). In principle, all stores could be open from 6am Monday through 6pm Saturday, and all

stores are allowed to sell all products during this period (Law no. 606, 2005). Practice shows

however, that these options are not used - actually only one operator (7-Eleven) is utilizing the

law to its full extent. Most retailers only operate with opening hours of 9 am-7 pm (Monday-

Thursday), 9 am-8 pm on Fridays and 8 am-5 pm on Saturdays. Besides these everyday opening

hours, the differentiated possibility lies in being open on Sundays. Stores larger than the turnover

KPI are allowed a number of open Sundays a year (every first Sunday in a month, all December

Sundays before Christmas, and 6 Sundays to be chosen individually as well). This adds up to 21-

22 open Sundays for large stores. On a typical Sunday, stores are open between 10 am and 4 pm.


This law is up for renewal in 2009, and generally expectations are that liberalization will contin-

ue, resulting in more opportunities for Sunday opening (DLF 2009). Interviews suggest that

especially centrally controlled retailers operating larger retail formats and destinations (e.g.

hypermarket formats and furniture stores) will utilize the opportunities for the increased open-

ing hours (DLF 2009).

It might be worth noting that it is the labor unions that are now trying to stop continued liberal-

ization, arguing that the infrastructure in terms of childcare is not in place to accommodate par-

ents working full time during weekends. The trade association, DSK (organizing small and

medium sized FMCG retailers), has accepted the continued liberalization.

The other important regulation concerning retailing is the planning and location of stores (Law

no. 937 of September 24th 2009) - focusing on maximum sizes for individual stores in the

FMCG sector (largest stores allowed) and specialty stores (such as furniture, DIY). The law

aims at 1) ensuring a variety of stores in cities (both small and large), 2) ensuring that stores are

planned in relation to infrastructural access (especially public transport), and 3) increasing a

sustainable retail structure lowering or minimizing transport distances in relation to shopping

(DLF 2009).

Retail parks outside the city center have been a trend in several cities in Denmark over recent

decades, i.e. harming inner-city retail environments. A major concern is to keep and sustain

retail environments in the cities, and the law is actively trying to avoid further expansion of the

out-of-the-city-center shopping opportunities (DLF 2009), also in order to remain and apply

existing infrastructure. A new law passed in 2008 introduced a new methodology to define what

the “inner city” is. Previous to this law the postal number system was used which was easily

applicable but less valid and relevant as a measure of ‘inner-city’. With the new law, inspired by

a Swedish model, measures based on density of buildings, inhabitants, traffic and stores is used

to define what inner city is. This law is not up for renewal within the next 5 years. The law

emphasizes that stores should mainly be established within cities and it limits store sizes to

3,500 m2 for grocery stores and 2,000 m2 for specialty retailing.

This has restricted both grocery and specialty retailers’ possibilities to establish larger store for-

mats which has been an interest for certain retailers, especially centrally controlled retailers,

e.g. those with hypermarkets, furniture, consumer electronics and DIY stores. The hypermarket

chain Føtex has, as an example, developed stores where grocery and non-food departments are

separated into two legally distinct entities with distinct entry and payment areas right next to

each other. In this way the well known Føtex format with both non-food and groceries remains

possible to uphold despite the restrictions of the law. Hence, this law is less liberal and more

regulated than in its earlier versions.


7. Summary

Denmark is known for its scientists like the physicists Niels Bohr and Tycho Brahe, the physiol-

ogist August Krogh, the architects Arne Jacobsen or Jørn Utzon, the designers Georg and Jacob

Jensen or Gertrud Vasegaard, and the film maker Lars von Trier. Besides that, though, Denmark

is also the home of some quite successful retailing companies which this paper has shown.

The Danish consumer can be seen as a benchmark for acting in a socially and environmentally

responsible manner and who actively influences retailing policy, e.g. in terms of offering eco-

logical and fair-traded products. We may also see best practices for the future when it comes to

electronic commerce, as Denmark is one of the countries with the highest Internet diffusion

rate.

Due to the small size of the market, foreign retailing companies are not entering the market in

that dimension as is the case in other countries. On the contrary, we are able to see, especially in

the fashion retailing segment, that Danish companies are quite successful in foreign markets.

Meanwhile, grocery retailing remains in more or less local hands, where only Netto has gone

international. Other Danish retailing companies, such as JYSK, are becoming important global

players.

Notes

[1] The sources for the rest of the data in this section are from a number of Danish newspapersavailable in the Info Media database.

[2] There is no recent data available on the turnover of these two firms. By 2007 the CEOof Torvet mentioned that “this year our turnover will reach the amount of a double cifrein mill. and I am quite sure that within two years we will reach a turnover of 100 m DKK(13 m EUR)” (Sørensen 2007). By 2007 Torvet.dk was “above 10,000” and is seeminglygrowing very fast (Jyllands Posten 2007). Skagen Foods had a turnover of 32 m DKK in2006 (4 m EUR) (Sørensen, 2007).

[3] http://www.abonnementslisten.dk, http://www.okologi.dk/Eksterne/stalddor/Default.asp andhttp://www.landkoeb.dk

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Documents

Peter Schnedlitz, Dirk Morschett, Thomas Rudolph, Hanna