DIFFERENTIATING IN THE DUTCH GROCERY RETAIL INDUSTRY THROUGH A SERVICE INNOVATION STRATEGY

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DIFFERENTIATING IN THE DUTCH GROCERY

RETAIL INDUSTRY THROUGH A SERVICE

INNOVATION STRATEGY

A STUDY ABOUT THE SERVICE INNOVATION OUTPUT OF FRANCHISED

SUPERMARKET STORES

by

ARANEA DE HEER

University of Groningen

Faculty of Management and Organization

MSc Business Administration, Strategy & Innovation

April 16, 2013

First supervisor

Dr. T.L.J. (Thijs) Broekhuizen

Second supervisor

Dr. E.P.M. (Evelien) Croonen

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ABSTRACT

Although service can be an instrument to obtain a competitive advantage in the grocery retail industry, service innovation of supermarkets is not a widely researched subject. Therefore, this research studies the (1) service innovation output of supermarkets, (2) factors that can influence service innovation output and (3) influence of service innovation output on customer satisfaction. The focus is on the service innovation of franchised supermarkets in the middle and higher service segment in the Netherlands. The main results show that service supermarkets mainly implement incremental innovations that are new to the store and aimed at the overall service concept. The innovation output is often strongly influenced by the franchisor, as more than half of the implemented innovations of supermarkets are initiated by the franchisor. Supermarkets do not differ strongly in terms of service innovation output across chains and across store size, degree of entrepreneurship, degree of cost focus, and influence of the franchisor on innovation. Finally, this research shows an insignificant influence of a store’s service innovation output on customer satisfaction, which contrasts against previous findings of survey studies that show that higher service quality perceptions lead to greater customer satisfaction. Explanations are provided for this insignificant effect.

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PREFACE

As a student of the study Master of Science Business Administration at the University of Groningen, I have written this paper as graduation thesis for the program Strategy and Innovation. During the different phases, I did not only learn more about the interconnectedness of concepts that can influence the performance of an organisation, but I also deepened my knowledge about innovation. From the start of the master, I find innovation a very interesting topic because of its relation to many aspects internally and externally to an organisation. In this research, I looked particularly at service innovation at supermarkets in the Dutch grocery retail industry. An industry that caught my attention, because of the commotion through price-wars and take-overs. I chose to research service innovation, because I believe that service is an important attribute in retailing to compete on.

I would like to thank several people for their support in the creation of my thesis. First of all, Thijs Broekhuizen as my first supervisor. Through his feedback and suggestions for improvement, I was able to create a well-structured and thorough research, and take my research to a higher level. Furthermore, I would like to thank Evelien Croonen who offered to be my second supervisor. My gratitude also goes to my parents, who supported me during the whole process, and Deike Schulz for always believing in me. Last, but not least, I would like to thank Fokke Ros. Without his motivational support and generosity in allowing me to work on my thesis during working time, I would not have been able to deliver this result.

Aranea de Heer

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1. INTRODUCTION

The supermarkets in the Dutch grocery retail industry have a strong focus on price. Many price war rounds took place and stores often advertise with special offers like two products for the price of one or a discount. It may seem that supermarkets pay more attention to price than service. This is surprising, because a service focus, like treating customers courteous and not letting them wait too long for the checkout points, benefits a supermarket’s competitive position (Reichart, 2009). In other words, good customer service positively influences customer satisfaction, which results in stronger customer loyalty that benefits a supermarket’s profit and growth (Heskett, Jones, Loveman, Sasser and Schlesinger, 1994). And provides opportunities to create higher profit margins (Anderson, Fornell and Lehman, 1994).

If customers are not satisfied with a supermarket’s service, they can switch to another store. On average, customers become disloyal to a supermarket after they had 3.4 bad shopping experiences, which are among others caused by not being treated well (Reichart, 2009). It is easy to switch between supermarkets, because switching costs are limited and customers are well informed about competitors’ offers through advertisements in newspapers and on television. The switching of customers can be avoided by maintaining and increasing customer satisfaction. This can be achieved by improving the quality of the service through enhancing the existing services or implementing new services. Satisfying customers through service innovation is considered to be an effective strategy for stores to meaningfully differentiate themselves from other supermarkets in the industry.

Supermarket chain stores can be company-owned or franchised. This study focuses on franchised stores as they are expected to be more entrepreneurial and competitive than company-owned stores and engage more into service innovation, because they are managed by independent franchise entrepreneurs and not fully operated by the headquarters like a company-owned store. This study researches the extent to which franchised supermarkets improve existing services and implement new services (service innovation output) in relation to influence factors (management input) and results (customer satisfaction). Because innovation can create added value for customers and consequently improve a store’s performance.

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perspective can explore the orientation of franchisees on service innovation output and the consequences for customers.

1.1 Problem Statement and Research Questions

The objective of this research is to explore how franchised supermarket stores compete on service innovation in relation to management input (store size, influence of franchisor, entrepreneurship) and customer satisfaction. The main question of this research is:

How does service innovation output influence the competitive position of franchised supermarket stores through affecting customer satisfaction?

To be able to answer the main question, four sub questions have been formulated:

1. What are the contextual factors in the Dutch grocery retail industry that shape service innovation of service supermarkets?

2. How do franchised supermarket stores manage service innovation?

3. What kind of service innovation output do franchised supermarket stores implement? 4. What is the relation between service innovation output, management input (store size,

influence of franchisor and entrepreneurship) and customer satisfaction in the grocery retail industry?

1.2 Limitations of the Research Scope

The scope of this research is further narrowed down by several limitations based on store attributes, segment and organizational level.

Store attributes. According to Martínez-Ruiz, Jiménez-Zarco and Cascio (2011) supermarkets

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Segment. Dutch supermarkets can be divided by the level of price and service. The different

segments are lower segment (discount prices: Aldi, Lidl), middle segment (average price and service: C1000, Jumbo) and higher segment (relatively high price and high service: Albert Heijn, Plus) (Den Ouden, Boerstra, Van der Hoeven and Holla, 2010)1. The supermarkets in the last two segments are to different extents involved in service innovation by introducing e.g. self-scanning and basket trolleys. Service innovation is the collective noun for the different service innovations that are implemented and/or consumed in a supermarket. In other words, as Kerin, Jain and Howard (1992) describe, innovations that influence “those consumer perceptions emanating from the internal environment of a retail store and those perceptions that can be at least partially shaped by retail store management” (p. 378). Because of their service focus, the service supermarkets in the middle and higher price segment, like C1000 and Albert Heijn, set the boundaries for the industry scope.

Organizational level. The organizational scope consists of franchised supermarkets, while

franchised stores are supposed to show more dynamics in service innovation output and management input than company-owned stores. In addition, this research limits itself to individual store level, because of the focus on the influence of management aspects that result from franchising.

1.3 Contribution to the Literature

By exploring how franchised supermarket stores compete on service innovation, this study combines existing theoretical concepts of service innovation, franchising and customer satisfaction. Therefore, this research approaches the subject from a different perspective than previous literature. Because it is researching service innovation in the grocery retail industry in more depth and in relation to franchising and customer satisfaction. No literature has been found about service innovation at supermarkets. However, literature about certain innovations in retailing like self-scanning is available (e.g. Dabholkar, Bobbit, and Lee, 2003). A service innovation approach in relation to customer satisfaction also contributes to the literature about customer satisfaction in grocery retailing (e.g. Martínez-Ruiz et al., 2011).

Many research views service quality and customer satisfaction from a customer perspective (see e.g. Dabholkar et al., 1996 and Huddleston et al., 2008), but not from an employee/franchisee perspective like is done by this research (for a notable exception see De Jong, De Ruyter and Lemmink, 2005, that research employee perceptions on service climate in relation to the consequences for customers). In contrast to previous studies, this study measures service innovation output objectively by looking at the objective changes performed by the store, and how this service innovation output - according to the managers - are received by customers (i.e., whether customer satisfaction increases because of

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higher service innovation output). Most previous studies resort to surveys in which solely customers are asked to rate both service quality and customer satisfaction. As such, this study will take a supply-based approach rather than a demand-supply-based approach.

Furthermore, this study increases our understanding of service innovation in a relatively unexplored industry: the Dutch grocery retail industry. Besides contributing to the academic literature, this study also contributes to the knowledge of service innovation among Dutch supermarkets. An inquiry among the most important research institutes, namely Syntens, Hoofdbedrijfschap Detailhandel, The Nielsen Company and GfK shows that there are no specific reports or publications about service innovations in the Dutch grocery retail industry (E-mail Diepenhorst-de Zeeuw, 2011; E-mail Ehlert, 2011; E-mail Van Voorthuizen, 2011).

1.4 Structure of this Paper

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2. INDUSTRY CONTEXT

2.1 Introduction

The industry context presents an analysis of the Dutch grocery industry. This provides a broader perspective in which the supermarket chains operate and compete. In addition, it presents the contextual factors that shape service innovation of individual stores. One of these factors is the ownership structure of supermarkets, because many stores are operated under a franchise format. Furthermore, this chapter includes several examples of service innovations to understand the concept of service innovation better.

2.2 Dutch Grocery Retail Industry

Supermarkets, which normally situate in a shopping centre or at an individual site, are offering a complete assortment of groceries, fruit, vegetables, and meat (Huddleston et al., 2008). The assortment can be divided in food products, non-food products and services (e.g. dry-cleaning). The main selling categories are meat, dairy products, beverages, groceries, toiletries, detergents and cleaning products (‘Supermarkten’, n.d.)2

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In 2010, the Dutch grocery retail industry consisted of 4,330 supermarkets, 1,300 mini supermarkets, 100 late-night shops and 30 food stores in hospitals (‘Aantal Winkels’, 2010)3. In comparison to 2005, the total number of supermarkets has declined with approximately 4%. However, the total number of floor surface has increased with about 8% to a total amount of 3.8 million square meters (‘Winkelvloeroppervlakte en’, 2010)4

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The total sales number of the Dutch supermarkets was in 2010 31.4 billion euro. In contrast to the year 2009, the total sales have grown with 1.2% (‘GfK Supermarktkengetallen’, 2010)5

. Research from ABN AMRO indicates that this growth number is lower that the long-term average over the period 2000 to 2010, which was 3.5% (‘Supermarkten’, n.d.). In comparison to other retail segments, the grocery retail segment suffers less from the economic crisis. Nonetheless, smaller supermarkets with a surface of less than 1,000 square meters are not optimistic about their future profits (‘Kleine Supermarkt’, 2010)6

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2

Retrieved August 25, 2011, from http://www.abnamro.nl. 3

Retrieved October 17, 2011, from http://www.hbd.nl.

4

Retrieved October 17, 2011, from http://www.hbd.nl.

5

Retrieved October 17, 2011, from http://publications.gfk.nl.

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The industry figures show that the Dutch grocery industry is a mature industry. Huddleston et al., (2008) says that supermarkets face fierce competition. This is in correspondence to the findings of ABN AMRO, which characterises the Dutch grocery industry as an industry with strong price competition (Supermarkten’, n.d.).

Within the Dutch grocery retail industry, several supermarket chains are present. Table 1 lists these supermarkets together with their market shares to indicate how the industry is structured. The figures show that Albert Heijn is market leader with a market share of 33.6%, followed by C1000 with a market share of 11.5%. According to the table, Superunie has the second largest market share (29.6%). However, this figure is a misrepresentation, because Superunie is a buyers’ cooperative that consists of a large number of supermarket chains like Coop, Deen, Plus, Poiesz and Spar. Of which Plus has the highest market share of 6% (‘Bestedingen en’, 2010)7. The market shares imply that the industry is a combination of monopolistic competition and ‘perfect’ competition (a fragmented market) (Gemser, 2007). Because two supermarket chains have a market share of more than 10% and the others all have smaller market shares. Throughout the years, from 2007 to 2010, Albert Heijn, Jumbo and Lidl gained market share. In contrast to C1000 and Aldi that lost market share.

Table 1

Market shares of supermarkets in the Dutch grocery retail industry (2007 - 2010) Dutch supermarkets 2007 2008 2009 2010 Albert Heijn 29.5% 31.3% 32.8% 33.6% C1000* 14.3% 13.2% 11.7% 11.5% Jumbo 4.4% 4.8% 4.9% 5.5% Superunie 30.0% 30.7% 29.6% 29.6% Aldi 8.9% 8.5% 8.3% 7.9% Lidl 4.0% 4.8% 5.4% 5.6% Other 1.5% 0.7% 0.8% 0.8%

Source: ‘Bestedingen en’ (2010).

* In 2012 Jumbo took over C1000. Because of the transition period that was not yet clearly visible at the end of 2012, the old situation as in 2010 is used further in this research.

The supermarkets can be categorised based on price and service, which are the key drivers of customers to buy at these stores. Figure 1 presents the positioning of the main supermarkets in the Dutch grocery retail industry. (This figure originates from a graph of GfK Panel Services Benelux (GfK) and ING Retail Jaarprijs, and a graph from a study by Federatie Nederlandse Levensmiddelen Industrie (FNLI) and GfK.)

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Positioning of Dutch Supermarkets based on price and service

Sources: ‘Top Topics,’ (2011) and Den Ouden et al. (2010).

Figure 1 shows a division between two strategic groups in the industry. These groups are the discount supermarkets (Aldi, Lidl and Dirk) and the service supermarkets (Albert Heijn, C1000, Plus and Jumbo). Within the service group, customers perceive Albert Heijn and Plus as offering a relatively high degree of service and being relatively expensive, Jumbo as offering a relatively high degree of service and being relatively inexpensive, and C1000, in contrast to Jumbo, as offering a relatively low degree of service and being relatively expensive.

2.3 Service Supermarkets

The supermarket chains in the service segment are C1000, Albert Heijn, Plus and Jumbo. Of which Albert Heijn, C1000 and Jumbo form together a strategic group. Organizations in an industry can be categorised into strategic groups, because they compete with firms that have the same strategies and properties (Athanassopoulos, 2003). The chains in the strategic group are service supermarkets operating in the middle and higher segment and nationwide, have the highest market shares and operate through company-owned and franchised stores. Table 2 shows the extent to which the service supermarkets are operated through franchised stores.

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Division of company-owned and franchised stores Supermarket chain Total number of

stores # of company-owned stores (%) # of franchised stores (%) C1000 (2010) 420 9.5% 90.5% Albert Heijn (2010)* 817 69% 31% Jumbo (2011) 245 60% 40% Plus (2011) 259 0% 100%

Sources: De Nationale Franchise Gids (n.d.)8, and Jaarverslag 2011 Sperwer Groep (2012)9 * The figures only refer to the ordinary Albert Heijn stores and not to AH to go and AH XL stores.

Supermarket stores or chains can receive an award that is based on (customer) rankings. This can result in free publicity, but awards are foremost a signal of quality to (potential) customers (Gemser, Leenders and Wijnberg, 2008). On which they can ground their choice of supermarket. Every half-year GfK holds a research among thousands of supermarket customers throughout the Netherlands (‘Jan Linders’, 2011)10

. The objective of the research is that customers rate their supermarket based on aspects like store cleanliness, quality of products, friendliness of staff, availability of products and waiting times for the checkout points. Based on this research, the best supermarket of the Netherlands is currently AH XL, followed in successive order by Deen, Jan Linders, Jumbo, Nettorama and Albert Heijn. Competing for an award can also result in an increased commitment to customer service by the employees of a supermarket (Poels, 2011)11.

2.4 Service Innovation of Service Supermarkets

Service supermarkets adapt existing services or implement new services in different ways. Several examples give an impression of these service innovations. These examples are categorised according to the different shopping stages as stated by Seiders, Berry and Gresham (2000), which are access to a store (e.g. parking and opening hours), searching for desired products in the store, getting desired products into possession and transaction (payment).

Access to a store. Innovations regarding the access to a store are for example a new parking

garage that is located under a supermarket store and an elevator to reach the parking garage indoors (‘Informatie Garage’, n.d.)12

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8

Retrieved September 26, 2011, from http://www.denationalefranchisegids.nl.

9

Retrieved December 9, 2012, from http://www.plus.nl.

10

Retrieved October 19, 2011, from http://www.janlinders.nl.

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Retrieved June 24, 2012, from http://www.distrifood.nl.

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Searching for desired products. An example of innovation in this stage of shopping is the

rolling basket, which is a basket with wheels and one handle (‘Rollend Winkelmandje’, 200613; Bervoets, 200714). Using this basket makes it easier to search for other products, while already collected products do not obstruct this search. Research shows that customers shop longer and buy more when they use the rolling basket (‘Rollend Winkelmandje’, 2006). Customers can also come across innovations in the interior of the store that make the search easier, for example broader aisles, improved lightning and use of materials and colours (Kroes, 2009)15.

Getting desired products into possession. Supermarkets can improve procedures in case

customers have trouble in getting the desired products into possession. For example, a store that runs out of bread gives the customer a coupon to exchange for bread when it is available again (Van den Oord, 2010)16. Although the customer did not get the bread into possession, the store softened the discomfort by giving a free bread. In the same way, the interaction with customers during their time in the store can be improved. For example, a storeowner, who takes a prominent role in engaging with customers by asking customers if they can find what they need, and if they like the store (Van den Oord, 2010). Personal interaction (verbal and non-verbal communication) with customers can be improved through training (Gabbot and Hogg, 2001).

Transaction. Supermarket stores can innovate the payment procedure by implementing

self-scanning. By scanning products during their shopping, customers can pay by their self without the help of a cashier (Marzocchi and Zammit, 2006). According to Marzocchi and Zammit (2006), the main advantage of self-scanning is the decrease in time that a customer otherwise should have spend in a queue for the checkout point. Self-scanning is also seen as easy and fun to do, and perceived as more reliable and better controllable (Dabholkar et al., 2003).

2.5 Conclusion

The Dutch grocery retail industry is a large industry with many supermarkets. It is also a mature industry with strong price competition that showed a small increase in the year 2010. The number of stores decreased, but the total amount of floor surface increased. This means that stores have become on average larger. In accordance, smaller stores fear their position. Within the industry, one can distinguish a strategic group of service supermarket chains, which are Albert Heijn, C1000 and Jumbo. Examples show that service supermarkets implement a diverse number of service innovations from the stage that customers access a store until they pay.

13

Retrieved October 19, 2011, from http://www.distrifood.nl.

14

Retrieved October 19, 2011, from http://www.mediastudies.nl.

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Retrieved October 19, 2011, from http://www.homestyliste.nl. 16

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3. THEORETICAL BACKGROUND

The theoretical background explains and connects the theoretical concepts of service innovation, franchising and customer satisfaction in relation to the grocery retail industry. As a result, assumptions are made about the influence of management aspects on service innovation output, and the influence of innovation output on customer satisfaction. The relations between the different concepts result in a conceptual model and several hypotheses.

3.2 Service Innovation

Service is one of the main aspects on which customers base their preference for a supermarket (Blodgett, Wakefield and Barnes, 1995). According to Zeithaml, Berry and Parasuraman (1988), a service differs from a product on several characteristics. Firstly, services are intangible and not a phenomenon that one can see or touch. Secondly, the outcome or performance of a service is heterogeneous. Each service is created in a unique context, which is influenced by and depending on customers and employees. At the interface, the interaction takes place between employees and customers. Parasuraman, Zeithaml and Berry (1985) say that services are intangible, heterogeneous and consumed at the same moment of production. Besides, many services only exist temporary and can therefore not be stocked (Lovelock, 1996).

In addition to these definitions, Bitner, Ostrom and Morgan (2008) define a service as customer involvement, (in)visible contact between customers and employees, support processes (processes to deliver the service) and physical attributes (e.g. baskets, store equipment). This definition includes the complete service experience and shows the possibilities to innovate or make improvements (“The Next Frontier,” 2011). The nature of the different definitions makes service innovation difficult to measure.

Service innovation is, like innovation, “something new which is presented in such a way that the value will be determined by the selectors” (Wijnberg, 2004, p. 1416). In this research, the selectors are a supermarket’s customers. Based on the definition of Wijnberg (2004), Jacobs (2007) believes that “innovation is something new with an added value” (p. 32).

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shopping (Jacobs, 2007, p. 35). Besides, if service innovation emerges from a new process, then process innovation is present. Although service innovation is non-technologic, (new) technology can be used to create an innovation (Jacobs, 2007; Den Hertog, 2000). For example, self-scanning is a technologically driven service innovation.

Den Hertog (2000) developed a service innovation model that consists of four dimensions, which are new service concepts, new client interfaces, new service delivery system and technological options. Each service innovation incorporates two or more of these dimensions that are interconnected to each other. A change in one dimension often results in a change in one of the other dimensions.

Figure 2 presents the innovation model, which is based on the original model of Den Hertog (2000, p. 495). The first dimension is new service concepts, which are conceptual innovations that can be very visible and tangible like a new store concept (e.g. AH to go), or less visible and more intangible like being able to shop fast at an AH to go while being on the way. The second dimension is new client interface, which are changes in or new interactions between the organization and a customer (e.g. more personal attention). Dimension 3, the delivery system, includes the “internal organizational arrangements” (p.497) that enable employees to do their work, or create and provide service. The right knowledge and skills can be acquired through training. Dimension 4, technological options, mainly IT, facilitate or drive service innovation. Besides the dimensions, the model shows the capabilities that support the implementation of the innovation dimensions, and the characteristics that influence the dimensions.

Figure 2

Service innovation model

Characteristics of actual and potential clients Characteristics of existing and competing services Dimension 2 New client interface Dimension 1 New service concept Marketing/distribution capabilities Dimension 4 Technological options

Organizational capabilities HRM capabilities

Dimension 3

New service

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Service Innovation Output. The service innovation output of supermarkets reflects the degree

to which a supermarket implements service innovations. These innovations can be typified and quantified according to the concepts of Jacobs (2007) and Den Hertog (2000), quantified by their total number and per service category, and categorised by their newness. Together they describe the service innovation output of a supermarket store. Counting innovations as an indicator of output is widely used in the literature (see e.g. Santarelli and Piergiovanni, 1996). The degree of service innovation output can also be seen as a store’s innovation capacity, or as innovativeness in terms of the importance or newness of an innovation (Orosa Paleo and Wijnberg, 2008).

The newness of an innovation can be categorised into radical, really new or incremental (Garcia and Calantone, 2002). These categories are based on the discontinuities that these innovations cause in the field of marketing (e.g. the creation of a new market or new marketing competences for employees) and/or technology (e.g. a new developed technology or a new assembly line for an organization) on a macro (world, market, industry) and/or micro level (organization). In other words, radical innovations cause marketing and technological discontinuities on both a macro and micro level, and incremental innovations only cause a marketing and/or technological discontinuity on a micro level. Imitative innovations are often incremental innovations. The marketing and technological innovativeness of imitative innovations is low. Therefore, more organizations can create the same innovation. Innovations that are really new are the innovation types between the radical and incremental innovations, and result from a discontinuity in marketing or technology on the macro level together with a marketing and/or technology discontinuity on the micro level.

Some service innovations at supermarkets are just small improvements. However, Jacobs (2007) says that every improvement, change or novelty is an innovation as long as it generates added value. Even if this added value is very small.

3.3 Influence Factors of Service Innovation Output

Some contextual factors have been identified as potential influencers of service innovation output, including store size, franchisor innovation input en entrepreneurship. By investigating the effects of these factors, we can assess which supermarkets are more innovative than others.

Store size. A firm’s size is seen as a driver of innovation (Damanpour, 1992). In the literature

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about their position. Therefore, the influence of a store’s size on service innovation output is included as a possible driver of service innovation of supermarkets.

Franchisor innovation input. A franchise format includes a franchisor (headquarters),

franchised stores and, but not necessarily, company-owned stores (Elango and Fried, 1997). In the service supermarket industry, a franchisee licenses a business format17 from the franchisor (Croonen, 2005; Kneppers-Heijnert, 1988). In exchange for the business format, the franchisee pays a fee and royalties (Scott, 1995). Franchising a chain’s business format causes that customers recognize the different stores as one chain. In general, customers cannot distinguish company-owned stores from franchised stores, because the physical appearance of stores is often the same.

Franchisors control the way franchisees execute the business format, so that the unity between the different stores is safeguarded (Kneppers-Heijnert, 1988). The level of control of the franchisor can differ between a soft and/or free, and a hard and/or full agreement. A soft agreement does not include many rules for the franchisee, but a hard agreement includes many rules that regard nearly the entire length of business. The harder the agreement, the more areas that are restricted by the agreement. This ranges from the purchase of goods in more soft agreements that are complemented with extra areas like administrative and marketing activities in more hard agreements, to hard agreements that include many areas like store presentation, training, promotion and purchase of goods (Croonen, 2005).

The hardness of the format can differ per supermarket chain. Therefore, it differs per chain in how far franchisees can operate their business according to their own discretion. In other words, the hardness determines the level of freedom of the franchisee to implement self-initiated service innovations. In 2007, for example, a franchise store of Albert Heijn in Amsterdam was one of the first stores who offered the trolley baskets (Bervoets, 2007). The franchisee introduced this new model, because of his preference for renewal and the expected financial advantage. The trolley basket encourages customers to buy more, because it can stock more products before it becomes too heavy. Another example is an Albert Heijn franchisee, who decided to implement self-scanning (‘Zelfscan’, n.d.)18. Besides self-initiated service innovations, the franchisee can also implement innovations that the headquarters initiates, e.g. those innovations that support the uniformity of the stores.

Entrepreneurship of franchisee. An owner of a chain prefers to franchise its business format

instead of managing it through company-owned managers, because of resource barriers (e.g. management capacity) and incentive aims (a franchisee receives a share of profit) (Lafontaine and Kaufmann, 1994). The incentive aim encourages franchise entrepreneurs to grow their business. In a

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Other franchise formats are trademark or product-distribution franchising (Kneppers-Heijnert, 1988).

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research by Tan (2001), entrepreneurs appeared innovative and willing to take risk. The higher innovativeness and risk-taking of entrepreneurs, as proposed by Tan (2001), is in correspondence with an entrepreneurial orientation, which consists among others of innovativeness, pro-activeness, competitive aggressiveness and risk-taking (Dess, Lumpkin and Taylor, 2005). Hult, Snow and Kandemir (2003) approach entrepreneurship independently of innovativeness and market orientation (customers and competition). However, in this research the concept of entrepreneurship is used according to Dess et al. (2005) and complemented with customer orientation.

3.4 Customer Satisfaction

One of the means to measure store performance is customer satisfaction, which is a widely used concept in the literature. Based on prior literature and group interviews, Giese and Cote (2000) define customer satisfaction as a cognitive and emotional response, which applies to a specific focal point (e.g. shopping expectations) and happens at a specific interval (e.g. during or after the shopping experience). Customer’s satisfaction leads to customer loyalty, which influences a supermarkets profit and growth (Heskett et al., 1994).

The confirmation or disconfirmation of the expectations determines customer satisfaction (Swan and Trawick, 1981). “When an experience is better than the customer expected, there is thought to be positive disconfirmation of the expectation, and a favorable customer evaluation is predicted” (Iacobucci, Ostrom and Grayson, 1995, p.278). The higher the positive difference between performance and expectations, the higher the customer satisfaction. Furthermore, positive disconfirmation of the expectations occurs when the performance is better than the expectations, whereas negative disconfirmation occurs when the expectations are not met by the performance. Expectations are confirmed when the performance is the same as the expectations. However, perceptions of an attribute of service can be higher than the expectations, but if the attribute is equal to a customer, the customer satisfaction will not increase (Iacobucci et al., 1995).

The satisfaction process consists of different stages (Swan and Trawick, 1981; Oliver, 1980). The customer has expectations of e.g. a store visit before visiting that certain store. During the store visit, the customer develops perceptions of the store, which the customer relates to earlier made expectations. This results in a (dis)confirmation of the expectations and denotes the degree of customer satisfaction, which influences a customer’s feeling about a next visit to the store.

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good or bad) or feeling (e.g. pleasant or unpleasant) (Swan and Trawick, 1981). Besides a satisfaction judgment, customer satisfaction can be indicated by the degree of re-purchases and the development of the image and reputation, because of its influence on these variables (McColl-Kennedy and Schneider, 2000; Yu, 2007).

3.5 Conceptual Model

The foregoing literature overview explained the different theoretical concepts. Next, the relations between the concepts are discussed and the conceptual model is developed by formulating hypotheses.

Store size. The size of a store is assumed to positively influence service innovation output.

Because larger stores have more resources than smaller stores. Therefore, the influence of the size of a supermarket on service innovation output is tested by the following hypothesis:

H1: The degree of service innovation output of franchised supermarket stores with a large amount of floor surface is higher than the degree of service innovation output of franchised stores with a small amount of floor surface.

Franchisor’s input to innovation and provision of freedom to franchisee. It is assumed that,

based on the hardness of the franchise format, franchised supermarkets differ in implementing franchisor initiated innovations and freedom to innovate. In case the franchisor initiates all innovations and the franchisee creates no additional innovations then the franchisor initiates 100% of all the innovations implemented at a store. By which the division of number of innovations initiated by the franchisor and franchisee determines the innovation input of the franchisor.

This research assumes a negative association between the percentage of franchisor’s innovation input and service innovation output of the franchisee. It is assumed that franchisees with a lower percentage of total innovations coming from the franchisor act themselves and thereby implement a higher degree of innovation output. Hypothesis 2a tests how the degree of innovations initiated by the franchisor influences the innovation output of service supermarkets.

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Connected to the previous hypothesis is the degree of freedom a franchisee has to innovate. This is again based on the thought that a higher degree of innovation output is driven by franchisees and not by the franchisor. Hypothesis 2b tests the influence of the degree of freedom to innovate on service innovation output.

H2b: The degree of service innovation output of franchised supermarket stores that have more freedom to innovate is higher than the degree of service innovation output of franchised supermarket stores that have less freedom to innovate.

Entrepreneurship and cost focus. In accordance to the literature about franchising and

entrepreneurship, independent franchise entrepreneurs are expected to have an entrepreneurial view that influences innovation output, because they are customer oriented, innovative, pro-active, competitive and risk taking. Hypothesis 2c tests if an entrepreneurial focus influences service innovation output.

H2c: The degree of service innovation output of franchised supermarket stores with a stronger entrepreneurial focus is higher than the degree of service innovation output of franchised stores with a weaker entrepreneurial focus.

In addition, one of the motivations of entrepreneurs to franchise is the ability to focus more on the customers, although it is possible that the customer service of franchised stores is minimal because of cost reasons (Leunissen, 1998). Hypothesis 2d tests if a cost focus, which relates to customer service, is of influence on the service innovation output.

H2d: The degree of service innovation output of franchised supermarket stores with a stronger cost focus is lower than the degree of service innovation output of franchised stores with a weaker cost focus.

Customer satisfaction. It can occur that the changes in service made by a supermarket are not

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H3: An increase in service innovation output of franchised supermarket stores results in an increase in customer satisfaction.

Figure 3 presents the conceptual model that shows these relations. The model indicates that ‘degree of customer satisfaction’ is the dependent variable of ‘degree of service innovation output’. The variable ‘degree of service innovation output’ is determined by the total number of service innovations and total number of service innovation categories. Furthermore, customer satisfaction is determined through an overall satisfaction judgment and number of purchases. It is assumed that each service supermarket store innovates. However, a store’s size, degree of innovations initiated by the franchisor, degree of freedom of franchisee to innovate, degree of entrepreneurial focus and degree of cost focus can influence the degree of service innovation output. The conceptual model is measured for the strategic group and each chain separately.

Figure 3

Conceptual model - for the strategic group and per chain

3.6 Summary

Supermarkets can provide service to make grocery shopping easier for customers. Service is, unlike a manufactured product, not standardized, tangible and stackable. In addition, service can consist of physical attributes, customer involvement, and contact between customers and employees. These elements can be a source of innovation, because a small change that creates added value is an innovation. To determine the innovativeness of changes in service, innovations can be categorised as radical, really new and incremental innovations. Another typology is one that can regard a change in

Indicators Management input

- Size of supermarket store (+)

=

- Total number of innovations - Total number of innovation categories Degree of service innovation output - Degree of innovations initiated by franchisor (-) - Degree of freedom of franchisee to innovate (+) +

=

- Satisfaction judgment - Number of purchases - Degree of entrepreneurial

focus (+)

- Degree of cost focus (-)

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the design of a service, a conceptual change of a familiar service or a complete new service. In addition, service innovation can regard new service concepts, new client interfaces, new service delivery systems and technology.

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4. RESEARCH METHODOLOGY

The hypotheses are empirically tested by data collected from franchised stores in the Dutch service supermarket industry. A sample of supermarket stores is selected and a method of collecting data is developed. Because of the character of the hypotheses, the research design is based on collecting quantitative data. Finally, a discussion of the methods for analysing this data shows how the possible relations between the theoretical concepts can be determined.

4.2 Research Sample

The sample results from a pool of stores (N = 537) that are randomly selected from the Supermarktpocket (2011) and therefore selected through non-probability sampling (Cooper and Schindler, 2006). Before being selected, the stores are preselected on being a franchised store. The Supermarktpocket is a publication of Reed Business and lists all supermarkets in the Netherlands with information about address, type of store, floor surface and number of checkout points.

The sample represents the strategic group that is developed in section ‘2.3 Service Supermarkets in the Dutch Grocery Retail Industry’, which consists of Albert Heijn, C1000 and Jumbo. In addition, the stores in the sample operated under the same name and chain during the last two years, and no distinction is made between different generations of stores within a supermarket chain.

Information about a store’s status of being a franchised store is derived from the commercial register of the Dutch Chamber of Commerce19. The Chamber of Commerce indicated that a franchised store is reported as main office in the commercial register (Telephone inquiry with Service Center Kamer van Koophandel Nederland, 2012). Distrifood confirms this data about ownership (“Supermarkpocket, 2011). Only Distrifood also calls franchised stores independent, because they make an additional division according to freedom of purchase; independent has more freedom than franchise (Telephone inquiry with Mrs Hop-Deminska, 2012).

4.3 Sample Composition

It is aimed for to create a sample of supermarkets that is representative for the selected strategic group with stores that operate longer than two years under the same chain name, show variation in store size and participate in competitions. The research sample consists of 23 supermarket stores located throughout the Netherlands. The chains Albert Heijn, C1000 and Jumbo respectively divide the

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sample by 34.8%, 52.2% and 13% (see table D1 in appendix D). This division is partly representative for the strategic group, because Albert Heijn and C1000 have respectively 52% and 34.6% of the total number of franchised stores in the industry. The stores of Jumbo represent 13% of the franchised stores in both the industry and sample (see table 3). The sample figures are representative for the figures of the industry (χ² = 3.241, df = 2, p = 0.198, n = 23).

Table 3

Market division and target population of franchised stores of Albert Heijn, C1000 and Jumbo Supermarket chain Total number of stores Total number of franchised stores Market division of franchised stores (%) Number of stores in sample Sample division (%) Albert Heijn 420 380 52% 8 34.8% C1000 817 253 34.6% 12 52.2% Jumbo 245 98 13.4% 3 13% Total 1428 731 100% 23 100%

The sample approximately represents the industry regarding the number of stores per amount of floor surface. Although smaller stores of less than 400 m² are not present in the sample, table 4 shows that the successive order of the amount of floor surface of stores in the industry is congruent to the division of the sample. The majority of stores in the industry and sample have a floor surface of 400 to 1,000 m², followed by a smaller group of stores with a floor surface of 1,000 to 1,600 m² and a floor surface larger than 1,600 m². A chi-square test shows that the composition of the sample regarding amount of floor surface does not show a dependency between the floor size of the respondents and the composition of the industry (χ² = 6.571, df = 3, p = 0.087, n = 23).

Table 4

Division of stores in the grocery industry and sample based on floor surface Floor surface Total number of

stores in industry (2011)* Division of stores in industry (%) Number of stores in sample Division of stores in sample (%) ≤ 400 m² 706 16.3% 0 0% 400 – 1,000 m² 2173 50.3% 11 48% 1,000 – 1,600 m² 1165 27% 9 39% ≥ 1,600 m² 279 6.5% 3 13% Total 4,323 100% 23 100%

*) Source: ‘De Zekerheid,’ (2011)20

General characteristics of the sample. The average number of checkout points per

supermarket are 7.43. Stores have minimally 4 checkout points and maximally 14. Of the stores,

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56.5% has 4 to 7 checkout points and 43.5% has 8 to 14 checkout points. The stores in the sample have on average 73 part-time and 28 full-time employees (mean figures of employees are rounded off to whole figures). In addition, they have a minimum of 20 and a maximum of 120 part-time employees, and a minimum of 10 and a maximum of 80 full-time employees. (Table D2 in appendix D lists the descriptive statistics of the variables number of checkout points, part-time and full-time employees and amount of floor surface for the complete sample and the three chains separately.)

All supermarket stores in the sample operate longer than two years under the same chain name (see table D3 in appendix D). As a result, supermarkets that opened recently according to the latest concept are not part of the data set. Of the supermarkets, only a small amount (13%) had a change of owner during the last two years (see table D4 in appendix D). The change of owner is subordinate to the innovation output of a store, but can be a reason why a store innovated more or less strongly. However, no data exist on this. Therefore, this is not researched further.

The sample also consists of stores that participated in a competition. Like observed in the industry analysis, competing for an award can motivate a store and its employees to deliver better service. It can also be a sign of having a focus on looking for improvements. Of the service supermarkets in the sample, quite a large number of stores (43.5%) competed for an award (see table D5 in appendix D). The competitions they participated in are organised by the chain, Distrifood (supermarket of the year) or Vakcentrum (ZO²Z Award). Of those that competed for an award 10% (N = 1) said to have been nominated or received a price for service (see table D6 in appendix D). If stores who participated in a competition innovate more than average is discussed in chapter 5. Herein the winning of a nomination or price is left out, because of the small percentage of stores that received a nomination or price.

Albert Heijn. Albert Heijn is in the sample represented by 8 stores (34.8%). The majority of

Albert Heijn stores has a floor surface of 400 – 1,000 m² (37.5%) and 1,000 – 1,600 m² (50%). Half of all the stores have 7 checkout points, the other half is equally divided over having 5, 8, 9 and 13 checkout points. The supermarkets have on average 75 part-time employees and 23 full-time employees. Of which 50% has 60 or 65 part-time employees and 15 or 20 full-time employees. 75% of the stores participated in a supermarket competition. However, no one was nominated for or received an award for service.

C1000. Of all the stores in the sample, 52.2% (N = 12) is a C1000 store. Most C1000 stores

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Jumbo. Stores of Jumbo are less (13%, N = 3) represented in the sample than stores of Albert

Heijn and C1000. The jumbo stores have a floor surface of 400 – 1,000 m² (33.3%), 1,000 – 1,600 m² (33.3%) and more than 1,600 m2 (33.3%). The supermarkets have on average 8 checkout points, and individually 5, 9 and 10 checkout points. The Jumbo’s differ in number of part-time (35, 80 and 120 employees) and full-time employees (19, 30 and 40 employees). The average number of part-time employees is 78 and full-time employees is 29. One third of the Jumbo stores participated in a supermarket competition, but this store did not win an award or received a nomination for service.

4.4 Data Collection

Quantitative data are collected to measure the degree of service innovation output and degree of customer satisfaction. To determine the influence of management input on service innovation output and to describe the sample, additional data are acquired about a store’s (innovation) management and characteristics (e.g. store size). The respondents are asked to answer the questions about innovation output and customer satisfaction with a two-year period in mind.

An online survey via www.surveymonkey.com is used to collect the data. Independent franchise entrepreneurs or their managers were invited by e-mail (provided for by the Supermarktpocket 2011) to participate in the survey. If the e-mail did not result in a response, the e-mail address was checked and a reminder was sent. The invitation to fill in the survey has been send to 537 supermarket stores. The data were collected in the period August 28th until September 26th 2012.

4.5 Measurement Instrument

The survey consists of general questions that describe a store and questions that result from the variables of the conceptual model. For the descriptive data and per variable will be outlined how the specific data are collected. As a result, survey questions are developed that are presented in appendix B.

Descriptive data (incl. store size). To describe the sample, data are collected about a store’s

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Degree of service innovation output. The variable degree of service innovation output

measures the total number of service innovations and number of categories that is innovated in. The innovation categories are the fields by which managers are asked, through open questions, which innovations they have implement in their supermarket during the last two years.

The innovation categories are developed by grouping the innovations that were named in the news articles on www.distrifood.nl21 in the period January 1, 2010 until April 1, 2012, in the shopping stages of Seiders et al. (2000). This is complemented by information on www.distrifood.nl about innovations of supermarkets that were winners of their province or received a wildcard in the election of supermarket of the year 2012 (Distrifood, n.d.)22. As a result, a framework of shopping stages together with the main and sub areas in which innovations can occur is created (see appendix A). This framework is the input for the 11 innovation categories, which are:

1. Opening hours and parking facilities: e.g. changes in the number of days per week or hours per day that the store is open, number of parking places or restitution of parking money.

2. Division, interior and ambience: Changes in division are e.g. changes in location of product groups, shelf division, aisles and use of fresh product corners. Changes in interior and ambience can be changes in the use of colours, materials, lightning, product or brand displays, and appearance of refrigeration systems. Or the implementation of product handlings like baking bread, grilling meat, and offering fresh (like fish) and regional products.

3. Safety: Changes to customer safety, e.g. customers can move through the store without hurting themselves, preventing slippery floors and theft.

4. Visible communication: e.g. changes in price signing on shelves, and other use of texts, logos and colour like product signing and product information on walls and shelves. Promotional innovations like an advertisement poster are excluded from this category.

5. Out-of-stock procedures: e.g. changes in stocking shelves, solutions if a product is (temporary) sold out or the way customers are informed if a product is (temporary) sold out.

6. Collecting products and self-service by customers: e.g. changes regarding means to collect groceries, e.g. shopping trolleys for special target groups (elderly), trolleys with extra facilities

21

A website of the independent journal Distrifood that addresses supermarket entrepreneurs.

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like a magnifying glass or a crate frame, or shopping baskets with wheels. Changes in what customers are allowed to do by their self are e.g. squeezing fruit or weighing products.

7. Contact between employees and customers: In the contact with customers changes can occur e.g. in the behavior of employees, attention for customers, answering questions and the number of contact moments.

8. Paying: e.g. paying by mobile phone, self-scanning, ‘only paying with a bank card’ checkout point and quick service checkout points.

9. Packing groceries and taking them home: e.g. changes in means that are offered to pack the groceries into, assistance in packing and transporting groceries.

10. Exchanging products, restitution of money and handling other problems and complaints : e.g. changes in the possibilities and criteria for exchanging products and situations in which customers can or cannot restitute their money.

11. Other changes: other changes that are not covered by previous categories.

The main category ‘other changes’ is added to prevent that not all possible changes are considered in relation to the total innovation output.

Additional criteria for the innovations that are considered in the realm of this study are innovations that:

- are visible for or experienced by the customer; - are aimed at making shopping easier;

- relate to the shopping stages of Seiders et al. (2000);

- are implemented by and used in the supermarket or on its site; - can be technical or non-technical;

- are not regarding (support) process innovation.

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The data about degree of service innovation output do not only give insight in the number of innovations and innovation categories, but are also used to analyze the newness of the innovations based on Garcia and Calantone (2002), and type of service innovations based on Jacobs (2007) and Den Hertog (2000).

Franchisor’s input to innovation and provision of freedom to franchisee. The degree of

innovations initiated by the franchisor is measured by asking the management to give an estimation of the percentage of the innovations that are initiated by the franchisor. In addition, the management is asked to indicate on a 6-point scale, which ranges from ‘no freedom’ to ‘complete freedom’, the degree of freedom that they receive from the franchisor to implement self-initiated innovations.

Franchisee’s entrepreneurship and cost focus. The degree of entrepreneurial focus of a

store’s management is measured by the aspects innovativeness, pro-activeness, competitiveness and risk taking (according to Dess et al., 2005) and customer orientation. The management is requested to rank the importance of these aspects based on a 5-point scale ranging from ‘totally not important’ to ‘very important’. Likewise, it is measured how important a cost focus is. As a result, the influence on service innovation output of as well an entrepreneurial as a cost focus can be measured.

Degree of customer satisfaction. The variable customer satisfaction measures the overall

satisfaction of the customers of the store, and is measured with two measures. The first measure is the management’s perception on the development of customer satisfaction, during the last two years, based on the satisfaction judgments of the customers, because they receive feedback from customers through remarks, complaints, compliments, questions and inquiries. The perception on the development of customer satisfaction is indicated by a 3-point scale that includes that the customer satisfaction decreased (1), remained the same (2), or increased (3).

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32 4.6 Data Analysis

The data resulting from the open questions about service innovation are grouped per supermarket and results in records that are together with the other data input for a statistical analysis that is performed in SPSS. If necessary, innovations are grouped in the right innovation category, removed if they are not relevant in terms of research scope, combined if more innovations are actually one innovation or split when an innovation contains more innovations. Scope relevancy concerns the type of innovation. The innovation should fit the scope of the service innovation output as described in section ‘4.5 Measurement Instrument’ and influence the ease by which a customer does his grocery shopping between passing the entrance gate up to and including the checkout point, and including the flower department, parking facilities and transportation of groceries.

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5. RESULTS AND DISCUSSION

The collected data of the service supermarkets result in a data set that is analysed by the software program SPSS 19 and according to Huizingh (2004). Firstly, it is described which kind of supermarkets are part of the sample. Secondly, the service innovation output of the supermarkets is outlined according to number of innovations, number of innovation categories, innovativeness and type. In addition, it is discussed how a store’s size and franchise format influence service innovation output, and what the influence is of an entrepreneurial focus and a cost focus. After that, the influence of service innovation output on customer satisfaction is examined. Finally, the extent of linear relations between the variables is researched.

5.2 Service Innovation Output of Franchised Service Supermarkets

For each of the 11 innovation categories (as developed in ‘4.4 Measurement Instrument’) a store could name a minimum of 0 and a maximum of 8 innovations, which can result in a total minimum score of 0 innovations and a total maximum score of 88 innovations per store. All stores innovate, although this ranges from 1 to 14 innovations. On average, stores introduced 6.96 innovations (SD: 3.99), by which most stores implement 1 to 5 innovations (39.1%) and 6 to 10 innovations (43.5%) (see table D7 in appendix D). A normal probability plot shows that the number of innovations per supermarket is normally distributed (see figure D4 in appendix D) (K-S = 0.688, p = 0.732, n = 23). The distribution has a non-significant small positive skewness (0.087) and negative kurtosis (-1.21) that diverges from a normal distribution.

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34 Table 5

Descriptive statistics of the variable service innovation output

Variable Mean Median Min. Max. SD Skewness Kurtosis Stat. St. error Stat. St. error

Complete sample # of innovations 6.96 7.00 1 14 3.99 0.087 0.481 -1.21 0.94 # of innovation categories 3.87 4.00 1 6 1.94 -0.292 0.481 -1.51 0.94 Stores participating in competition # of innovations 6.40 6.50 1 13 4.061 0.160 0.687 -1.312 1.334 # of innovation categories 3.80 4.00 1 6 2.044 -0.250 0.687 -1.730 1.334

A comparison of the chains on total number of innovations and number of innovation categories shows that there are no significant differences across chains (see table 6).

Table 6

Comparison of chains on innovation output through One-Way ANOVA

The main categories that are innovated in are the categories opening hours and parking facilities; division, interior and ambiance; safety; visible communication; and out-of-stock procedures. The category exchanging products, restitution of money and handling other problems and complaints is the category in which the least is innovated. Table 7 presents the percentage of stores that implemented one or more innovations per category.

Mean F p

Innovation output

Albert Heijn C1000 Jumbo

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35 Table 7

Percentage of stores that innovated through one or more innovations per innovation category

*) See page 29 and 30 for an explanation of the scope of the innovation categories.

The exploration of service innovations in the industry analyses (see chapter 2) indicates that the majority of the service innovations are incremental. This is confirmed by the data that show that service innovations of supermarkets can be typified as incremental innovations. Examples of incremental innovations are a change in opening hours, interior, appearance of employees, approach of customers and assuring safety, but also implementing shopping baskets with wheels, a cooking workshop and installment of Wi-Fi. From a customer perspective, not all changes are about innovations that add something to the store. Also innovations occur that deduct something, like removing the grill corner and detection gates. However, these changes are not numerous. In appendix C, all innovations that were named by the stores are listed and grouped according to their degree of innovativeness and kind of innovation.

The enumeration of innovations in appendix C shows that many innovations are easy to imitate, because of the low marketing and technological innovativeness. For example, extending opening hours and shopping baskets with wheels. These innovations are not new to the world and industry, but new to the firm. Innovations in the grocery industry are in general not driven by new technology. Although innovations in the categories safety, out-of-stock procedures and paying can be technology-based like cameras, PIN-checkout points and out-of-stock software.

The incremental and new to the firm innovations can also be typified according to their kind in terms of Jacobs (2007). The large majority of the service innovations are changes in the design of an existing service. For example, a change in the appearance of a store, opening hours and extra PIN-only checkout points. Only a small amount of innovations are new concepts for existing products or product

Innovation category* % of stores that innovated through one or more innovations

per innovation category

Opening hours and parking facilities 60.9%

Division, interior and ambience 69.6%

Safety 52.2%

Visible communication (regarding product) 39.1%

Out-of-stock procedures 56.5%

Collecting products and self-service by customers 21.7%

Contact between employees and customers 26.1%

Paying 26.1%

Packing groceries and taking them home 17.4%

Exchanging products, restitution of money and handling other problems and complaints

8.7%

DIFFERENTIATING IN THE DUTCH GROCERY RETAIL INDUSTRY THROUGH A SERVICE INNOVATION STRATEGY