Lower half of a woman grocery shopping, she is holding a green shopping basket.

New research highlights the impact of product substitutability on retailer and manufacturer profits

GAINESVILLE, Fla. – For most people, a trip to the grocery store is a fairly simple errand. Some create lists while others rely on their memory for the items they need. But how does a customer choose among multiple items of the same type offered in a store? For example, if you’re looking to buy Greek yogurt, there are currently more than 10 brands choices available. For other items on your list, say raisin bran cereal, there are far less substitute products available (three, at last count, from Post, General Mills and Kellogg’s).

Amy Pan, Asoo Vakharia and Quan Zheng

Assistant Professor Amy Pan, McClatchy Professor Asoo Vakharia and alumnus Quan Zheng.

With products that have more or less substitutes, there are profit benefits for both grocery store retailers and product manufacturers. New research from Amy Pan and Asoo Vakharia of the University of Florida Warrington College of Business with Quan Zheng (Ph.D. ’18) of the University of Science and Technology of China highlights the impact of product substitutability, or competition, on retailer and manufacturer profits.

Using an economic framework, the team of researchers found unique benefits to retailers and manufacturers. Their key insight is that retailers and manufacturers may have different preferences for product substitutability depending on how consumers desire the products and the number of stocked brands.

For product categories where there are a large number of substitutable products available (e.g., Greek yogurt), the competing manufacturers and the retailer would prefer that consumers perceive these varieties to be less substitutable. Conversely, for product categories such as raisin bran cereal, the manufacturers would prefer little differentiation between their offerings by setting similar prices and even standardizing content. The retailer, on the other hand, might choose to advertise differences between these three varieties of raisin bran so that customers perceive them to be less substitutable.

The results of “Common Retailer Channel Revisited: The Role of Supply Network Size,” also highlight some validity for current, seemingly-contradictory store brand positioning strategies by retailers like Aldi and Publix.

Some discount retailers (e.g., Aldi offering at most two national brands for a given product) make the appearance of their store brands similar to national brands, while other dominant retailers (e.g., Publix, one of the largest U.S. regional grocery chains) do not reinforce such physical similarities. In this regard, it also sheds light on persuasive advertising and marketing communications which can be used to influence consumers’ perceptions of product substitution. For example, retailers can display comparison charts emphasizing the features of competing product offerings and depending on the network size and supply coverage, the contents can highlight either the differences or the similarities among different brands in a product category through the design of the chart.

This research is forthcoming in Production and Operations Management Journal. Read the full paper.