Strategic Choices in
Price Promotions
Research towards Forward Buying and its Determinants
Strategic Choices in Price Promotions
Research towards Forward Buying and its Determinants
Rijksuniversiteit Groningen Msc: Business Administration Specialization: Marketing Management
Qualification: Master thesis
Faculty supervisor: Dr. L.M. Sloot Co-assessor: Drs. J. Berger Organization: Bickery Food Group B.V.
External supervisor: Drs. J.A.N.M. van Snellenberg MCM
Author: F.W. van der Steege Address: Springweg 5, 3511 VH, Utrecht
Phone number: 06 53846426 E-mail: f.w.van.der.steege@student.rug.nl
Student number: 1729993
buying in the food market. This is the final product to finish my Master of Marketing Management at the University of Groningen.
During my study Marketing management and the internship at Bickery Food Group B.V. I realized marketing accountability is an important and interesting topic. Inspiring for this research has been the increasing promotional costs in the food market and the need of further research in practice. Writing this paper was a great learning experience to me and I would like to thank people who have contributed to that. First of all, I would like to thank Bickery Food Group B.V. for the opportunity they gave me to perform this research. My great appreciation goes to my supervisor, Hans van Snellenberg for his time, motivating feedback and practical advices.
At the university, my graduation process was supervised by Laurens Sloot. I would like to thank him for his inspiring feedback and motivating attitude, which helped me to improve this paper. Besides this, I want to thank my second supervisor, Hans Berger for assessing this paper.
Finally, I would like to take this opportunity to thank my partner, family, friends and colleagues at Bickery Food Group B.V. for their motivating reactions and encouragements during writing my thesis. Due to all, I will look back with pleasure on completing my thesis and study.
still not clear for researchers, brand manufacturers and retailers. This study contributes to the knowledge on the effectiveness of price promotions in relation to forward buying. Forward buying means that retailers regularly take advantage of the temporary price discounts to stock up with extra goods, putting them into inventory for later sale. This research indicates that the level of forward buying is on average 27% of promoted sales in the Netherlands nowadays. This means that 27% of the price promotion budget is not effective.
Field research and academic marketing literature highlights the proactive role that brand manufacturers can undertake to alleviate the forward buying problem. Therefore this study provides an answer on the following problem statement:
To what extent does forward buying occur in the Dutch food retail sector and which factors are related to the level of forward buying?
The research is built on a three way approach. The exploratory research and qualitative interviews are done to provide practical insights into forward buying. The literature research is done (1) to motivate the subject forward buying, (2) to provide background information about the Dutch food industry, price promotions and forward buying and (3) to come up with variables that influence the level of forward buying. The empirical research is done to quantify the results of the exploratory and literature research.
The level of forward buying decreased from 55% in 1976 to 33% in 2009 in the US. Performed empirical research shows that the average level of forward buying is 27% over six brands from twelve Dutch retailers over 2008 and 2009 (N = 71). The level of forward buying differs per retailer and brand. This study analyzed four retailer related determinants of forward buying (Service orientation retailer, Price orientation retailer, Order level and Size of the retailer) and six product related determinants of forward buying (Volume per Euro, Length expiration date, Category sales, Product sales, Frequency price promotions, Promotional pressure product and Promotional pressure category).
The variables Frequency price promotions, Promotional pressure product and Promotional pressure category do significantly correlate to the level of forward buying, the other eight determinant do not significantly correlate to the level of forward buying.
Three interesting findings to decrease the level of forward buying for distributors and brand manufacturers are presented:
Be alert to every retailer. Do not believe that some retailers are not forward buying. No significant relation is found between forward buying and retailer related characteristics. Good forecasting and determining maximum sales during promotions is essential.
essential.
1.1 Company introduction ... 9
1.2 Marketing spending ... 9
1.3 Field research ... 10
1.4 Objective of research ... 11
1.5 Research questions... 11
1.6 Scientific and Management relevance ... 11
1.7 Research structure ... 12
1.8 Structure paper ... 12
1.9 Scope of study ... 12
2. Background ... 13
2.1 Food industry ... 13
2.1.1 The Dutch food market ... 13
2.1.2 The retail market ... 14
2.1.3 Trend of increasing competition ... 15
2.1.4 Trend of supply chain optimization ... 15
2.1.5 Trend of pressure on retailers and brand manufacturers ... 16
2.1.6 Trends in consumer behavior ... 16
2.1.7 Result of the changing market ... 17
2.2 Price promotions ... 17
2.2.1 Promotional spending ... 17
2.2.2 Promotional pressure ... 18
2.2.3 Effectiveness of price promotion ... 18
2.2.3.1 Price elasticity ... 18
2.2.3.2 Profitability ... 19
2.2.3.3 Discount level and support ... 19
2.2.3.4 Consumer stockpiling ... 20
2.2.3.5 Effects on competition ... 20
2.2.4 Result of price promotions ... 20
2.3 Forward buying ... 20
2.3.4 Level of forward buying ... 23
2.3.5 Complexities of forward buying ... 24
2.3.6 What is known about forward buying? ... 24
3. Empirical research ... 25
3.1 Theoretical framework ... 25
3.1.1 Retailer strategy and order level ... 25
3.1.2 Retailer size ... 26
3.1.3 Volume per Euro ... 26
3.1.4 Length expiration date ... 27
3.1.5 Category sales ... 27
3.1.6 Product sales ... 27
3.1.7 Frequency of price promotions ... 28
3.1.8 Promotional pressure ... 28
3.1.9 Difference in sales - Control variable ... 28
3.1.10 Conceptual model ... 29 3.2 Methodology ... 30 3.2.1 Research methods ... 30 3.2.1.1 Quality measurement ... 30 3.2.1.2 Descriptive research ... 30 3.2.1.3 Causal research... 30 3.2.2 Dataset ... 31
3.2.3 Data collection dependent and control variable ... 32
3.2.4 Data collection independent variables ... 32
3.2.5 Caveats ... 34 3.3 Results ... 34 3.3.1 Quality measurement ... 34 3.3.2 Description of statistics ... 36 3.3.3 Hypotheses test ... 37 3.3.3.1 Correlation analysis ... 37 3.3.3.2 Regression analysis ... 40
4.2 Determinants of forward buying ... 45
4.3 Recommendations to Distributors and Brand manufacturers ... 46
4.4 Limitations and Future directions ... 47
References ... 49 Appendix I (Experts) ... 53 Expert 1 ... 53 Expert 2 ... 55 Expert 3 ... 56 Expert 4 ... 58 Expert 5 ... 59 Expert 6 ... 60
Appendix II (Additional literature) ... 61
Position of retailers ... 61
Shopnumbers and turnover Dutch retailers ... 62
Appendix III (Empirical outcomes) ... 63
Data quality check ... 63
Regression test ... 64
List of figures
Figure 1. Research structure ... 12Figure 2. Generic food supply chain ... 13
Figure 3. Promotional Pressure (Rolling MAT) ... 18
Figure 4. Conceptual Model ... 29
Table 2. Strategy clusters ... 14
Table 3. Costs forward buying of total organization ... 21
Table 4. Effectiveness price promotions ... 22
Table 5. Summary forward buying literature ... 23
Table 6. Data selection ... 31
Table 7. Measurement dependent and control variable ... 32
Table 8. Measurement independent variables ... 32
Table 9. Difference in sales... 35
Table 10. Correlations control variable ... 35
Table 11. Description of data ... 36
Table 12. Correlation independent variables ... 37
Table 13. Overview items for regession test ... 42
Appendix II Table 14 Number of shops per retailer ... 62
Appendix II Table 15 Retailer revenue ... 62
Appendix III Table 16 Difference in sales - brands ... 63
Appendix III Table 17 Differences in sales - Retailers ... 63
Appendix III Table 18 Multicollinearity test - Retailer strategy ... 64
Appendix III Table 19 Multicollinearity test - Retailer size ... 64
Appendix III Table 20 Multicollinearity test - Category Sales ... 65
Appendix III Table 21 Multicollinearity test - Product sales ... 65
Appendix III Table 22 Multicollinearity test - Promotional pressure ... 65
Appendix III Table 23 Multicollinearity test - Correlation between variables ... 66
Appendix III Table 24 Regression test 1 - including Tolerance and VIF ... 67
Appendix III Table 25 Regression test 2 - including Tolerance and VIF ... 67
Appendix III Table 26 Regression test 3 - including Tolerance and VIF ... 68
Appendix III Table 27 Regression test 1 - Model summary ... 68
Appendix III Table 28 Regression test 1 - Anova ... 68
Appendix III Table 29 Regression test 1 - Coefficients ... 69
Appendix III Table 30 Regression test 1 - Excluded variables ... 69
Appendix III Table 31 Regression test 2 - Model summary ... 70
Appendix III Table 32 Regression test 2 - Anova ... 70
Appendix III Table 33 Regression test 2 - Coefficients ... 70
Appendix III Table 34 Regression test 2 - Excluded variables ... 71
Appendix III Table 35 Regression test 3 - Model summary ... 71
Appendix III Table 36 Regression test 3 - Anova ... 71
Appendix III Table 37 Regression test 3 - Coefficients ... 72
1. Strategic Choices in Price Promotions
During my study Marketing Management, I realized that marketing accountability is a hot topic. Marketing accountability shows what the marketing activities and spending contribute to the organization i.e. showing the added value of a marketing activity (Verhoef 2010; Kumar 2004; Frambach and Leeflang 2009, Rust et al. 2004). Leeflang, Verhoef and Wiesel mentioned that marketing should take a more prominent role in demonstrating the effect of marketing activities. Furthermore, marketing accountability is on top of the marketers agenda, according to the results of a large marketing survey presented by the Dutch marketing magazine “Tijdschrift voor Marketing”1. However, before starting my master thesis, I wanted to get more feeling with marketing in the food industry, in order to write an interesting thesis for the marketing literature as well as the food industry. So I started an internship at Bickery Food Group B.V. (further mentioned as BFG). I realized that improvements in marketing accountability are valuable for BFG.
This study will examine the effectiveness of price promotions in relation to forward buying. This chapter is a general introduction to the subject of this paper, it introduces the company Bickery Food Group B.V. and it motivates the subject. Furthermore the objective, the research questions and the relevance of this study is explained. Finally, the structure of this paper is presented.
1.1 Company introduction
In August 2010, I started an internship at BFG. BFG is an independent specialist and market leader for the sales, marketing and distribution of fifteen international Premium Food Brands and nineteen food specialties on the Dutch food market2. Some of the premium brands are Bonne Maman, Innocent, Orangina, Dole, Maaza, Punica, and Capri Sonne. The market consists of two market segments, at-home (including retail and specialty stores) and out-of-home (including restaurants, catering and petrol stations).
Changes in this food market resulted in a pressure on premium brands. BFG knows their sales margins of food products decline and has the need to analyze their margin structure. In a first assignment for BFG, I examined the profitability per brand and per client. I analyzed which brands are profitable and which brands should be removed out of assortment. The question after gaining insight in the profitability of the brand portfolio is how to improve the profitability of the company. The profitability can be improved by several means, e.g. reducing costs, logistic efficiency and marketing. As my field of interest is marketing, the next section explains more about the marketing and its spending.
1.2 Marketing spending
Marketing spending at BFG is separated in sales related spending, (i.e. price promotions, feature and displays) and marketing related spending (i.e. commercials, sampling, etc). The sales related
1
Marketing Online is an online news site, which presents articles of the magazines Tijdschrift voor Marketing, Adformatie and other Dutch magazines related to marketing. Presented on www.marketingonline.nl.
2
spending increased over the past years at BFG, due to the increase in price promotion spending. The effectiveness and profitability of these price promotions need more research.
More insight in the effectiveness of price promotions is not only the case for BFG, also other distributors and brand manufacturers struggle with this problem. Kumar et al. (2001) mention that the ineffectiveness of price promotions represents the ‘‘number-one concern’’ among brand manufacturers. More in dept, Lal et al. (1996) claimed that some price promotions are often unprofitable for brand manufacturers, due to the fact that retailers forward buy and do not pass through the price discounts to the consumer. It would be interesting to further research the level of forward buying and the impact on profitability. Also interesting to know is how and when forward buying exists, in order to decrease the level of forward buying. Ailawadi and Harlam (2007) and Hall et al. (2010) mention that future research is needed to consider how factors controllable by brand manufacturers affect forward buying.
1.3 Field research
In order to find out what is known about forward buying in the food market, in-depth interviews are conducted with six Experts in the food market (presented in Appendix I). Expert 1 (Appendix I) mention that it is worthwhile to have a close look at the effectiveness of marketing promotions and forward buying, because retail price promotions take half of the marketing budget of a brand manufacturer. He investigated the effectiveness of price promotions:
Research shows that price promotions have on average a negative Return on Investment. Furthermore, results show that forward buying makes the difference between profitable and unprofitable price promotions. Costs of forward buying for our organization are 1,8% of the total sales margin.
Expert 1
This means that in general on the short term, a price promotion results in a negative Return on Investment (ROI), however if the level of forward buying is zero, the price promotions result in a zero or small positive ROI. Due to the negative or maybe small positive ROI could conclude that brand manufacturers and distributors should stop financing price promotions. However, this is not as easy as it seems to be regarding the prisoners’ dilemma of the distributor and brand manufacturer. Retailers use price promotions as a tool to improve their competitive position according to Expert 3 (Appendix I). For instance, if brand manufacturer A does not offer a price promotion, the retailer will ask brand manufacturer B (a competitor, which offers the same kind of product with another brand name) to offer the product with the price promotion, and then brand manufacturer A looses sales. So, price promotions are part of the deal when listing a product at the shelves. Not providing the price promotions means less sales to the brand manufacturer. Therefore brand manufacturers have to do something to improve the profitability of price promotions. Paying attention to forward buying will result in more profitable price promotions for the brand manufacturer according to Expert 1 and 3 (Appendix I).
increasing competition and pressure on product price margins next years. Expert 4 forecasted that the margins will further decrease and the extra sales will not compensate this. Therefore a zero retail growth index for 2011 is forecasted, which means that the pressure on prices and promotions will continue. These experts mention that a lot of improvements can be made towards the effectiveness of price promotions in relation to forward buying.
On the other side, Expert 5 (Appendix I) predicts that forward buying is not a really important subject to research, because forward buying will decrease due to the logistic optimization in the food supply chain. The other Experts 2, 4 and 6 (Appendix I) only could confirm that forward buying happens, however they do not know more about the level of forward buying, or how it will develop in the future.
1.4 Objective of research
There is room for improvement towards the effectiveness of spending on price promotions by reducing forward buying. This paper sett lights on forward buying. To decrease the level of forward buying, distributors and brand manufacturers need to know more about forward buying. The objective of this study is to provide insights in the level of forward buying and to determine factors that influence the level of forward buying, in order to help brand manufacturers and distributors to manage price promotions more effectively. The problem statement is:
To what extent does forward buying occur in the Dutch food retail sector and which factors are related to the level of forward buying?
1.5 Research questions
To provide an answer on the problem statement, the following research questions need to be answered:
1. What is the level of forward buying in the (Dutch) food retail market and how does this differ per retailer and per product?
2. What are the determinants of forward buying mentioned in qualitative interviews with Dutch food retail Experts and academic marketing literature?
3. Can the determinants be validated by quantitative research, based on data available at BFG? 4. How should forward buying be treated by brand manufacturers and distributors to increase
the profitability of a price promotion?
1.6 Scientific and Management relevance
The marketing spending on price promotions is increasing, while the effectiveness of price promotions is still not clear for researchers, brand manufacturers and retailers. Research indicates that the level of forward buying is on average 30% in the Netherlands nowadays. This means that 30% of the price promotions budget is not effective. This study tries to contribute to the knowledge on the effectiveness of price promotions in relation to forward buying. Academic marketing literature show that the determinants of forward buying in retail is limited (Ailawadi and Harlam, 2009 and Hall et al., 2010). The scientific relevance of this study is (1) demonstrating the level of forward buying in the Dutch food market and (2) providing proven determinants for forward buying in retail.
product. This study provides practical tools to decrease the level of forward buying. Knowing this, helps brand manufacturers and distributors to manage price promotions and marketing budgets more effectively.
1.7 Research structure
This research builds on a three way approach. Figure 1 is a visual presentation of how the research is structured.
1. The exploratory research and qualitative research is done to provide practical insights into forward buying (Malhotra, 2007; 143). Data is gathered with in-depth interviews with six Dutch food retail Experts. Experts are managers or directors of a trade organization, a buying organization, a brand manufacturer, a retail organization and a research company. These Experts are chosen, because they are working in different organizations and view the food market and price promotions from a different perspective. The interviews are used to introduce the subject of the paper, to come up with new determinants of forward buying and to provide recommendations. The
interviews are presented in Appendix I.
2. The literature research is done (1) to motivate the subject forward buying, (2) to provide background information and (3) to come up with variables that influence the level of forward buying. The determinants of forward buying are presented and explained in the theoretical framework.
3. Empirical research is done to quantify the results of the exploratory and literature research. The empirical research is done by quantitative research.
1.8 Structure paper
Chapter 2 presents background information about the Dutch food market, price promotions and forward buying. Chapter 3 describes the empirical research, including the theoretical framework, methodology and the results. Finally, chapter 4 presents the discussion and conclusion including recommendations, limitations of this research and suggestions for future research.
1.9 Scope of study
In order to keep the size of the master thesis within boundaries of the master thesis, the empirical research is limited to sales promotions of Dutch retailers. To preserve confidentiality, the in-depth interviews are included in the Appendix I without the name of the company and person. Also BFG data is shown in percentages.
Literature research Chapter 2 & 3 Empirical research Chapter 3 Qualitative research Chapter 2 & 3 Exploratory research Chapter 1
Discussion and Conclusion Chapter 4
To understand the food market, this chapter present
industry, price promotions, its effectiveness and forward buying.
2.1 Food industry
This section starts by explaining the Dutch food market in general. Secondly
described in more detail. After that, trends in the food market are explained, which includes the increased competition, supply chain optimization and consumer trends.
2.1.1 The Dutch food market
The food industry chain can be separated into several parts this study is on the second (dark)
the relation between the food retailer and the distributor or brand manufacturer. The food retailer is further mentioned as retailer (i.e. supermarkets)
The food market consists of two channels, (1)
In the Netherlands, total consumer food spending in these two channels were 55,8 billion in 2008, 55,7 billion in 2009 and 55,5 billion in 2010
consumer food spending started in 2009. As the decrease in food spending was a
Economic growth Inflation Buying power Consumer confidence * First quarter Source: CPB 201 3
Calculated by Food Service Institute Nederland, independent knowledge institute on developments in the food market.
Farm Producer
Source: Folinas et al., 2006
2. Background
To understand the food market, this chapter presents background information about the Dutch food its effectiveness and forward buying.
explaining the Dutch food market in general. Secondly,
After that, trends in the food market are explained, which includes the increased competition, supply chain optimization and consumer trends.
The food industry chain can be separated into several parts, as presented in Figure (dark) part of the chain, from distributor to consumer, and
the relation between the food retailer and the distributor or brand manufacturer. The food retailer is (i.e. supermarkets), which do not include specialty stores.
Figure 2. Generic food supply chain
The food market consists of two channels, (1) the at-home channel and (2) the out
herlands, total consumer food spending in these two channels were 55,8 billion in 2008, 55,7 billion in 2009 and 55,5 billion in 2010, based on the FSIN database3. The slight decrease in consumer food spending started in 2009. As presented by the key performance indicators in
was a result of the economic decrease of -3.9 in 2009
Table 1. Key performance indicators
2008 2009 2010 2011* Economic growth 1.9 -3.9 1.8 2.5 2.5 1.2 1.3 2.0 Buying power 0.0 1.8 -0.5 -0.3 Consumer confidence -20 -22 -13 -10.0 quarter 2010 and CBS 2011
Calculated by Food Service Institute Nederland, independent knowledge institute on developments in the food market. Producer Distributor or brand manufactureer At-home (retailer) Out-of-Home
s background information about the Dutch food
, the retail market is After that, trends in the food market are explained, which includes the
Figure 2. The focus of , from distributor to consumer, and especially on the relation between the food retailer and the distributor or brand manufacturer. The food retailer is
, which do not include specialty stores.
the out-of-home channel. herlands, total consumer food spending in these two channels were 55,8 billion in 2008, The slight decrease in rmance indicators in table 1,
3.9 in 2009.
Calculated by Food Service Institute Nederland, independent knowledge institute on developments in the food market.
2.1.2 The retail market
The Dutch retail market consists of 24 large retail chains. The number of stores per retail chain range from 20 (Sanders) to 831 (Albert Heijn) (ACNielsen 2010).
retailer. Some of the retail chains are benefit from quantity discounts. The 24
ACNielsen5 cluster retailers, based on the two factors: price which cluster, which retailer belongs.
Strategy cluster Full service
(large assortment, high service level, high price)
Value-for-money
(medium service, medium price, many local oriented retailers)
Quality discount
(high service, large assortment, low price)
Hard discount
(Rock bottom price, strong focus on fancy label)
* Estimation
** Not all retailers are included
Source: EFMI business school 2010; ACNielsen 2009; ACNielsen 2010
4
EFMI business school is an independent academic knowledge institute, focusing on management questions of companies in the food industry
5
ACNielsen company is a leading global information and measurement company
The Dutch retail market consists of 24 large retail chains. The number of stores per retail chain range 20 (Sanders) to 831 (Albert Heijn) (ACNielsen 2010). Table 2 presents the
retail chains are organized as buying organizations, to cluster purchases and benefit from quantity discounts. The 24 retailers differ in strategy. EFMI business school
based on the two factors: price- and service level. which cluster, which retailer belongs.
Table 2. Strategy clusters
Retailer** Buying organization
(large assortment, high service level, high price)
Albert Heijn Albert Heijn Super de Boer Bijeen
Plus Superunie
Coop Superunie
(medium service, medium price, many local oriented
Jan Linders Superunie
C1000 Bijeen Deen Superunie Vomar Superunie DekaMarkt Superunie Poiesz Superunie Sanders Superunie EM-TE Superunie MCD Superunie
(high service, large assortment, low price)
Jumbo Bijeen
Nettorama Superunie Hoogvliet Superunie Dirk (incl. Bas
& Digros)
Superunie
(Rock bottom price, strong focus on fancy label)
Lidl Lidl
Aldi Aldi
Source: EFMI business school 2010; ACNielsen 2009; ACNielsen 2010
usiness school is an independent academic knowledge institute, focusing on management questions of companies
ACNielsen company is a leading global information and measurement company
The Dutch retail market consists of 24 large retail chains. The number of stores per retail chain range presents the market share per buying organizations, to cluster purchases and . EFMI business school4 and and service level. Table 2 shows to
Buying organization Market share (2009) Albert Heijn 32,8% Bijeen 6,5% Superunie 6,0% uperunie 2,4% Superunie 1,0% Bijeen 11,7% Superunie 1,9% Superunie 1,7% Superunie 2,4% Superunie 0,9% Superunie 0,6%* Superunie 1,8% Superunie 0,9%* Bijeen 4,9% Superunie 0,8%* Superunie 1,9% Superunie 4,2% 5,4% 8,3%
Retailers represent almost half (48%) of the consumer food spending, which is 26,5 billion in 2009. On average, the retailer sales grew with 4% per year from 2003 to 2008 (ACNielsen, 2008). Unlike the decreasing spending on food by the consumer in 2009 and 2010, the consumer spending in supermarkets grew with 3,5% in 2009 and 1,3% in 2010 (FSIN, 2010; 20). Retailers benefited from the increase in buying power, which was + 1.8% in 2009 (Table 1). However the economic downturn also hit the retailer in 2010, the sales growth (+ 1,3%) is lower than the average sales growth (4%). The consumer confidence dropped; producer confidence reached its lowest level and buying power decreased (Table 1). This resulted in a smaller sales growth for supermarket sales.
2.1.3 Trend of increasing competition
Competition between retailers and the competition between brand manufacturers are increasing. Retailers keep an eye on competitor prices, e.g. the price image battle of Albert Heijn (FSIN,
2011). When the retailer A offers a lower sales price, retailer B follows by lowering their sales price too. The retailers’ (price) image is more important than the category profitability (Appendix I Expert 1 and 3, and Van Aalst 2010);
The difference between the discount and the service retailers is decreasing. Expert 4 mentions that the price is a more important driver for the consumer and thus also for the retailer. This means that most retailers are focusing on improving their price image. Expert 3 mentioned that differences between retailers will decrease, because the discount retailers will offer qualitative vegetables with a lower price and the service supermarket also have to be compatible against discounters, they will lower their price of these categories too. This means that service retailers will lose their high margin products, which means it is more difficult to be profitable;
The acquisition in the retail landscape, e.g. Super de Boer by Jumbo and C1000 (Broecke, 2010). Due to acquisitions (between retailers and buying organizations), price contracts between retailers and the brand manufacturers are compared. Sometimes differences exist between contracts. Then the buying organization chooses the best deal and tries to benefit from scale advantages (Appendix I, Expert 5);
The share of private label products increases (Appendix I, Expert 4). The retailer gets more negotiation power, due to availability of private label products. This results in a pressure on the competition between manufacturer brands and store brands (Appendix I, Expert 3 and 4; EFMI business school 2009).
2.1.4 Trend of supply chain optimization
Another trend is the supply chain optimization by retailers. Supply chain management has a major impact on the corporate organizations, contact with suppliers and customers and the whole process from order processing; from the order to the shelf. Supply chain management has a profound impact on the ability of organizations to compete and to increase profit according to Van den Broecke (2010). In the nineties, new supply chain systems were introduced in the food market, such as Enterprise Resource Planning (ERP). Later in that decade, optimization solutions for warehousing, transportation and inventory management were introduced.
increased product introductions and shorter life cycles, (3) the need of variety in products within the product portfolio, and (4) the pressure on the working capital.
Due to the increasing pressure on the value chain, one of the most important challenges is the optimization and customization of the chain in 2009. However in 2009, a dramatic turnaround existed due to the recession, which took away initiatives that add value in the long term according to Kinder (2010). Organizations returned to principles such as lowering operational costs. A supply chain study conducted by AMR in 2009 (Kinder 2010) shows that the main business priorities for the global supply chain industry were (1) an increase in productivity (2) increase profitability (3) reduce operational costs and (4) redesigning the supply chain networks to improve service.
Expert 1 and 5 (Appendix I) mention the trend of logistic optimization by retailers. Based on literature research is concluded that logistic optimization and supply chain optimization was an important aspect for brand manufacturers and retailers for decades and which will ask attention in the future.
2.1.5 Trend of pressure on retailers and brand manufacturers
A pressure exists on brand manufacturers and retailers. Retailer sales grows every year, as explained. However, ACNielsen (2008) and Van Aalst (2010b) argue that the margins of retailers are decreasing, due to the increasing competition. The small growth in retail sales and the decrease in retail margins result in a stable income to retailers.
EFMI Business School (2009) did research on the pressure on margins regarding 35 retailers and 73 brand manufacturers based on a period from 1997 till 2006. They conclude that the brand manufacturers and retailers return on sales (ROS) growth both decreased in these years with -0,1% and 0% respectively. ROS is Earnings before interest and taxes (EBIT) divided by Sales, which is an indicator of organizational profitability. They mention that the revenue growth (3,4%) of Dutch brand manufacturers hardly compensate the inflation rate. The average Dutch brand manufacturers ROS is 5,4%, the Dutch retailer ROS is 3,5%. The brand manufacturers ROS is higher, however the negotiation position of premium brand manufacturers deteriorates. The retailer has stronger negotiation power, because they can use private label products as alternative. The market share of private label increased from 19% in 2003 to 25% in 2008. EFMI business school (2009) found that the price oriented retailer has a higher return on sales than the full service retailer; a relating factor is the productivity (sales per meter) of the retailer. Furthermore, sales development and profitability remain at Dutch premium brand manufacturers compared to other European premium brand manufacturers. A reason is the scale advantages, which is beneficial to European manufacturers. To conclude, the retailer is winning more power over brand manufacturers.
2.1.6 Trends in consumer behavior
2.1.7 Result of the changing market
The retail market is a highly competitive market; supply chain optimization will go on and the consumer becomes more critical and margins of products are under pressure. Subsequently a pressure on promotions exists. The pressure on price promotions results in a pressure on brand manufacturers according to Van Aalst (2010a and 2010c). In addition, Expert 4 (Appendix I) shows that the growth in promotional pressure at premium brands increases more than other second brands or private label products. Next section explains more about price promotions.
2.2 Price promotions
Price promotions are temporary price cuts, which brand manufacturers offer to retailers to encourage them to reduce the retail prices (Kumar, 2001). This section discusses price promotions in the food industry and its effectiveness.
2.2.1 Promotional spending
To promote products (i.e. increase awareness, increase sales, etc.) several tools in the marketing mix can be used. Price promotions have emerged as the most important part of the marketing mix for retailers and brand manufacturers (Kumar et al., 2001; Srinivasan et al., 2004; Appendix I Expert 3). Lal et al. (1996) argue that price promotions remain as one of the major competitive tools for brand manufacturers. Brand manufacturers use price promotions to defend market share, to communicate something about the product or to ask for attention for the product. Retailers use price promotions to sharpen their price image, increase sales, to generate store traffic and to generate a better competitive position (Drèze and Bell 2003). However, only offering price promotions will harm the brand. Price promotions are the most easy to copy promotions, the marketers should think in more creative solutions (Appendix I Expert 3). Furthermore, price promotions drive less, not more, loyalty due to cherry picking. Cherry picking means that shoppers do multiple purchases of the offer, however fail to complete their regular shopping list in the rest of the store (Garner 2004). Nevertheless, the increased competition leads to an increase in the pressure on price promotions. Drèze and Bell (2003), Haitao (2008) and Expert 1, 2 and 5 suggests that brand manufacturers face a prisoner’s dilemma situation regarding price promotions. Brand manufacturers have to offer price promotions; otherwise competition will take business away. It is important for retailers to realize, that more often than not, brand manufacturers subsidize these promotions (Drèze and Bell 2003). Price promotion is a tool for retailers to lower the consumer price perception. Price promotions do have an effect on the consumer price perception of the retailer and not on the price perception of the brand or brand manufacturer.
2.2.2 Promotional pressure
In today’s food world, promotional pressure is increasing. Promotional pressure is the promoted sales divided by the total sales. Promoted sales means sales with a promotional discount, which sometimes is supported by a feature, display or both. Promotional pressure increased in 2003 due to the price war, and it is expected to increase after 2010 (Sloot 2010, GFK 2010). Promotional pressure increased with 0.9% (from 16,8% to 17,7%) in 2010. Figure 3 is a visual presentation of an increase in the promo pressure in 2009 and 2010.
Figure 3. Promotional Pressure (Rolling MAT)
The average Dutch promotional pressure is 17.7%; however this differs per category (Appendix I Expert 4 and 6). Sloot (2010) mention that instead of a price war, the food industry faces a promotional war. He estimates promoted value will increase to 20% - 22% in 2011.
Promotional value represents on average 16% of brand manufacturers revenue in U.S (Pauwels, 2007). However promotional value in US retail market is higher than in Dutch retail market (Gomez and Rao, 2009), and this research is ten years old. To compare, Expert 1 (Appendix I) calculate that 7% of total sales is spend on branding activities and 9% of total sales is spend on sales related activities (e.g. price promotions) in his company (brand manufacturer). In total, 16% of total sales is spend on marketing activities.
2.2.3 Effectiveness of price promotion
Calculating and showing the effectiveness of price promotions is valuable, however complex. Academic marketing literature studied the different aspects of the effectiveness of price promotions.
2.2.3.1 Price elasticity
Price promotions often result in large sales effects for the promoted item (Neslin 2002; Heerde et al. 2003 and Heerde et al., 2004). Consumers are sensitive to prices. A commonly used measure of price sensitivity is price elasticity; price elasticity is percentage change in quantity sold divided by percentage change in price (Levy and Weitz, 2009). Bijmolt et al. (2005) did a meta-analysis on price elasticity, across a set 1851 price elasticity cases and 81 studies. The average price elasticity for food products is -2,6. Furthermore, this study conclude that over the past four decades, sales elasticity have significantly increased in magnitude, which means that consumers are more reacting on price
16,8 17 17,2 17,2 17,4 17,4 17,4 17,5 17,7 17,7 17,7 17,7 14 15 16 17 18 19 P10 09 P11 09 P12 09 P01 10 P02 10 P03 10 P04 10 P05 10 P06 10 P07 10 P08 10 P09 10 % p ro m o te d v a lu e
promotions. Nijs et al. (2001) studied the category demand elasticity effects of 560 consumer product categories in Dutch supermarkets over a 4-year period. They conclude that:
“Although the short-term effects of price promotions (on category demand) are generally strong, with an average elasticity of 2.21 and a median elasticity of 1.75, they rarely exhibit persistent effects. Instead, price-promotion effects typically last for around 10 weeks, and their long-term impact converges to zero in 98% of the 560 product categories investigated”.
Nijs et al. (2001)
This means that price promotions have an effect on category demand and so sales in the first ten weeks, however 98% of price promotions do not have an effect on the long term. Price promotions only increase short term sales.
2.2.3.2 Profitability
Besides the effect on sales, price promotions do affect the profitability of brand manufacturers and retailers. The effect of promotions on the financial performance of manufacturers versus retailers has been studied on a five-year long weekly scanner database for 25 product categories in Dominick’s (Chicago area) by Srinivasan et al. (2004). They wrote about price promotions:
“Overall, price promotions typically do not have permanent monetary effects for brand manufacturers and retailers. Price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Moreover, retailer category margins are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer.”
Srinivasan et al. (2004)
Srinivasan et al. based their finding on unit sales and revenues of brand manufacturers and total category revenue, store revenue and store traffic of retailers. Price promotions are typically not beneficial for retailers, because a price promotion can reduce sales of other products in the category or store.
Gerstner and Hess (1991) analyze different types (pull and push) of price promotions and their profitability for retailers and brand manufacturers. Brand manufacturers can stimulate sales by a temporary wholesale price reduction for the retailer (push), a rebate directed toward consumers (pull), or a combination of both. The retailer will argue for push promotions, and the manufacturer will argue for the push-pull promotion combination. Considering the communication and distribution costs, pull price promotions are usually more costly and thus less attractive to the manufacturer. Gerstner and Hess suggest for adopting a retailer-rebate strategy, which is a compromise for both parties.
2.2.3.3 Discount level and support
On average, a price discount of 25% creates the maximum sales; the relative number of units sold will decrease when discounts are deeper than 25%. Price promotion provides the highest sales bumb when the price promotion is supported by a feature and or a display (Van Heerde et al., 2004). In addition to supporting price promotion, Desai (2010) examines the strategic effects of advertising prices by retailers. This study concludes that when a high service retailer does not advertise its prices, it has a lower per-unit profit margin. And when the low service retailer is the only one not advertising its price, the high-service retailer enjoys a higher per-unit profit margin (Desai, 2010).
2.2.3.4 Consumer stockpiling
Ailawadi et al. (2009) did research towards the impact of price promotion on consumer stockpiling and profitability for brand manufacturers. Consumer stockpiling is a consequence of price promotions. It occurs because the promotion induces consumer to buy sooner or to buy more than they would have done otherwise. The effect on profitability depends on what consumer do after the promotion. If price promotions result in extra consumption in the category (consumption effect) and if the extra inventory preempts future purchases of competing brands, it will benefit the brand manufacturer. However, if this preempts future purchases of the promoted brand (loyal acceleration), it will has a negative effect on the brand manufacturers’ profitability. This research set price promotion and consumer stockpiling in a positive light, because it increases consumption, preempts competitive sales and has a positive influence on repeat purchase behavior of the consumer. However here needs to be mentioned that the long term effects are beyond the scope of that research.
2.2.3.5 Effects on competition
Van Heerde and colleagues studied price promotion and competition effects. On average a price promoted brand gains 100 units, the net loss on other brands is 33 units, so the secondary demand effect is about 1/3 (Van Heerde et al. 2003; Van Heerde et al. 2004). Ailawadi et al. (2009) suggest that many times competitors do not react to marginal increases in promotion, whereas Steenkamp et al. (2005) concluded that the most common form of competitive reaction is passive. Thus, price promotions have an effect on the sales of competitive brands; however competitive reaction on price promotions is minimal.
2.2.4 Result of price promotions
Price promotions do increase sales, however, they are not always profitable to brand manufacturer. The ineffectiveness of price promotions could be the result of the pressure on price promotions by retailers (Kumar et al. 2001). By calculating the effectiveness of price promotions, several aspects should be taken into account. The effectiveness of price promotions is also influenced by the level of forward buying. Next section describes forward buying.
2.3 Forward buying
2.3.1 Definition of forward buying
Before discussing forward buying, the definition of forward buying needs to be defined. A half century ago, Lewis (1951) defined forward buying as:
Buying for inventory reserves and buying to meet operational requirements to the extent that they can be foreseen.
Lewis (1951)
Desai et al. (2010) mention that forward buying occurs when retailers purchase units during a particular period, hold some of them in inventory, and then sell them in subsequent periods. However some manufacturers accuse retailers of pocketing a large fraction of the price promotions to benefit from it (Nijs et al. 2009). Lal et al. (1996) define forward buying as:
Retailers regularly take advantage of the temporary price discount to stock up with extra goods, putting them into inventory for later sale.
Lal et al. (1996)
In this study, forward buying is intended as the definition of Lal et al. (1996). Some studies did research towards pass through of price promotions by retailers. Pass through is forward buying, however visa versa. Pass through is the share of price promotions passed through to the consumer by the retailer (Armstrong 1991; Besanko et al 2005). So when the level of pass through is 70%, then the level of forward buying is 30%.
2.3.2 Field research
It is worthwhile to have a close look at the level of forward buying and effectiveness of price promotions, because retail price promotions take half of the marketing budget of a brand manufacturer according to Expert 1 (Appendix I). Table 3 shows a pro forma of how the EBIT of a price promotion is calculated in the study of Expert 1. Research of Expert 1 shows that forward buying took 1,8% of total company sales in 2009. If forward buying does not happen, ROI should be 1,8% higher.
Table 3. Costs forward buying of total organization
Pro Forma
Sales (Excl. taxes) + 1000
Costs (Sales, logistics, marketing, etc.) - 900
Forward buying - 18
EBIT + 82
Return on Sales 8,2%
Costs of Forward buying 1,8%
Return on Sales (Excl. forward buying) 10,0%
Furthermore, Expert 1 calculated the effectiveness of a price promotion, including the costs of forward buying, which is presented in Table 4. Price promotion normally results in a negative EBIT, however if the level forward buying is zero, instead of 30%, the price promotions investment result in a zero or small positive EBIT. To conclude, forward buying can make the difference between profitable and unprofitable price promotions.
Table 4. Effectiveness price promotions
Pro Forma
Sales +10.000
Base sales -1.500
Costs of sales -5.500
Increase in sales + 3.000
Subsidizing of sales promotion (20% discount) - 2.000
Advertising costs - 2.100
Scale advantages logistics + 500
EBIT -600
Costs of forward buying (30% over 2.000) +600
EBIT (excl. forward buying) 0
Source: Expert 1, Appendix I
A negative EBIT could also be the result of too high promotional discount, to high cost of advertising, to small uplift in sales, or a combination of these factors. However, forward buying could be seen as a variable cost, which can be influenced. Paying attention to the costs of forward buying will result in lower cost and more profitable price promotions for the brand manufacturer.
Nowadays brand manufacturers are aware of forward buying and are more active in fighting against forward buying. On the other hand, retailers can use forward buying as a tool to increase margins and benefit from forward buying. Expert 2 mentions that retailers are searching for other ways of forward buying to benefit from price promotions. He mentions two possibilities. The first possibility is that retailers want to extend the order period of products with a price promotions at the brand manufacturer. However the retailer does not extend the promotional period to the consumer. Retailers buy products on the first and last day when the promotion is offered by the brand manufacturer, and then the retailer has more time to sell the promoted item before and after the consumer promotional period. The second possibility for forward buying is that the retailer asks for deeper price promotional discount. The retailer, however, do not pass through the entire discount towards the consumer.
2.3.3 Academic marketing literature
price promotion system. Next paragraph explains the level of forward buying and how it changes over years.
2.3.4 Level of forward buying
Experts calculate that the level of forward buying range between 25% and 35% nowadays (Expert 1 and 3). Literature demonstrates that over time, the average percentage of forward buying, decreases, i.e. the level of pass through increases.
Chevalier and Curhan (1976) examined the retailers’ price promotions in the US. 35 years ago, the average price discount was 8%. The average pass through was 45%, i.e. forward buying was 55%. Armstrong (1991) examined 605 manufacturers’ trade promotions for a period of two years at four product categories. He found that 63% of trade deals, retailers do offer with any price reduction. However this does not mean that the retailers, which pass through the promotion, sell all 100% of promoted products with a price promotion to the consumer, e.g. is possible that they pass through only 60% with promotion. Concluded can be that 63% or less of the promotion is passed through to the consumer. Kumar et al. (2001) examined a single manufacturer and single retailer. They concluded that on average 55% of the trade deals are pocketed by retailers. Besanko et al. (2005) analyzed eleven product categories and found that the average pass through is more than 60%. They also concluded that pass through is higher for private label products of retailers than for premium brands. Pauwels (2007) examines 75 brands in 25 categories on retailers. He found that pass through of price promotions is 65%. Finally, Nijs et al. (2009) observed weekly shipments to and prices paid by wholesalers and retailers and calculated a pass through rate of 67%.
Table 5 presents an overview of the studies, which examine the level of forward buying. This shows that the level of forward buying is decreasing. The studies to forward buying are mostly based on research in the U.S. and different samples. Nevertheless, assumed can be that the Dutch market presents the same decline in the level of forward buying, because the last two studies, one in the US and one in the Netherlands presents almost the same outcome. This level is also confirmed by Expert 3 (Appendix I).
Table 5. Summary forward buying literature
Literature Year Sample Country Level
forward buying
Chevalier and
Curhan 1976
992 trade promotions of
brand manufacturers U.S. 55% Armstrong 1991 605 manufacturers
4 product categories U.S. ~ 37% Kumar et al. 2001 Single manufacturer and
single retailer U.S. 55% Besanko et al. 2005 11 product categories U.S. < = 40% Pauwels 2007 75 brands in 25 categories U.S. 35% Nijs et al. 2009 1000 retailers U.S. 33% Expert 1 2009 1 brand manufacturer NL 30%
2007). Not all retailers are happy with this system (Expert 6). Drèze and Bell (2003) examined price promotions in relations to the scan-back method in the beverage category. Retailers generally favor off-invoice promotions over performance based price promotions, because of the greater freedom, while the opposite is true for manufacturers. This study concludes price promotion payoff, based on scan-back data instead of off-invoice deals, do not cause excess ordering and generate higher retail sales through lower retail prices, so it will positively influence promotions effectiveness.
The second change is the decreasing available for storage of inventory. The optimization and just-in-time management in the supply chain result into less space for inventory at the supermarket, retailers’ warehouse and distributor according to Muilerman et al. (2005).
2.3.5 Complexities of forward buying
Desai (2010) examines additional complexities that arise from forward buying in a variety of settings. Offering promotion shapes the possibility to forward buying, however eliminating trade promotions does not mean that forward buying will go away. He also mentions that forward buying could be profitable for retailers, however not always. When two retailers purchase from a single brand manufacturer, competition forces each retailer to pass through more of the wholesale prices reductions. Disallowing forward buying during a trade promotion can have other consequences, a decrease in overall effort of the retailer that results in an overall decrease in demand for the product. Based on this research, forward buying could have positive and negative influence on the profitability of a brand for brand manufacturers and distributors.
2.3.6 What is known about forward buying?
The imperfect channel behavior knowledge asks for further research (Kumar 2001). Ailawadi and Harlam (2007) and Hall et al. (2010) mention that future research is needed to consider how category characteristics and other factors controllable by brand manufacturers such as different types of trade promotion or different performance clauses affect forward buying. This is an interesting topic for researchers and managers in the food industry, looking at the trend of increased spending on price promotions, the promotional war and the expected increase in the level of forward buying.
3. Empirical research
The previous section highlights opportunities for an empirical research towards forward buying. Firstly, this chapter explores the theoretical constructs that are relevant; the theoretical framework is presented, including determinants and the conceptual model. Secondly, the methodology of research is described, and finally the results are presented. The results of this study are used to come up with conclusions and recommendation to academic marketing literature and managerial decision making.
3.1 Theoretical framework
In this section, the second research question: “What are the determinants of forward buying mentioned in qualitative interviews with Dutch food retail Experts and academic marketing literature?” will be answered.
The determinants mentioned by Experts are described. These determinants are supported with academic marketing literature. In addition, other important determinants based on academic marketing literature are added. The determinant descriptions are concluded with a hypothesis. Finally, the hypotheses are summarized in the conceptual model (Figure 4).
3.1.1 Retailer strategy and order level
Nowadays, Dutch retailers distinguished themselves by different strategies. Expert 2 and 3 mention that the level of forward buying depends on the retailer strategy. Retailer strategy can be separated in service oriented and discount oriented retailers. The experts expect that the level of forward buying is higher when the retailer is a discount-oriented retailer instead of a service-oriented retailer, because a discounter focuses more on price. By using forward buying, they can offer products with lower prices to the consumer.
Academic marketing literature presents research on this area. Kumar et al. (2001) studied the behavior of retailers’ customers and the level of pass through. They conclude that when the retailer has a large group of high valuation customers, pass through will be lower, then when a retailer has a small group of high valuation customers. The high valuation customer is less price conscious and more loyal to the shop, the low valuation customer is more price conscious and less loyal to the shop (Kumar et al. 2001 and Gerster and Hess 1995).
Levy and Weitz (2009; 43) mention that retailer strategy differs in (1) price, (2) service level, (3) order level and (4) importance of fresh products. They define a discount retailer as a low cost supermarket, who offers lower priced products and limited service compared to competitors. Furthermore, a discount retailer buys large quantities and concentrates on special deals. Service retailers (conventional supermarkets) are differentiating their offering by emphasizing fresh products, targeting health conscious and ethnic consumers and providing a better store experience and services.
Retailer strategy differs on a several variables, which could influence the level of forward buying. This research will contribute by examining the relation between forward buying and retailers’ service strategy and retailers’ price strategy.
Hypothesis 1: The higher the service orientation of the retailer, the lower the level of forward buying.
In addition, Hall et al. (2010) studied the effect of two retailer strategies. They defined (1) the brand-by-brand approach, where profit for each brand is maximized separately over the time horizon, and (2) the category management approach, when the sum of profits, across all the brands in each category, is maximized over the same time horizon. They found that order quantities are much higher in the case of a brand-by-brand approach then the category management approach, furthermore the pass-through is higher in the brand-by-brand approach, because in this approach retailer ignores the impact of brand switching. So when retailers have larger order quantities, the level of forward buying will be higher. Levy and Weitz (2009; 43) suggest that discounters order in large quantities. However, Hall et al. (2010) argue that order behavior depends on other variables, for instance other products in the category and the price of the product. Order quantities could differ per product and per retailer, therefore the order level per product is tested in relation to the level of forward buying. The order level is based on the average order quantity.
Hypothesis 3: The larger the order quantity, the higher the level of forward buying.
3.1.2 Retailer size
Besides the strategy of a retailer, the size of a retailer could influence the level of forward buying. Expert 1 did research towards this subject and finds that forward buying is higher for independent stores. The reason could be that the greater the retailer, the more important are inventory storage costs, therefore greater retailer have relative less space for inventory.
Haitao (2008) and Blattberg et al. (1981) argue that chain stores and warehouse clubs usually have lower inventory costs than independents due to the lower cost of capital. Chain stores and warehouse clubs have relative higher inventory holding capacity and much more shelf space than independents, which is a big component of inventory holding costs. They argue, the greater the retailer, the lower the level of forward buying.
The effect of retailer size on the level of forward buying is researched by different studies, however one clear conclusion is missing. This research will test if expert 1 is right or not, by examining the relation between forward buying and the size of the retailer by using the indicators; market share of the retailer and the number of stores of the retailer.
Hypothesis 4: The larger the retailer size, the lower the level of forward buying.
3.1.3 Volume per Euro
The previous determinant shows that storage space and costs of a retailer is important. Related to this, the volume of a product could influence the level of forward buying. Expert 1, 2 and 5 mention that storage costs and available space could depend on professionalism of the retailers’ logistic system. Some retailers use a replenishment system (Expert 6). This system exactly calculates the sales per period, the products in inventory and how many products the retailer needs to order for next period. In addition, Muilerman et al. (2005) mention that in some retail chains, inventory is highly controlled and less space is left over.
To examine if high storage inventory costs of an individual product has an influence on the level of forward buying, the volume of a product is used as indicator. To equalize, the volume of a product is related to purchase price of the product.
Hypothesis 5: The larger the volume per Euro of a product, the lower level of forward buying.
3.1.4 Length expiration date
The length to expiration of a product is an important determinant for forward buying according to Expert 1, 2, 3, and 5. Less forward buying will occur, when products have a short expiration date, like fruit, vegetables, dairy products, etc. When the length to expiration is short, less forward buying will occur, because of the risk the retailer has that the product will go beyond the expiration date. Categories like carbonated soft drinks, toilet products, sweet and biscuits should have a higher level of forward buying. Products with a long expiration date are more attractive to forward buying, because these products have less quality loss and retailers have more time to sell the product. No academic marketing research can be found that examines the relation between the length of expiration date and forward buying. This study will be the first in examining the determinant expiration date.
Hypothesis 6: The longer the length of expiration date, the higher the level of forward buying.
3.1.5 Category sales
Difference in sales in a category influences the level of forward buying. Hall et al. (2010) and Ailawadi & Harlam (2009) argue that pass-through is higher in high-sales categories, because (1) retailers could earn higher profits when the category grows as a result of the price promotions and (2) promotions could generate more store traffic.
Research to this determinant will be valuable, because Experts do not show knowledge according to this determinant. This study will contribute to this finding in literature, by testing if besides sales in the category, the share of the category of the retailer and the total market has a relation with the level of forward buying.
Hypothesis 7: The higher the sales and units sold in a category, the lower the level of forward buying.
3.1.6 Product sales
Besides differences in category sales, a difference in product sales could influence the level of forward buying according to Experts and academic marketing literature.
Expert 5 mention that forward buying occurs more at high rotated products. When products have a high rotation, it makes sense to profit from the extra margin to the retailer. When product rotation is low, less profit could be conducted by forward buying.
Pauwels (2007) concluded that smaller brands have a disadvantage compared to leading brands. The first reason is that competitors react much more on smaller brand promotions than on leading brand promotions and the second reason is the lower retailer support on promotions to smaller brands. Less retailer interest leads to lower pass-through. Academic marketing literature argues the higher the product sales, the lower the level of forward buying.
Experts and academic marketing literature shows two contradictory views. Assuming that expert 5 comes up with a good argumentation, this research will test if expert 5 if right or not.
3.1.7 Frequency of price promotions
The higher the promotional frequency, the higher the impact on manufacturer revenue (Srinivasan et al. 2004 and Pauwels et al. 2002).
Expert 5 mentions that when retailers know that products are often in promotion, do motivate retailers to buy a lot of products in promotion, and wait till the next promotional period. For instance he mentions that some ethnic retailers know that products are often in promotion. These ethnic retailers buy many products in promotions; wait till the next promotional period is announced and buys again.
However, Kumar et al. (2001) concluded that the level of forward buying will decrease when the number of price promotions increases. This could be the result of the increase in margin for retailers, when price promotions are scheduled more often. As mentioned before, retailers’ interest in price promotion will be higher, because they could earn higher profits when the category grows and promotions could generate more store traffic.
Research to this determinant will be valuable, because Experts do not have knowledge about this determinant. Frequency of price promotions influences forward buying in a positive way, based on a study ten years ago. Because of the changes in the market of increasing promo pressure, this study examines if frequency of price promotion still influences the level of forward buying.
Hypothesis 9: The lower the number of price promotions, the lower the level of forward buying.
3.1.8 Promotional pressure
The level of forward buying could be affected by the increase in promotional pressure. Promotional pressure is the share of promoted sales in a category, related to the total sales in the category (ACNielsen, 2010).
Promotional pressure differs between products and categories. Expert 1 argues that when promotional pressure of a brand is high, retailers are less likely to forward buy. The risk for retailers by having too many products in inventory due to other promotions, withhold retailers to forward buy.
However, Pauwels (2007) found that aggressive promotion may not be beneficial, because the retailer is unlikely to pass through all promotions, and furthermore the passed-through promotion leads competitors to retaliate in turn and so on. So the level of forward buying will increase when promotional pressure increases.
Two contradictory views are described, which need further research. Differences could exist due to different views on promotional pressure. This study examined the promotional pressure in two ways, based on the promotional pressure of the product and based on the promotional pressure in the relevant category.
Hypothesis 10a: The higher the promotional pressure of the product, the lower the level of forward buying.
Hypothesis 10b: The higher the promotional pressure in the category, the lower the level of forward buying.
3.1.9 Difference in sales - Control variable
total sales of a brand over one year (e.g. BFG sales = 1000 and ACNielsen sales = 950, then the difference in sales is 50 and 5%). This difference is used as an indicator of the quality of the data. The difference is presented by the control variable “Difference in sales”. The dataset is correct when the difference in sales is close to zero and the difference in sales does not influence the level of forward buying.
Hypothesis 11: No relation exists between differences in sales and the level of forward buying.
3.1.10 Conceptual model
The previous described hypotheses are summarized in the conceptual model (Figure 4). This is a visual overview of the factors (determinants) that influence the level forward buying. The signs “+” and “–“ show the expected positive or negative relation between the determinant and the level of forward buying. The determinants are divided into retailer related and product related determinants. This because this study assume that the brand manufacturer and distributor can influence the level of forward buying in two ways; by focusing on characteristics of the retailer and by focusing on characteristics of the product. Next section explains how the determinants are measured and tested.
Control variable Product related determinants
Forward buying
Category sales Volume per EUR Length expiration date
Promotional pressure product Frequency price promotions
Product sales
Retailer related determinants
Price orientation retailer
Size retailer Order level retailer Service orientation retailer
+
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+
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+
+
Promotional pressure category
