THE PHYSICAL DISTRIBUTION SERVICE AS A DETERMINING FACTOR IN THE PURCHASE DECISION PROCESS – PART 1

Upon completion of 10 years of data collection and evolutionary analysis of the results of the Benchmark – Customer Service survey, it is possible to increasingly understand how the conditions surrounding the competitive environment affect the relationship between economic agents.

In this sense, it appears that the current economic environment in recent years has been decisive for the increase in the importance of the physical distribution service for commercial relations along the chain of consumer goods, more specifically between the link that comprises manufacturers and networks of supermarkets.

It is observed that the physical distribution service consists of a competition weapon of increasing relevance in differentiation initiatives against the competition, by adding value to the product marketed by the consumer goods industries.

This article, which will be divided into two parts, also indicates that there are ample opportunities to improve the quality of this customer service, largely due to the level of dissatisfaction and the increased level of demand on the part of the trade.

This first part will discuss the impacts of the economic scenario on the decision-making process for commercial purchases. The second will deal with the effects on the level of expectation of the trade of the distribution service offered, as well as on the perception of the performance of the service provided by the industry.
THE ECONOMIC ENVIRONMENT

The economic growth cycle, which began in 1994 as a result of the currency stabilization plan, led to a vigorous and sudden increase in the population's purchasing power. However, this virtuous cycle was already exhausted by the end of 1997.

Table 1 indicates that up to 1997 there was an increase in workers' income of 28,9%, as well as an accumulated growth of 17,1% in the Gross Domestic Product, both at decreasing rates. As a result, supermarket sales rose by 19,6% between 1995 and 1997 (or around 40%, if only the growth in the second half of 1994 is considered, which already included significant gains related to the economic stabilization plan).

From 1994 onwards, competition rules began to change, largely as a result of the process of liberalization of market laws introduced by the government. Until then, business profitability was largely leveraged by financial engineering, due to the high inflation rates in the economy. Finally, the search for operational excellence has become key to the competitiveness of companies.

In a later period, an unsuccessful attempt to resume sustained economic growth, which took advantage of the sharp devaluation of the real in 1999, brought only a spike in economic growth in 2000 and a prolonged perverse effect of increased inflation rates. Between 1999 and 2002, the real devalued by 199,1% against the US currency, which largely contributed to inflation accumulating 43,2% in the same period.

As a consequence of the policies adopted to contain inflation, consumer purchasing power, which had already been depressed since 1998, reached 2002 with an accumulated loss of around 12,7%.

In 2003, the prophylactic treatment introduced by the new government succeeds in reversing the inflationary rhythm, without avoiding yet another undesirable side effect on the worker's purchasing power. At the end of the year, the decline in income reached 12,2% – the highest since the implementation of the economic stabilization plan in 1994.

It is important to point out that the entire 28,9% gain in workers' income between 1994 and 1997 was practically lost in a later period, between 1998 and 2003. In this period, income was reduced by 23,7%.

Next, it will be presented how changes in the population's income have an impact on the decision-making process of supermarket trade purchases along with the consumer goods industry.

EVOLUTIONARY ANALYSIS OF RESEARCH RESULTS BETWEEN 1994 AND 2003 

The results of research carried out by the Center for Studies in Logistics, and presented below, indicate that the economic environment conditions commercial relations between retail and industrial companies, participants in the supply chain of consumer goods products.

The final consumer is perceived as the sovereign entity of the supply chain, illustrated in Figure 1. After all, the relevance of the entire flow of goods and products along the links in this chain is subordinated to the value perceived by the final consumer. That is, the final consumer is the one who, ultimately, governs the cause and effect process along the supply chain in terms of changing requirements in order to meet their needs.

Figure 1 - The Consumer Goods Supply Chain

Figure 1 presents the logic of the physical flow of goods between the industry and the consumer, which can be done directly, as in the case of virtual stores, via the internet; through wholesaler; or through a retail network. This last case is the object of the research carried out.

THE BUSINESS PURCHASE DECISION PROCESS

The analysis that follows indicates that the consumer's purchasing power level has brought direct consequences in the commercial relations between the industry and the supermarket chains. In short, common sense is reaffirmed: evidence is presented that the orders that the industry receives from retailers are conditioned to the purchase pattern of the final consumer.

In the first place, the 28,9% growth in income of the population between 1994 and 1997 provoked changes in consumption habits which, in turn, modified the demand pattern of retailers vis-à-vis the industry. It should be remembered that in this period there was a generalized increase in the consumption of higher value-added products, including imported products due to the favorable exchange rate for Brazilians. There was also a search for greater operational efficiency, which was largely motivated to account for the higher sales volume, as well as to compensate for past speculative gains.

As of 1998, the repercussions of the continued decline in consumer purchasing power were strongly reflected along the supply chain. As a rule, central attention was redirected to meeting basic needs, modifying the chain of requirements between the consumer and the industry, with retail having the role of transmitting them in its purchasing decision process.

In the same period, the deterioration of the economy and the vertiginous drop in workers' purchasing power, which led to the erosion of consumption patterns, contributed to the reduction in retail performance (see Table 2).

Table 2 indicates that from 1998 onwards there was a loss of productivity in retail trade. Between 1998 and 2002 there was a 21,69% drop in productivity in the area; 9,04% in productivity per employee; and 21,62% in productivity per check-out.

The drop of 0,85% in the sales of the supermarket sector (Table 1), between 1998 and 2003, corroborates the thesis that workers reduced their consumption pattern to meet their needs due to the strong loss of purchasing power. In turn, commerce began to demand from the industry greater price discounts and lower transaction costs, as well as more promotion, to the detriment of product quality and sophistication.

These changes in commercial relations between the supermarket retailer and the consumer goods industry can be seen from the analysis of the results of the Benchmark – Customer Service survey (see general information in the table below). The dynamics of the decision-making process for the purchase of trade with the industry is represented in Figure 2.

Figure 2 - Evolution of the Purchasing Decision Process from Trade to Industry

Figure 2 shows how the relative importance of the retailer's purchasing decision variables, product, price, customer service and promotion and advertising, changed over the period considered by the survey. It is worth mentioning that in this context, the product incorporates, in addition to physical characteristics, those attributes related to its expanded concept, such as its intrinsic quality and image.

It is observed that customer service is the variable that showed the greatest growth in relative importance, when considering the entire period of the survey. Between 1994 and 2003, the physical distribution service grew by 38,9%, surpassing the position of promotion and advertising in 1995. In this period of time, the relative importance of customer service grew from 14,4% to 20,0% , or 5,6% percentage points.

From Figure 2, it can be seen that the increase in importance of the physical distribution service, in the period from 1994 to 2003, occurred in two distinct growth cycles. At first, between 1994 and 1997, customer service was valued, from 14,4% to 18,7% in relative importance, as a means of achieving operational efficiency in the physical distribution process to offset the loss of inflationary gains in the period, which fundamentally sustained the business, as previously mentioned.

The growth in consumption observed at that time, due to the increase in workers' income, also played a relevant role in valuing customer service. The industry's existing distribution capacity did not support the increase in demand from the trade, notably between 1994 and 1995, contributing to the increase in dissatisfaction with the service provided. Evidences for this fact will be presented in the second part of this article.

In 1998, the importance of customer service dropped to 16,4%, the year in which retail trade reached the highest level of revenue growth (see Table 1) and productivity since 1995 (see Table 2). Apparently, the pressure for service eased as the trade showed its best results.

In 2000, customer service gained new impetus as a result of efforts to mitigate the sharp decline in productivity in the retail sector. This time, the sharp loss of 5,5% in consumer purchasing power in 1999 was decisive for retailers to once again give increasing importance to customer service. The appreciation of distribution services was motivated by the search for improvements in business results, through the reduction of operating costs. During this period, a change in the level of importance of customer service can be observed: from 16,9% in 1999 to 19,2% in 2000, reaching 20,0% in 2003.

In both cases, the consumer had a preponderant role insofar as he was the one who determined the consumption pattern which, in turn, influenced the transactional relations between retail and the consumer goods industry.

There is, therefore, evidence of a direct relationship between the worker's purchasing power and his consumption pattern, which in turn conditions the relationship between commerce and industry.

In fact, the demand from retailers for lower transaction costs is behind the growing importance of customer service attributed by retailers over the period surveyed.

In a later analysis (part 2 of the article is included), it will be observed that, as a rule, retail has been increasingly dissatisfied with the physical distribution service of the consumer goods industry. This often happens as a result of the combined effect of the growth in the level of trade demand for better services and the worsening performance of the industry.

It should be remembered that the improvement in the level of service implies gains in efficiency of the physical distribution process, either in terms of inventory reduction, by minimizing delivery time or delays, or through greater product availability to the consumer to avoid shortages ( stockouts).

When analyzing the behavior of the other purchase decision variables, a significant consistency is observed in relation to what happened with customer service throughout the research period.

In 1999, the product that had reached its peak in terms of relative importance, gave way to the other purchase decision variables – from 30,8% in 1994 to 36,9% in 1999, regressing to 27,1% in 2003 , expected to reach 26,5% in 2005. In 2001, product ceased to be considered the most important variable, with price assuming this position.

The weight of price in the retail purchase decision followed an inverse trajectory to the worker's income level. In the period between 1994 and 1997, during the cycle of economic growth, while the worker's real income increased by around 28,9%, commerce gave decreasing importance to price in its purchases from industry. In this period, the price lost around 19,7% in importance – from 38,5% in 1994 to 30,9% in 1997.

As of 1997, it is observed, as a rule, that the price has consistently gained importance in the decision-making process of commercial purchases, as the purchasing power of the consumer has been eroded. While income fell 23,7%, the price increased by 13,3% – from 30,9% in 1997 to 35,5% in 2003, reaching 35,8% in 2005.

With regard to the promotion and advertising variable, notably from 2000 onwards, this has tended to grow in importance in trade relations between retail and industry. It is observed that promotion and advertising gain in relative importance as the purchase decision process becomes centered mainly on price. Between 2000 and 2003, while the relative importance of price varied from 32,6% to 35,0%, promotion and advertising increased from 14,2% to 18%.

It should be noted that 1999 represents a milestone in which the changes in the trajectory of the product, price and customer service variables are clearly perceived, as a result of the impacts of the exchange rate crisis on the economy of the previous year. From then on, as a consequence, the product gave way to price, customer service and promotion and advertising.

FINAL CONSIDERATIONS

In short, it appears that commerce responds to consumer needs, translating them into purchasing requirements with the industry. In this sense, as the purchasing power of the consumer decreases, the price gains in importance in the decision-making process of purchasing from the trade with the industry, while, at the same time, the product loses in relevance. On the other hand, customer service gains in importance when there are pressures in economic terms, either to restore profitability or to outperform the competition in terms of service level.

There is, therefore, the potential of the physical distribution service as a means to leverage the level of competitiveness of supply chains.

Once verified how much the physical distribution service is a determining factor in the retail purchasing decision process, the research seeks to assess: What is the level of satisfaction of retailers with the distribution service of the consumer goods industry? Do companies holding the best practices have their performance differentiated by retail trade? – Subjects of the second part of this article.

BIBLIOGRAPHY

FLEURY, PF, LAVALLE, CR Evaluation of the physical distribution service: the relationship between the consumer goods industry and the wholesale and retail trade. Management and Production, vol. 4, nº 2, August 1997.

CHRISTOPHER, M. Logistics and Supply Chain Management: strategies for reducing costs and improving service. Prentice Hall, 1998.

BOWERSOX, DJ, CLOSS, DJ Business Logistics: the supply chain integration process. Atlas publishing house, 2001.