Uses examples to illustrate the trade-offs to be made between operating efficiency and customer satisfaction.Consumer/Household Economics,

Watkins, Edgar P.

English

Research Papers in Economics

MANAGERIAL ECONOMICS AND CUSTOMER SATISFACTION
by
Edgar P. Watkins
The Ohio State University
Columbus, Ohio
Uses examples to illustrate the
trade-offs to be made between
operating efficiency and customer
satisfaction,
Will a food distribution organization
which concentrates on operating efficiency
and cost reduction achieve first place in
the hearts of customers? Managers of re-
tail stores, and of organizations operating
these stores are frequently troubled because
customers do not always respond to the well
designed stores operating in an efficient,
systematic way. Management may well be
pulled in different directions by two some-
times conflicting objectives . The economics
of the business demands that costs be cut
and price and operating efficiency increased.
Thus, the managerial economics aspect. cus-
tomers, on the other hand, may well respond
to a much broader program in which cost
cutting and efficiency are only an integral
part of a total marketing mix. Hence, the
customer satisfaction aspect.
Mana erial economics has been defined
by Haynesf as economics applied in decision
making. The tools of managerial economics
are well known. Some variations of these
tools are widely used in food distribution.
Included are such diverse subjects as:
-- Forecasting demand
-- Sales forecasting
-- Analysis of fixed and vari-
able costs
-- Breakeven analysis and its
application
-- Cost functions
-- Relation of production
functions to cost curves
-- Incremental reasoning in
pricing
-- Margin cost pricing
-- Present value analysis
-- Discounted rate of return
-- Analysis of uncertainty
-- Measurement of risk
-- Linear programming
-- Replacement decision making
-- Lease or own decisions
-- Market segmentation
-- Location analysis
The use of such tools and techniques is
a necessary part of managing the food business.
As food distribution companies grow in size
and complexity, the economics and management
required for planning, for reporting, for
control tend to become more formalized. In
the process of formalizing these techniques
and implementing planning, exercising con-
trol, and executing the reporting procedure
there is evidence that translation of oper-
ating efficiency, cost control and pricing
at retail tends to overwhelm meeting the
total needs of customers as they see these
needs at the retail store level.
To reason why meeting the needs of
customers maybe overwhelmed, or overlooked,
it may be useful to examine considerations
customers feel are important when choosing a
food store. The needs of customers, as iden-
tified by a continuing series of trading area
analyses, are associated with a broad range
of interests. The range of customer consid-
erations in choosing a food store are closely
identifiedby four major segments in trad”ng
area analyses at The Ohio State University. $
(1) Store Related
Cleanliness
Shopping convenience
Location convenience
Out-of-stocks
Journal of Food Distribution Research February 73/page 65(2) Price &Advertising Related
Price unaware
Expectation of lower prices
Expectation of competitive
prices
Expectation of specials
Acceptance of promotion pro-
grams
(3) Product Related
Meat quality and freshness
Wide choice of items
Produce quality and fresh-
ness
General quality level
Recognized brands
(4) Employee & Service Related
Courteous, friendly, helpful
employees
Quick check out
Miscellaneous services
When the listing of economic tools that
managers find useful is compared with the
listing of considerations customers find
useful in choosing a retail food store, and
the quantitative increases related to both
are examined, it becomes fairly apparent
that managers have relatively few numerical
measures of performance related to those
things customers feel are important. In the
areas of customer concern, the planning,
reporting and control aspect of the business
may indeed become cloudy or unsure. Yet,
the successful use of these economic tools
requires satisfying customers from their
point of view.
There is evidence that some of the
efficiencies and productivity of an organi-
zation which accrue up until the time of
the retail sale may indeed be lost in the
retail function of the business. Handy and
Padberg3 explore a conceptual model of the
food industry. These points are made in
relation to the food distribution sector:
1. Core distributors (defined as the
ten largest retail food chains) have a pre-
retailing advantage pertaining to cost and
efficiency, not product quality.
2. This pre-retailing advantage may
account for 2.4 to 3.0 percent lower store-
door merchandise costs than fringe distrib-
utors (defined as small and medium sized
food retailers).
3. Progressive fringe distributors
rely on unique store decor, highly motivated
personnel and innovative merchandising pro-
grams .
4. Fringe distributors had gross mar-
gins in the retail function of 2 to 5 per-
centage points less than the core distribu-
tors .
Additional evidence regarding retailing
efficiency is found in operating information
as reported in leading grocery publications.
In 19704 only one of the core firms was in
the top ten of the 50 largest chains having
the best return on net worth. Only one of
the core firms was in the top ten as reported
as having the best profit margin. Only one
was in the top ten reporting the largest
gain in earnings over the previous year.
In spite of lower cost to the store-
door over the past decade, the core distrib-
utors have just about maintained their share
of the market. In 1960 the top ten chains
had 28.2 percent of the total grocery store
sales . In1970 this figure was 28.5 percent.
Recently, the growth of food distrib-
utors has been greatest in the small to
medium size firms. The sales gains of chains
with 50-99 stores was 16.2 percent in 1970
over 1969.5
Change in Food Chain Sales
By Number of Stores
Sales Gain
Chains 1970 Over 1969
500 stores or more 8.6%
250 - 499 stores 9.2
100 - 249 12.9
50 - 99 16.2
25 - 49 12.7
11 - 24 10.0
If Handy and Padberg are right in their
observations about pre-retailing efficiency
as compared to retailing efficiency, the
fringe distributors’ and independents’ record
seems to indicate that somehow they are able
February 73/page 66 Journal of Food Distribution Researchto balance higher store-door costs with some
measure of retail efficiency. Customer sat-
isfaction may account for some of this dif-
ference at retail. This retailing efficiency
may be gained by increased customer satis-
faction resulting in higher sales volume.
One evidence of customer satisfaction
can be observed by comparing avera e store
sales volume. E Handy and Padberg report
that only two of the top ten chains had
average supermarket sales of $2,000,000 or
more in1961, while 55 of the 11-100 largest
chains had sales of this size.
In 1970two (20 percent) of the top ten
chains had average store sales of $3,000,000
or more per year. Forty-five percent of the
11-100 largest chains had average store sales
of $3,000,000 or more per store per year.
Sales per square foot would give a greater
degree of precision to this comparison.
Food distributors have had fewer tools
to measure customer satisfaction than those
related to pricing, efficiency, and cost
reduction. Observations suggest that man-
agement of firms operating in a more com-
pact trading area may be better able to
maintain contact with stores on customer
oriented information not necessarily related
directly to historical information concern-
ing operating efficiency, cost reduction,
and pricing efficiency.
~Some of this dichotomy of interest be-
tween efficiency, costs, price, and customer
satisfaction can be illustrated with two
brief cases. The first case compares two
operations, one of which places emphasis on
efficient internal operations and cost re-
duction. The other operation is highly
orientedto freshness and quality at retail.
The second case illustrates that efficiency
translated to the customer as price reduc-
tions may not attract additional customers
if the store or organization falls short of
providing other elements related to customer
satisfaction.
The first could well be labeled ‘rThe
Cost Reduction Trap.” In this instance, we
are concerned with two chains’ produce oper-
ation. One was a division ofa large chain,
one a medium size chain. Both operated over
about the same geographical area. Both had
about 50 stores.
Chain A felt they based most of the
decision making on economic facts. For
example, most of the produce from distant
producing areas was shipped by railroad
rather than truck because of freight savings.
They seldom mixed loads because of increased
charges. The stores ordered ten days ahead
with no adjustments in orders permitted a
week before deliveries. They operated on a
two day distribution center cooler supply as
a safety stock. Supervisors hadtherespon-
sibility for balancing supplies between
stores . Stores were locked into a two or
three times a week delivery schedule depen-
dent upon location and store size. The
major emphasis for retail managers was im-
plementing company policy.
Chain B favored truck delivery to the
distribution center on all items possible.
While acknowledging a higher transportation
cost, they cited 2-4 days quicker delivery
to the distribution center from shipping
points and amore reliable delivery schedule
from production areas to the distribution
center , Wide use was made of mixed loads to
secure fresh shipments of low sales volume
items , They operatedon a policy ofan empty
cooler at the distribution center. Stores
submitted their orders one week in advance
and were permitted, although not encouraged,
to make adjustments up until the evening be-
fore shipping to the stores. Stores could
receive deliveries daily although most chose
a three day schedule. Store managers and
department managers were expected to manage
their store within broad policy guidelines.
Chain B’s store-door costs were higher
than Chain A. However, on many high sales
volume items Chain B had four to six days
less elapsed time than in Chain A between
production point shipping and when customers
picked most items out of the display and
carried them home. Chain B had readily ob-
servable freshness differences in stores.
Customers in this area rated Chain B’s
produce tops in quality. Which company had
the stores that really scored with customers?
Case No. 2 will be labeled “The Price
Dilemma.” This store is a one store inde-
pendent. Extension and distributor manage-
ment programs have reached this retailer in
recent years. His net had increased over
the past four years from .14 percent to 1.35
percent of sales with a steady increase in
Journal of Food Distribution Research February 73/page 67sales volume. A national chain competitor
moved to discounting, the third competitor
to do so over a three year period. An addi-
tional competitor had by far the largest
sales volume in the market and was not dis-
counting. The latest chain move to a dis-
count program convinced this store owner he
had to meet discount pricing schedules,
which he implemented largely by deep price
cuts on high volume items. A customer anal-
ysis of that trading area shortly before in-
dicated that 40 percent of the trading area
customers were not oriented stronglyto price
comparisons . Can you predict the result for
this store’s operation? The net plunged back
to where it had been four years before while
sales were stagnant. In the process, some
very desirable changes affecting store oper-
ations were postponed because of financial
problems.
This latter case illustrates that prob-
lems of tuningin customers are not those of
large organizations vs. small organizations
but ones of meeting customer needs in each
store’s trading area. This procedure may
become more complicated for large sized
organizations but is not limited to them.
Food distributors must be concerned with
managerial economics. But they also must
be concerned with satisfying customers.
When operating ratios indicate poor
performance and employees are pressured to
improve, the wrong button may be pushed.
An overly narrow interpretation of effi-
ciency related ratios may call for an in-
crease in sales per man hour, perhaps through
job consolidation or through a quota in the
number of labor hours allowed. The real
problem in this case could well be merchan-
dising the store for satisfied customers
which can result in a higher customer count
and a larger sales volume. Putting unreal-
istic pressure on employees may well push
sales volume the wrong direction as store
cleanliness declines, employee courtesy and
friendliness disappear, and out of stocks
rise resulting in customers being turned
off instead of tuned in.
An analysis of customer satisfaction
of each store’s trading area is used only
infrequently to identify problem areas and
opportunities . The Kroger-Donnely Study7
several ‘years ago strongly recommended that
each store be designed for and operated to
meet the needs of the customers in its
trading area. The implementation of this
recommendation hasnot been a major achieve-
ment of the food industry. At the present
time, customer analysis seems to be used
most often in feasibility studies and site
location work,
Leed8 has developed a technique that
enables managers to sample customers in their
trading area for opinions related to some
ten aspects of store operations and of com-
petitors in their trading area.
Skinner9 has been active in promoting
seminars which concentrate on the management
of external factors, including customer
evaluations, of store operations.
Both Watkins ’IOand Vastine’sll work on
trading area analysis
evaluate one or more
operations different”
in every study made.
Most customer or:
suggests that customers
major aspects of store
y than does management
ented evaluations seem
more difficult to express than standard oper-
ating ratios, possibly because of less
practice and less experience with this kind
of information. The sum of customer exper-
iences and impressions, however, has a major
and long-lasting impact on the operating
statement, and on the firm’s efficiency.
A more complete management information
system for the future calls for not only
sophisticated financial and operating infor-
mation but also a systematic approach to
customer motivations, opinions, and values.
The challenge at the present time is one of
implementing measurement techniques related
to customer satisfaction and integrating this
measurement into the total system.
lW. W. Haynes, Managerial Economics,
Business Publications, Inc., Austin, Texas,
P, ~.
‘Edgar P. Watkins, Retail Food Store
Market Analysis, Cooperative Extension Ser-
vice/Department of Agricultural Economics &
Rural Sociology, ESO No. 5, The Ohio State
University, Columbus, Ohio
February 73/page 68 Journal of Food Distribution Research3C, R. Handy and D. L. Padberg, “A
Model of Competitive Behavior in Fo-o”d In-
dustries, ” American Journal of Amicultural
Economics, Vol. 53, No. 2, May, 1971.
4Supermarketin~, October, 1971, p. 57.
5Progressive Grocer, April, 1971, p. 81.
61bid.
7“ConsumerDynamics in the Supermarket,”
Progressive Grocer in cooperation with Reuben
H. Donnely Corporation and the Kroger Com-
pany, 1966.
8Dr. Ted Leed, “RiverCityFood Shopping
Survey: ACase Study,” University of Massa-
chusetts, Amherst, Massachusetts.
10Ed Watkins, “Store Image: A Manage-
ment Tool,” Journal of Food Distribution,
Contributed Papers Issue, September, 1971.
llWilliam Vastine, paper presented at
National Association of Retail Grocers
Annual Meeting, June, 1972.
>W<*>W i’c
WHAT IS THE FOODDISTRIBUTIONRESEARCH SOCIETY?
In May 1960, a group of interested edu-
cators , government researchers, and food in-
dustrypeople met to discuss theirmany mutual
problems. The open, frank discussion sparked
the enthusiasmof those involved and annually
thereafter, the group informally sponsored
the Food Distribution Research conference at
various universities throughout the United
States.
The need for more formal organization
was recognized and at the 1967 conference
the Food Distribution Research Society was
officially formed.
The need to coordinate food distribution
research and its implementation has brought
together, as members of the society, a group
of concerned persons dedicated to progress
in this particular industry,
Purposes of
the Organization
The Society organizes and holds confer-
ences, meetings, symposiums, etc. of leaders
in the field of food distribution research,
and provides an atmosphere wherein ideas,
methods, technical developments, and problems
can be freely discussed,
Research
The Society encourages research by de-
fining research problems of the industry; by
providing guidelines and direction for de-
veloping ,and implementing food distribution
research; by coordinating efforts of research
workers; by feeding back research needs to
researchers.
Information ,
The Society serves as an information
clearinghouse for past, current, and future
food distribution research, and provides
channels for exchange of information.
Implementation
The Society encourages implementation
of research findings through communication
of research results to users, through train-
ing, and through encouragement of application
and implementation research.
Professional Advancement
A major goal of the Society is to gain
increased recognition for the field of food
distribution research, thereby enhancing the
roles of those involved in it.
>’< 9<* 9<9<$<
Journal of Food Distribution Research February 73/page 69

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