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Battle for the food dollar: Report from the trenches

STANFORD - The things people put in their grocery carts fascinate Jim Lattin.

An associate professor of marketing and management science at the Stanford Business School, Lattin isn't snooping to see whether or not consumers are eating from all the basic food groups. What interests him is why shoppers choose the things they put in their market baskets and how they decide how much to pay.

Do consumers have loyalty to a specific store or brand? Can they be lured away from a competitor by a sale? When do consumers march into a store determined to buy something no matter what it costs, and when can they be convinced to open their pocketbooks to take advantage of a special?

In one research paper, "A Two-State Model of Purchase and Brand Choice," co-authored with Randolph Bucklin, assistant professor of marketing at the Anderson Graduate School of Management at University of California-Los Angeles, Lattin researched consumer behavior in buying saltine crackers and ground coffee. The data indicated that consumers shopping in an unfamiliar store are more likely to respond to promotional price reductions to decide whether to buy and, if so, which brand.

In a more recent paper, "A Theoretical Rationale for Everyday Low Pricing by Grocery Retailers," Lattin and Gwen Ortmeyer, assistant professor of marketing at Harvard Business School, studied the retail battles between grocery stores featuring "everyday low prices" and those that mark down items on sale.

Stores on either side of the debate try to convince consumers that their pricing approach is the only way to save money. Lattin and Ortmeyer say the two pricing policies appeal to different types of consumers and can coexist in the same market area.

Lattin and Ortmeyer argue that grocery stores are competing for two types of customers: "cherry pickers," who are willing to pore over newspaper ads and drive from store to store looking for the best bargains, and expected price shoppers, who want a reasonable price but won't spend time or stockpile their cupboards to get the lowest possible price.

Stores that feature everyday low prices lose the cost advantage of buying large quantities of goods to use in promotions, but they may be able to save the expense of changing prices on items already in the store and reduce their advertising budgets, since they don't feature weekly specials.

If a retail market area has enough bargain hunters and harried shoppers short on time, stores with either pricing approach may prosper, say Lattin and Ortmeyer.


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