Retail Sales: Do They Mean Reduced Expenditures? German Grocery Evidence
Abstract
Retail pricing strategies incorporate promotions, sales, and rigidities. A number of models have
been proposed in particular to explain the occurrence of sales. Focussing on the market for fresh
foods the model by Varian and the loss leader argument seem to be intuitively best fitting to the
conditions in the fresh food market. From these models we derive several hypotheses that are
tested for a unique data set of the German fresh food retail market. The data set consists of
weekly prices for ten food items in 131 grocery shops over the period from 1995 to 2000.
Following Varian sales should lead to reduced expenditures, while the loss leader argument
assumes that consumers are lured into the shop by promotional sales which are covered by
higher prices for other products. The results indicate that expenditures decrease with the number
of sales in the short run but this effect is outweighed by a dynamic price adjustment thereafter.
1. Introduction
All consumers are affected by pricing strategies in the retail sector. Though decreasing,
the share of food and beverages consumption expenditures today accounts for 20 % of total
private expenditures in Germany. This share of total expenditures also is typical of other
European countries. In the U.S. the share is smaller, while in developing countries the share of
food costs is typically much higher. Because of the improved access to detailed data, theoretical
and empirical studies of retail pricing have become increasingly feasible. Of particular interest
is the question of whether retail sales play a constructive role in a competitive economy,
signalling needs of retailers to reduce inventories, or of the food chain to increase sales to clear
unanticipated supplies. Alternative hypotheses include strategic goals such as loss-leader
theories. In any case, these theories have been examined empirically only on a limited basis in
U.S. retail markets. An important constraint on empirical enquiry has been the identification of
“sale” status of prices. In this paper, we introduce a price-based indicator of “sale” status of
prices and examine the relationship between “sales” and retail price levels. In particular, we
examine intertemporal relationship between “sales” and consumer expenditures, as well as the
relationship of “sales” across product categories. To do so, we employ a unique data set for
German grocery stores.
The paper is structured as follows. First, we briefly summarize available theoretical and
empirical results that consider the role of retail sales. Next, we consider the German grocery
sample, presenting descriptive statistics for weekly German food retail price time series for ten
fresh food products in 131 grocery stores over the period from 1995 to 2000. In the final
section, we present our indicator of sale status, and present results of an empirical model of the
role of sales as a determinant of the level of consumer expenditures. We find that while retail
sales are not correlated across products within a store, are not correlated over time, and are not
correlated across stores, retail sales appear to be part of an intertemporal pricing strategy that
begins with a contemporaneous reduction in consumer expenditures that is followed by
increases. These results are not consistent with cross product loss-leader strategies in a static
sense, but nevertheless suggest that retail sales play a strategic role, perhaps providing
information, though are financed by price increases that follow later in time which might be
interpreted as a dynamic loss leader strategy.
2. Review of the theory on retail sales
Within the retail pricing literature, considerable attention has been paid to the
explanation of sales. Hosken and Reiffen (2001) defined sales as “temporary (significant)
reductions in the price of an item that are unrelated to cost changes”. In this section we briefly
summarize the existing theories on sales or promotional retail pricing and assess their
implications for retail pricing for fresh foods. Different promotional strategies can be applied to