By: Teresa F. Lindeman

October 8, 2005, Pittsburgh Post-Gazette

Traditional supermarkets have generally not instilled much loyalty in customers who carry their loyalty cards, but they have collected a stockpile of data that can help battle competition from discounters and high-end grocers, a Carnegie Mellon University researcher says.

The problem, said Vishal Singh, is that supermarket chains really aren't doing that good of job of analyzing all that information that they are getting from these so-called loyalty cards, such as Giant Eagle's Advantage Card.

If Giant Eagle, Shop 'n Save and other middle-market grocers are going to survive the squeeze by Wal-Mart and Whole Foods Market, they should use the information they collect to identify the customers who spend the most money at their stores and find ways to keep them coming in.

"It's a very small proportion of people that account for the biggest losses" whenever a bigger competitor or specialty store comes in, said Singh, an assistant professor of marketing at CMU's Tepper School of Business who served as lead researcher for a team that analyzed data from an unnamed East Coast regional supermarket chain.

Grocers everywhere are looking for new tools and information that can help them survive and grow in a traditionally tight-margin business that's been roughed up by the explosion of Wal-Mart Supercenter stores that offer full-line groceries and high-end specialty chains such as Whole Foods that lure away upscale shoppers.

Some are considering throwing in the towel. Just last month, Idaho-based Albertsons said it was weighing strategic alternatives -- Wall Street-speak for a sale, while Minnesota-based food distributor Supervalu announced it would sell its 20 company-owned Shop 'n Save stores in the Pittsburgh region. Jacksonville, Fla.-based Winn-Dixie entered bankruptcy this year and has been selling off stores to get back in fighting shape.

In their research, Singh's team found the arrival of Wal-Mart Supercenters two miles away from one of the outlets of the regional chain that it studied was followed by an almost immediate 17 percent drop in sales volume at the smaller grocery. In a business in which margins can run one or two cents on the dollar, that kind of loss can be devastating.

Further parsing shopping patterns, the researchers found roughly 70 percent of lost revenue could be traced to just 20 percent of the store's customers.

Those most likely to defect were generally families with babies or pets, as well as shoppers who went to the store on weekends and bought cheaper, private label brands. Those most likely to stick around tended to spend more on fresh produce, seafood, salad bars and "ready-to-eat" foods that might serve as a quick dinner plan.

Armed with such data, supermarkets facing an incoming Wal-Mart or other discounter should identify the big spenders and their preferences so they can be lured back with special promotions. Once back in the store, such customers tended to spend as much as usual. The same data mining techniques could be used to identify and feed the needs of the soy milk drinkers and natural food fans who might slip away to Whole Foods.

While loyalty cards have been in place for years, Dr. Singh said he believes many supermarkets are still under-utilizing the information. "They're not doing even close to what they can do with what they have," he said.

The research, which also involved Karsten T. Hansen and Robert C. Blattberg of the Kellogg School of Management at Northwestern University, has been accepted for publication by the trade journal Marketing Science.