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1Running head: CONSUMER DEMAND

Factors Altering Consumer Demand in Grocery Retail

Diane Kloppenborg

Peru State College


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Abstract

The purpose of this paper is to examine the factors that alter consumer demand in grocery retail as

well as the implications those factors have on how retailers calculate demand. Predicting consumer

demand for products is extremely important in the grocery retail business. Numerous internal and

external factors affect the demand patterns of the items carried within a grocery store. The focus

will be on five important factors that affect consumers decisions regarding items purchased within

a grocery store. This paper will discuss the price of the product, consumers income, price of

related goods, preferences of consumers, and the number of consumers within the market.

Discussion regarding the effects of these topics on both consumer and retailer product decisions is

provided within this paper.

Keywords: demand, forecast, substitute, complimentary, retailer, consumer


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Factors Altering Consumer Demand in Grocery Retail

Demand refers to the quantity of an item consumers are willing to purchase at a specific

price (Li, Sun, & Montgomery, 2011). Computing the demand of a product requires consideration

of many factors. These factors include the price of the product, price of related goods, income level

of consumers, preferences of the consumer, and the population of the market. Advertising,

promotions, and future prices also may play a role in determining demand.

Grocery stores are readily available to consumers. The Bureau of Labor Statistics

approximates that there were around 85,000 grocery stores within the United States. In the past,

consumers did not have a variety of places to purchase household goods and groceries. Now there

are often several grocery stores located within the same town. The abundance of retail stores

allows consumers to shop around for the store that offers the preferred level of service and prices.

Determining consumer demand for products is becoming increasingly difficult because

consumers have numerous places to purchase goods. Grocery stores are constantly in competition

regarding pricing and the products offered. Therefore, predicting the quantity of items consumers

will purchase has become increasingly difficult. Miscalculating demand for products can lead to

overstock in inventory or stock-outs and disappointed consumers.

Grocery retailers often carry an extensive variety of items. Beyond perishable and non-

perishable food items, grocery retailers also may carry household and beauty products, tools, and

toys. The more items a store carries, the more difficult determining the demand of each item

becomes. Retailers must accurately determine the quantity of items consumers will likely purchase

to avoid overstock, stock outs, and consumer dissatisfaction.

Consumers have the capability to shop around for products. Availability of product

assortment to the consumer requires that the retailer consider external factors when computing


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demand. Retailers must consider the amount of competition within the market when determining

demand of products. If there are several other retailers selling the same items, demand for the

products on hand may decrease. If the retailer is the only merchant within the area, the products

that offered within the store will be high in demand.

The price of the product has a large impact on the demand of an item. If an item's price is

low, the consumer will be more willing to purchase multiples of those items. At a higher price,

however, the consumer will be less likely to purchase the same amount. The Law of Demand is the

relationship between price and the quantity consumers are willing to purchase (Li, 2011).

Consumers income is another factor that incorporated into the forecast method. As the

consumers income increases, the amount of items purchased will also increase. During tough

economic times, the retailer must consider that a consumers income will decrease and adjust the

forecast accordingly.

The price of related goods will also affect the demand of products. Items that consumers

typically used together are called compliments (Li, 2011). If one of these items price increases,

consumers will purchase less of that item. Accordingly, consumers would also purchase less of the

second item. Increasing the price of one of the complimentary items reduced demand of both

items.

Substitute items also affect demand. If an items price increases but the same type of item

from another company does not, demand for both will change. The item with the increased price

will suffer a loss of demand while the substituted items demand will increase because the

consumers preferred it due to its lower cost

Price of the Product

The Consumer


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The price of the product affects the amount of an item a consumer is willing to purchase.

Demand for a lower priced product will be higher than that of a high priced product. Consumers

will be willing to purchase larger quantities of an item that is relatively low in price. When

determining which items to purchase, price plays a large role in determining demand for the

consumer. 74% of consumers list the price of products as the key determinate when making

purchasing decisions (Anselmsson, J., & Johansson, U., 2009).

Potential consumers will decide that an item is not worth purchasing if the price is higher

than the predetermined price limit each individual has set. When this occurs, the consumer will

decide either not to purchase the item or find a reasonably priced substitute to purchase instead.

Both decisions present the retailer with unpredictable changes to the demand of the items.

The Retailer

When determining the price of a product, retailers must consider the amount a consumer is

willing to pay for the item as well as the cost to the retailer to purchase and make it available to

consumers. Therefore, retailers must calculate the optimal price to maximize profit on the sale of

that item (Fox, Postrel, Semple, 2009). The optimal price must ensure a profit from the current

sale as well as promote future sales of that item.

When determining the price of a product, retailers must determine the ideal price of that

item from the consumers point of view. If the items price is too high, consumers will not

purchase the item. However, if the items price is too low, the retailer will not make a profit from

the item due to purchasing and inventory holding costs.

Information gathered in the study presented by Van Ittersum, Pennings, and Wansink

(2010) states that consumers neglect to consider the digits reflecting the cent in the cost of a

purchase. Therefore, it is beneficial to a store to reduce the cost of an item to $.01 below a whole


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number. In the study, Van Ittersum theorized that by decreasing the dollar amount in the price sales

would increase on that particular item (2010).

Retailers must also consider the impact the lower price will have on the demand for other

items with higher prices. Consumers will be more likely to purchase the lower priced item, which

would therefore decrease demand for like items that are more expensive. Product pricing within a

store can influence prospective patronage (Fox, 2009). Consumers perceptions of store pricing

will greatly influence the probability of return visits to the store.

The Consumers Income

The Consumer

According to Van Ittersum, Pennings, and Wansink (2010), one in seven United States

households lives in poverty (p.90, para 1). The authors of research also state, one in six can only

afford the basic necessities. This data forms the basis for another factor that alters demand. A

consumers income influences item selection and quantity of items purchased from a retailer.

Consumers income will also determine which items within the store have a higher

demand. If a large percentage of the local population is living on a fixed income, staple foods will

have a higher demand than items that are not necessities. Consumers will spend the money

available to them on low priced items with wide versatility rather than purchasing items that are

high cost, luxury items.

Approximately 30% of consumers calculate a type of mental plan regarding purchasesto

make during a shopping excursion (Stilley, Inman, Wakefield, 2010). Consumers typically will set

a predetermined limit on the amount of money they are willing to spend. Within this plan,

consumers will incorporate the types of items to purchase. Developing a predetermined plan will


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assist the consumer in remaining with a budget. If the consumer encounters unexpected sales on

the items they wish to purchase, there would then be extra money for additional purchases.

The Retailer

When considering consumer income to determine demand, the retailer must consider which

items consumers will classify as staples. Demand will be higher for milk, bread, eggs, and other

grocery items that are necessities within a home. Therefore, the retailer must ensure that adequate

inventory is available to meet consumers needs.

The retailer must also recognize that the demand for luxury items will not be as great and

manage the inventory of those items accordingly. It is imperative that retailers also consider which

items consumers may substitute for another in order to save money. Consumers prefer store brand

or lower quality items because the price is lower. That type of consumer decision would increase

the demand for the substituted item while decreasing the original items demand.

Retailers benefit from placing promotional items near the entrance of the store. Products

with a lower than normal price will be the first items a consumer encounters. This practice can

increase the stores reputation of having low prices. Building consumer confidence in low pricing

will increase the probability of a return visit.

By placing the items near the cash registers, if a consumer has completed shopping and

still has some portion of the mental budget remaining these items may be purchase to spend the

remaining amount. Retailers must choose carefully which items to place on prominent display

within the store. Ensuring the items have a high demand with consumers will increase the

probability of purchase.

The Price of Related Goods

The Consumer


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In grocery retail, many goods are related goods, or compliments. Compliments are items

that are consumed together (Bezawada, Balachander, Kannan, & Shankar, 2009). Because these

items are often consumed together, it is likely consumers will purchase them together as well.

When a consumer seeks to purchase complimentary items, the price of all items becomes less of a

factor in the purchasing decision.

Consumers will gravitate toward items that have a reduced price. Items that coincide do

not need to be at a reduced price to become part of the consumers purchase. Characteristically,

individuals do not purchase complimentary items separately. Therefore, if consumers bypass one

item, the consumer will bypass the complimentary item as well.

During the course of a shopping event, consumers may confront a stock-out of a particular

item. A stock-out occurs when the demand of a particular item was underestimated. The stores

inventory did not provide enough of the item to replace consumers purchases.

In the event of a stock-out, the consumer may make the decision to purchase a substitute

item instead. Substitute items are goods that consumers do not consume together. Instead,

individuals choose to consume one item or the other. When this occurs, consumers will amend the

original purchase choice to include a like item from a different brand. Therefore, the retailer must

incorporate the potential demand of substitute items as well when forecasting overall demand.

The Retailer

If one of the compliments price increases significantly, the demand for that item will

decrease. However, the price increase of that item will affect the demand for the second

compliment as well. Therefore, retailers cannot determine the demand of certain products

individually. Complimentary items must be determined together recognizing that changes in one

item will affect changes for the other ones as well (Bezawada, 2009).


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It is beneficial for retailers to recognize the products that consumers will purchase together

and display the items together. The aisle placement and display locations of these items greatly

increase sales by providing convenient shopping. Placing soft drink and snacks within the same

aisle, for instance, allows the consumer to acquire non-meal items in one location. The consumer

may enter the store only wishing to purchase one of these items. However, when entering the aisle

and presented with two complimentary items, the consumer is more likely to purchase the second

item as well.

Another instance of related goods affecting each others demand is substitute items. For

instance, Coke and Pepsi are substitute goods. Consumers generally have a preference regarding

which brand is preferred. However, in the event a consumer is not able to purchase the brand of

choice, the other brand is available to purchase instead.

When determining demand for substitute goods, retailers must examine whether the

demand for these brands will be equal or if one brand will become more in demand. When

determining demand, the nature of competition from substitute items is considered. Retailers

utilize relative sales activity from both products when computing the demand equation.

The Preferences and Expectations of Consumers

The Consumer

Consumer preference and expectation are the most difficult factors affecting product

demand to measure. There are numerous reasons a consumer may prefer to purchase one item

rather than another. An individuals choice may be the reflection of a new marketing campaign for

the product. There may also have been a health study released determining that an item is not good

for an individuals health.


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A consumers anticipation of future events will also affect the demand of products.

Weather is a determining factor that influences consumers decisions concerning purchases. In

anticipation of a major weather event, consumers may stockpile groceries to avoid traveling in

inclement weather. Management must prepare for these types of increases in sales.

The Population of Consumers in the Market

The Consumer

Now, more than ever before, there are more grocery retailing options available to

consumers. Within any given city, there are numerous grocery stores where consumers can

purchase merchandise. Consumers have to decide whether to remain loyal to a store or to purchase

merchandise at a different store that promises better goods and services. Making the decision to

remain loyal to the existing store may be the result of contentedness with the services and

merchandise available there. The decision may also stem from unwillingness to integrate change

into the consumers life.

Consumers choice in retailers stems from many different factors. A retailers price and

assortment of goods affects whether a consumer will choose to purchase merchandise there.

Customer service levels and ease of access also contributes to consumers decision on where to

complete purchases. Consumers analyze the differences between retailers when determining which

store to patron.

The reasoning behind the purchase also affects where and when a consumer purchases

merchandise. According to Prasad & Reddy, 16.2% of consumers purchase items to fulfill

fundamental enjoyment needs. Another 34.8% prefer to purchase items that are necessary and

rarely make unplanned purchases. Conventional consumers make up 28.2% of the population


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analyzed by Prasad. This group of individuals base purchasing decisions on quality and assortment

of the items. The final 20.8% make purchases to indulge the need to socialize (2007).

The Retailer

Determining the number of consumers that will purchase items requires two types of

discovery based knowledge. By applying the law of retail gravitation, retailers can safely presume

that consumers will choose a retail store based its size and location (Briesch, 2009). Consumers

are not likely to travel farther than necessary to purchase merchandise. Therefore, it is reasonable

to conclude that calculating the immediate population of the region will produce an approximation

of consumers.

The retailer then considers the amount of competition within the immediate region. After

determining the number of potential consumers, the retailer must consider the number of stores

offering the same type of product in the immediate vicinity. If there are numerous retailers

providing the same products at competitive prices, consumers will have many different options

when choosing a store.

Retailers must consider a large range of factors that comprise the competition between

retailers. Price, store location, product range and quality, queuing time, opening hours and access

to parking are all factors that create competition (Fox, 2009). Consumers will choose the retailer

that meets individual preferences in completing purchases. When confronted with a choice

between retailers, consumers will weigh these factors in determining which retail store to patron.

Retailers can increase patronage within the store by complying with the preferences of

consumers. Offering low prices and an adequate assortment of product retailers will increase the

number of consumers purchasing merchandise within the store. The retailer must also remain

competitive when determining store hours and customer service features. In the event that a retailer


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lacks in any of these areas, the risk of losing current patrons and the possibility of gaining new

ones significantly increases. Analyzing all of these components allows the retailer to better

approximate the local patronage within the store.


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Conclusion

Many factors affect consumer demand in grocery retail. Price of the product, consumer

income, price of related goods, preference of the consumer, and the amount of consumers within

the market all play roles in altering the consumer demand of products. Determining demand is not

black and white in the retail world and all of these variables coincide with one another.

The process of determining demand is an intricate procedure involving an infinite number

of variables. The price of the product affects which items a consumer will purchase during a

shopping trip. The price will determine which items end up in the cart and which ones consumers

leave on the shelf. In order to determine the prices of products, retailers must consider each of the

other factors mentioned within the paper.

Retailers must be willing to put forth the effort required to forecast demand of the products

offered. Forecasting demand is not an easy process. Determining the demand for a product requires

each variable be determined and recognition that none of the variables is independent. Each

variable affects the outcome of another variable within the equation.

The next step in the demand process is to be creative and develop new store layouts and

marketing in response to the demand of the products. If these attempts are effective, demand for

the products will increase and produce a positive outcome for the retailer.

Forecasting and determining demand effectively requires the retailer to continue to

implement the necessary procedures. It is not necessary for retailers to complete this process daily

due to the complexity and time consuming nature of the process. However, retailers must be aware

of the demand of the products consumers have a desire to purchase. Therefore, regular completion

of the forecasting model is necessary to produce optimum results.


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References

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73(3), 99-117. doi:10.1509/jmkg.73.3.99

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van Ittersum, K., Pennings, J., & Wansink, B. (2010). Trying harder and doing worse: How

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