Estimating Substitution and Basket Effects in Retail Stores: Implications for Assortment Planning
41 Pages Posted: 2 Dec 2016
Date Written: November 30, 2016
Abstract
Many retailers are reducing store footprint and downsizing their assortments accordingly to improve store productivity. Some of the revenue for items removed from the assortment may be recouped by substitution, but also some of the revenue for items kept in the assortment may be lost due to basket abandonment. For a practical setting where baskets may contain any subset of items from thousands of products, estimating both substitution and basket effects is a challenge. To address this we develop a demand model that incorporates a multinomial logit (MNL) model to estimate substitution within a subcategory and a parsimonious model to estimate basket retention. Using transaction and product availability data from 8 stores of an office supplies retail chain that were dramatically downsized from large- to small-format stores, we show that inclusion of the basket retention effect in assortment selection for the small stores can significantly improve profits at these stores.
Keywords: Assortment Planning, Substitution and Basket Effects, Multinomial Logit Model
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