AN ANALYSIS OFADVERTISING

By

SUPERMARKETPATtERNS

Michael R. Reed andLynn W. RobbinsAssistant Professors

Department of Agricultural Economics500 Agricultural Science Bldg.-South

Lexington, Kentucky 40546

The authors evaluated the importanceof advertising in the overall competi-tive framework of the food retail in-dustry.

introduction

Newspaper advertising plays amajor role in the merchandising activ-ities of supermarkets. it draws atten-tion to the store and products thatthe store offers during any given timeperiod. Newspaper advertising is alsonecessary for supermarkets wanting toqualify for manufacturer allowances.Advertised specials are critical to*rchandising behavior. Consequently,in order to understand the competitiveenvironment of the modern supermarketone must understand the motivation be-hind advertised specials.

Holdren (1) argued that adver-tising in newspapers is an” importantcompetitive forum for grocery stores,items that have strong “transfereffects” are particularly good innewspaper ads. A product will havestrong transfer effects ifY amongother things, a substantial quantityof that product is purchased and theadvertised price is low enough to benoticed by the consumer.

Journal of Food Distribut

Sturgessl (2)

on Research

study of grocery prices in Australiaadds support to Ho!dren’s hypotheses.

Gray and Anderson (3) fotrnd thatadvertised specials save shoppersmoney. They also found that compe-tition between national brands andprivate labels Is enhanced by adver-tising allowances on national brands.The existence of advertising allowancesby manufacturers plays an importantrole in determining the content ofweekly supermarket ads.

Objectives

TI.7..,’,.~,, ~iill investigate the

factors which appear to influence asupermarket’s decision to advertisea product in the local newspaper.The specific objectives are:

(1) to identify the relationshipbetween advertised specials and manu-facturer’s deals (allowances).

(2) to ascertain the pattern ofadvertised specials between super-

,~arkets.!>

(3) to determine how advertisingPqttsrns differ between products.

September 81/page 19

(4) to investigate the degree towhich price competition is generated bythe advertised specials.

Methodology

Advertised specials on twenty-five different products were collectedon a weekly basis from a SoutheasternSMSA (Standard Metropolitan StatisticalArea) newspaper for a one year period(May 14, 1980 to May6, 1981). A listof the products appear in Table 1.All brands, grades and sizes werestandardized. However, quality ofsome items, especially meats, could

differ between stores. These productswere chosen because they were pur-chased and advertised frequently inthe,weeks before the study period.The prices of these products were col-lected for four different chain storeswhich operate in the case city and thesurrounding region. These four chainstores accounted for twenty-foursupermarkets in the region.

Chain A is a local chain withsupermarkets which are generallysmaller than the other three chainsand their stores tend to operate inthe surrounding areas, rather than in

TABLE 1. SAMPLE PkuDUCTS

Chuck Roast (with bone)

T-Bone Steak

Quarter Pork Loin

Nixed Fryer Parts

Wieners (regional brand)

Bacon (regional brand)

Bologna (regional brand)

Eggs

Margarine (national brand)

Orange Juice (national brand)

Yellow Onions

Bananas

Head Lettuce

Pork and Beans (national brand)

Canned Green Beans (national brand)

Macaroni & Cheese Dinner (nationalbrand)

Ketchup (national brand)

Mayonnaise (national brand)

Bread (store brand)

Corn Flakes (national brand)

Flour (regional brand)

Instant Coffee (national brand)

Soft Drink (national brand)

Shortening (national brand)

Powered laundry degergent (nationalbrand)

September 81/page 20 Journal of Food Distribution Research

the case city. This chain caters to

lower income patrons. Chain B is alocal chain, and its stores are con-centrated in the case city. Chain C

is a regional chain. However, all of ‘Chain C’s stores covered by the studiedads are located in the case city.Chain D is a national chain and allof its stores covered by the ads arein the case city.

Data on manufacturers allowancesand the cost of the products for oneof the local chains was obtained eachweek. This information was not avail-able for meats, produce, eggs, breador soft drinks.

Results

Advertising andManufacturer Allowances

An important component of objec-tive one was to determine how much ofthe newspaper advertising was used toqualify for manufacturer allowances.If one assumes that the advertisingallowances offered to each of thefour chains are identical in dura-tion, the results indicate that mostof the advertising is done for thispurpose. Seven of the twelve pro-ducts, for which allowance informa-tion was available, had allowancesfor the entire year. These productswere margarine, coffee, macaroni andcheese, pork and beans, green beans,shortening, and ketchup.

For three products, flour,orange juice, and corn flakes, almostall advertising was done during orclosely following deal periods. Or-ange juice had deals for 17 of the 52weeks. During, or within two weeks of

those 17 periods, orange juice wasadvertised 12 times. One time, ChainC advertised orange juice at an obvi-ously non-deal price--far above anypossible deal price.

Journal of Food Distr

deals for the last ten weeks of thestudy and during that time Chain Band D each advertised it once. Flourhad deals for 40 of 52 weeks and itappeared that all advertising was doneto qualify for allowances. Two products,laundry detergent and mayonnaise, werecommonly advertised during non-dealperiods. Laundry detergent was adver-tised 27 times by the stores and appar-ently only 6 of these qualified foral lowances. The chain for which def-initive allowance information was avail-able advertised laundry detergent fourtimes with only one qualifying for anal lowance. Mayonnaise was advertisedtwelve times, with nine occurring duringdeal periods.

The fact that a majority of theproducts where deal information wasavailable, had advertising allowancesfor each week lends some insights intothe “battle of the brands.” The manu-facturers constantly give incentivesfor retailers to promote their products.These allowances at times accountedfor as much as 20 percent of the costto the retailer for macaroni and cheese,ketchup, flour, and margarine. Eachweek the advertising allowance formargarine was over 20 percent of thewholesale cost.

Allowances, when offered, werefairly stable from week to week with‘r~spect to the amount of allowanceoffered, for most products, The excep-tions were ketchup and flour. Theallowances for ketchup varied fromtwo to 30 percent and from five to 25percent for flour (see Figure 1 forspecial flour prices). This variance,coupled with the fact that allowanceswere offered infrequently for someitems and much more frequently andeven continually (throughout the studyperiod) for others, suggests thatdeals for items may be used by manu-facturers to reduce excess inventories.Variable allowance magnitudes and

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Journal of Food Distribution Research

frequencies would be less likely toexist if manufacturers were n~t usingthem, in part, for inventory control.

Time Patterns forAdvertisements

On a store by store basis, theadvertised specials exhibited only afew discernible time patterns. Chuckroast probably had the most stablepattern. Chain A advertised chuckroast every 4-5 weeks, Chain B every5-6 weeks, and Chain C every 2-4 weeks.Other products which exhibited somepattern, for a given chain, were T-Bone steak (nearly every week byChain D), quarter pork loin (nearlyevery week in the fall by Chain D),mixed fryer parts (nearly every weekby Chain D and 2-3 times per month byChain C), weiners (every 3-5 weeks byChain A), eggs (nearly every week byChain D), and coffee (every 2-3 weeksby Chain B). Figures 2 and 3 showthe pattern of specials for T-Bonesteaks and mixed fryer parts. ChainD tended to be the most patternedadvertiser and those advertisementsappear almost every week. Adver-

tisements for meats and meat products,tended to be more pattern oriented.However, one must conclude that formost products there is no significantpattern in advertising (only 10 pat-terns emerged out of one hundredpossibilities).

Advertising appeared to beseasonal for only one of the 25products; onions. All other product

advertising was dispersed evenlythroughout the year. Holiday adver-

tising was only obvious for the sam-pled products for the July 4 weekend.During that week at least two chainsadvertised margarine, mixed fryerparts, bacon, weiners, lettuce, andbologna. Only T-Bone steaks wereadvertised by two or more chains theweek of Thanksgiving; only soft drinks,

welners, and T-Bone steaks were adver-tised the week of Christmas; and onlysoft drinks, eggs, and T-Bone steakswere advertised the week of Easter.One must also remember that Chain Dregularly advertised eggs and T-Bonesteaks, so it could be argued thattheir ad for those products was notmotivated by the holiday.

Frequency of Advertising

The products in this study werechosen because they were frequentlyadvertised. However the frequencydid vary markedly by product: Partof the reason is the brand chosen, butcertainly some products tend to beadvertised more often than others.Of the products in this study, mixedfryer parts, soft drinks, quarter porkloin, T-Bone steaks, eggs, and headlettuce were most commonly advertised.Except for soft drinks, these were allnon-branded products. The most common-ly advertised branded products weresoft drinks, bacon, bologna, margarine,weiners, and coffee. In both cate-gories meats and meat products werecommonly advertised.

Each chain concentrated its ad-vertising in a different product butwithin similar groups. All firmsconcentrated in meats and meat products,produce, and soft drinks. Chain C wasvery pronounced in its advertising ofchuck roast, mixed fryer parts, andhead lettuce. Chain D concentratedits efforts especially on T-Bonesteaks, quarter pork loin, mixed fryerparts and eggs.

The leading advertisers of thetwenty-five products were Chain D(281 times), Chain C (239 times),Chain B (198 times), and finallyChain A (163 times), As mentionedearlier, these totals are sensitiveto the products used in the sample.However, the total number of items

Journal of Food Distribution Research Sepbember 81/page 23

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81/page 24

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four chairts’probably reflect the sameranking (Chain D would advertise themost products and Chain A would ad-vertise the least).

Prices ofAdvertised Items

One reason for advertising pro-ducts Is to attract shoppers to thestore. Many times the store willprice the product below thelrcostbecause of its transfer effect forother pr~duc.ts (Holdren). Three ofthe products sampled in this studywere frequent loss-leaders; flour,laundry detergent, and shortening(See Fi@res 1, 4, and 5). Accord-ing to wholesale cost of flour bythe chain, three of the four chains(Chains A, B and D] sold flour be-low cost at least once during the 52week petiod. Chain B sold flourbelow cost the most times (4) andChain D twice sold flour below costduring non-deal periods. The largestloss was 304 per pound by Chain B(or 28 percent below cost). Flourwas the only product that Chain Asold below cost (it d3d so twice).

Laundry detergeat was sold belowcost$ at least once, by three of thechains (B, C, and D). Chain C soldlaundry detergent below cost eighttimes, and had the largest per unitloss (about 356 or 21 percent belowcost for a one-week period).

Every time Chains B, C and Dadvertised the shortening productsampled, it was priced below cost.Chain B advertised shortening sixtimes, while the other two chainsadvertised it twice. The biggestloss was 384 or 19 percent.

Three products, for which in-formation on wholesale costs wereavailable, were never priced below

cost by any of the chain stores.These products were Coffeet greenbeans, and corn flakes. For theother products- the losses per unitware generally only a cent or @mand losseswere nut very common.

Pr}or to the study it was ex-pected’ that products would be pricedsuch that the price enddd with a ‘9”(i.e. 69t, $1.09), but the extent ofthe practice was surprising. Nearlyevery time a product was advertisedits price would end with ‘9”. Thelone exceptions were pork and beans,green beans, macaroni and cheese,coffee, lettuce, and bananas. Thefirst three exceptions were becauseof the wholesale price of the products.A retail margin going up to a “9”price would likely be too high; andgoing down to a “9” price would in-volve a loss.

in the pricingof mixed fryerparts some chains took l’advantageliof the strategy of “9” (See Figure 3).in the first few weeks of the study,Chains B and Dwould advertise mixedfryer parts at 494 per pound, Chain Cwould advertise them at 47c or 48t perpound. When the advertised pricewent up to 594 per pound at the otherchains, Chain C sold at 574 per pound.Finally, when prices went up to 694per pound at Chains A and B, Chain Dpriced their mixed fryer parts at 684.Chain C’s specials would at times lagtheir competition by a week or two,and at other times would appearsimultaneous ly. However, during thewhole time Chain C.always made surethey had the lowest price (at leastby a penny or two).

Price competition in advertisedproducts, during the 52weeks of thestudy was very fierce for many products.The frequent advertising of flour,laundry detergent, and shortening atprices below cost highlights this point.

September 81/page 26 Journal ofFood IINstribution ~search

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year.~ Figure 7 dws+he%ro~~ of &e”’+=s.=weeklflspecials o r T-Bone” stea%&-fer~~.mbthe t!&ee chains Each chainmadedeep f!$?ice cuts hen T-Bones were ale cost of theadver~sed with he exception ofChain!$ one week Over most of thefourt~n weeks, hain D had the lowest the pricing of advertisedunadv~tised pri e , but the highest indeed central to the com-adverfillsed “price

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! REFERENCEStheir~ricing st ategies. Chain B

$ :;:was v~y aggress ve in pricing T- X“’ 1. The Structure ofBone ~eaks, egg ,-soft drinks, fiour, ~~ etail Market and the Marketand shortening. Cha.i.n C was very 8 Retail Units. iowaaggre~~ive ii,n pr cing T-Bone steaks, ~& ~t~te University Press: Ames,eggs,~aundry de ergent, and mixedwx ~l~$a i 968.fryer parts. Ch ins A and D werevery ~gressive !+w3n%y--ene++edwt----- —--—-’2:--$tiqess; t:-+t:-’%Study of”Re-

each; ~ Chain A with head iet.tuce and tail Prices of Groceries in Re-Chain2B with auarter pork loin. lation to Standard Price Theo~j.tf

Review of Marketing and Agric6~-tural Economics, 38(1970):170-89.

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3. Gray, R. W. and R. Anderson.“Advertised Specials and LocaJCompetition Among Supermarkets. ”Food Research Institute Studies,Vol. 3, No. 2 (1962):125-39.

September 8i/pa.ge 32 Journal of Food Distribution Research