Do promotions increase store expenditures?: a descriptive study of household shopping behavior

An important question that has been raised in supermarket retailing is whether weekly promotions induce households to increase their instore expenditures or merely reallocate a predetermined spending amount in that week. That is, are households’ grocery shopping expenditures preset before entering the store or are flexible and determined while in the store as a function of the specific store offerings encountered during the store visit? This is an important question for the retailer in light of the vast array of temporary promotions offered to consumers. Indeed, should expenditures be fixed before entering the store (for instance, as a function of the household’s inventory and/or income), it is possible that retailers might decrease their profitability when running promotions by displacing expenditures from high margin items to lower margin products. We claim that to answer this question meaningfully one must consider the totality of the household’s withinstore purchases (i.e., the market basket) and not just purchases of the promoted products. Using a rich database that contains the entire basket of goods bought over time by households from a given supermarket chain, we attempt to describe the drivers of both the level of expenditure and its allocation over the different groups of products. We use an extended version of the Almost Ideal Demand System (AIDS) for this purpose and our empirical results provide convincing evidence that while household expenditures do increase with promotions, there is also a significant reallocation of expenditures among the different groups of products. This implies that retailers have to choose carefully which items are promoted and to what depth, if promotions are also to increase profits, not merely store level expenditures