Profitability Performance of Supermarkets : The effects of scale of operation, local market conditions, and conduct on the economic performance of supermarkets

Abstract: Ever since introduced and rolled out on the market during the 1950's and 1960's the supermarket format of grocery retail stores has played an important role in the grocery retail sector in Sweden, as well as in other countries. Although the sector in Sweden has evolved into a sector harbouring various store formats, the supermarket remains the major one - about half of the total volume of sales currently goes through supermarkets. Issues referring to the economic performance of supermarkets, and its antecedents, are thus of interest not only to retailers, but also to consumers as well as to society, overall.This study contributes to previous research by explicitly addressing bottom-line performance of supermarkets, and by bridging different fields of research. With the structure-conduct-performance (SCP) paradigm as theoretical underpinning, a cross-sectional design is developed for the study, comprising the economic performance of 168 supermarkets. By pooling data from various sources a unique database is developed, providing prerequisites for a comprehensive investigation into the effects of scale of operation, local market conditions, and supermarket conduct on various aspects of supermarket performance, all the way to bottom-line profitability performance.The results show that profitability performance of supermarkets is a consequence of a complex network of relationships between various aspects of economic performance, scale of operation, local market conditions and supermarket conduct. The profit margin, i.e. the span between gross margin and operating costs%, turns out as the major determinant of profitability performance. The profit margin, in turn, is found related to productivity, which in turn is found related to the volume of sales. Scale of operation and local market conditions are found working themselves into profitability performance, via conduct and various aspects of economic performance. However, neither scale nor favorable local market conditions turns out as the determinant of high rather than low profitability performance. Among the most as well as among least profitable, there are small and large supermarkets, facing local markets of favorable as well as unfavorable conditions. Rather, the dividing line between the low vs. highly profitable lies in the interplay between market conditions and conduct. Results from analyses of internal and external characteristics of the least and most profitable show important dissimilarities referring to their interplay with local market conditions. As such, the study provides important implications for retailers, from a strategical, tactical, as well as operational perspective.