Market Strategy: Three-Part Research

From #105, March-April 2003

Market Strategy: Three-Part Research

B Y   P E T E R   C.   D A V I S

Have you ever wondered, "Who is our competition and why? What is our geographic trade area? Are there things we could do better to satisfy or communicate with our current customer base?" These are among the questions to answer for your retail food co-op when trying to understand the present or plan for the future.

To compete effectively against other food stores, retail food co-ops often must utilize two somewhat parallel marketing strategies in order to completely understand their market and engage their customers and potential customers:

Market segmentation is a strategic approach that allows the food co-op to identify the specific market segment to which it has its greatest appeal. Then, with this segment as its target market, the food co-op can establish appropriate and effective merchandising and operational practices to adequately serve this target market segment.

Market differentiation suggests that to the extent a food co-op can sufficiently distinguish itself and its offerings from those of its competitors, the co-op can heighten the loyalty of its customers and thereby render itself somewhat protected from the actions of those competitors. It accomplishes this primarily through the development of identifiable merchandising and operational characteristics.

Together, the implementation of these two strategies can result in establishing a niche for the co-op by maximizing its appeal to its target market, minimizing the impact of competitive actions, and clarifying its image to the consumers in its market area.

Various types of data provide information necessary for implementation of these strategies. Such data might include a reliable definition of the geographic trade area served by the co-op and its sales penetration within that area; the demographic characteristics of its trade area population base; image strengths and weaknesses, both for the co-op and its competitors; and the shopping habits and motivations of its customers.

In order to gather this information, there are several research methodologies that a food co-op might consider. The remainder of this article will discuss three of the primary research methodologies: customer research, consumer research, and market research.

Customer research

This type of research centers on those who shop the co-op: its customers, both members and non-members. Customer research generally involves surveys that are conducted in-store, over the telephone, or by mail. Such a survey can provide information on who your customers are and how they perceive the co-op.

Specifically, you can obtain information from your customers about your overall image and your image in particular departments. Factors that contribute to your image include prices, quality, selection, customer service, cleanliness, and store conditions, to name a few. A customer survey can also assist you in gathering information regarding your customers’ motivations and shopping habits.

While a customer survey gathers point-in-time data, it can also be used to monitor shifts in your store’s image or your customers’ habits. If this is your objective, the survey methodology is best repeated on a periodic basis (such as annually). The underlying assumption here is that if a co-op understands how it is perceived by its customers, it can respond accordingly and adjust its merchandising and operational goals. The success of your ability to respond to your customers depends in large part on the reliability and depth of your ability to understand their perception of you.

Customer research can also help you to identify problem areas (real or perceived) that have caused or may cause a decrease in sales or profits. Again, these problem areas may relate to the entire store or to a specific department and may occur in areas such as quality, selection, pricing, or customer service.

For example, suppose a co-op’s deli sales have started slipping, in both the absolute sense and relative to other departments. Further, based on transaction data, this slippage seems to be due to both a reduction in the number of deli customers and a smaller average deli transaction. A brief questionnaire administered among a representative sample of shoppers in the store could uncover some of the reasons for that change and generate ideas for what you might do to regain those sales.

Customer research has an inherent limitation: it only accounts for your existing customers, not consumers at large. As such, general research data obtained from your shoppers tends to be biased, most often in favor of your store. Customers shop at stores where their likes are greater than their dislikes, or they would not be shopping there. Therefore, while customer surveys may be reliable indicators of shopping trends at your store, their usefulness as indicators of the image characteristics you have within your overall market is somewhat limited and must be interpreted in light of this bias.

Consumer research

Consumer research involves gathering data from consumers at large, whether customers of your co-op or not. This data can reveal shopping habits, motivations, and image perceptions not only about your co-op but also about major competitors. Given this "intelligence" about your own image as well as that of your competitors, the co-op can develop strategies both to reach its target market and to differentiate itself through merchandising and operational offerings.

Consumer research studies often involve mail-back surveys, telephone surveys, face-to-face interviews, or even focus group panels. Such surveys often can serve as reliable sources of market-wide attitudes, opinions and perceptions–again, about the co-op and about its competitors.

Take the case of a medium-sized co-op in a market of about one-quarter million people. Sales at the co-op had been growing for several years. Then the rate of growth started to slow, and soon sales declines began to occur. The competitive environment had not changed (there were two major natural food competitors), and there seemed to be no explanation for the sales decline. A consumer research study was undertaken, consisting of about 400 random telephone interviews conducted among pre-qualified natural food consumers. Based on the results of the survey, it was determined that the co-op’s produce quality was perceived in the trade area as being lower than it used to, and consumers were responding by starting to shop elsewhere. Armed with this information, the co-op was able to take corrective actions–both in its produce department and in its communications with trade area consumers.

Focus groups are another type of consumer research has become quite popular during the past two decades. This methodology consists of recruiting a group of 10—12 consumers, pre-selected on the basis of certain criteria (demography, shopping habits, shopping motivations, etc.), and then gathering them together for a one- to two-hour meeting in which the discussion is led by a skilled moderator. Often these group meetings are held in a "focus group room" equipped with a one-way mirror along one wall; members of the co-op’s management can sit behind the mirror and observe the proceedings. This represents qualitative rather than quantitative research, but it can provide valuable insight into consumers, their shopping behaviors, their motivations, and their perceptions.

Market research

Market research is just what it sounds like–researching your market. Both the customer and consumer research activities described above fall within the realm of market research.

To complete the picture you need to determine, and then describe, the geographic trade area served by the co-op. This step is necessary in order to understand the level of market potential that exists in the trade area as well as to identify the prevalent demographic characteristics of the trade area population. Together these are used to define your target market.

An accurate definition of a co-op’s trade area allows you to evaluate the co-op’s market position within it, to identify trade area sectors in which you have sales potential but your actual sale penetration is weak, and to construct an effective advertising/outreach program.

A co-op’s trade area can be determined with a relatively simple customer survey that I call "CATS": Customer Address and Transaction Survey. This survey utilizes a street map of the area surrounding the co-op that has been divided into sectors, using census tract boundaries. A representative sample of customers (members and non-members alike) are asked to identify the tract within which they live and the amount of their transaction on the day of the interview. By apportioning the total annual business of the co-op on the basis of the geographic distribution of survey transactions, the geographic reach of the co-op can be determined. A store’s trade area is generally defined as that area from which it derives 65—80 percent of its business.

Once a co-op’s trade area has been determined, other types of research activities such as those described earlier can be applied. Additional calculations can be performed to determine how well the co-op penetrates the various parts of its trade area, how well it draws customers past its competitors’ locations, and spots in the trade area in which to concentrate advertising or outreach, to name a few. Another important use of "CATS" trade area data involves the pre-determination of the impact on co-op sales that likely will occur when a new competitor opens in or near its trade area.

Summary

Because a food co-op is first and foremost a retail store, it should engage in the same types of data gathering techniques that are used by its competitors. Whether you are gathering information from your customers, defining your trade area and sales penetration levels within it, or gaining knowledge about the consumers in your trade area, it behooves any co-op to learn as much as it can about the people and the area it serves. Only in this way can it adequately define its target customers and differentiate itself from its competitors.

 

Peter Davis is a location research consultant for Cooperative Development Services (PeteDavisConsult@aol.com).

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