An analysis of the concentration of consumer purchasing in FMCG markets

Kim, J (2012) An analysis of the concentration of consumer purchasing in FMCG markets. Doctoral thesis, University of London: London Business School.

Abstract

The 80/20 rule (also known as the Pareto principle/law) states that the top 20% of the contributors account for 80% of the outcome. This work undertakes a thorough analytic and empirical investigation on the extent to which this conventional wisdom applies in purchasing concentration in FMCG (fast-moving consumer goods) settings. For analytical part of the investigation, I use the most widely validated models for the purchasing of FMCG products: the NBD (negative binomial distribution) and the DM/NBD (Dirichlet-multinomial/NBD). I undertake an analysis of what patterns of concentration we could expect to observe if these models are indeed correct characterizations of buying behaviour. My analysis using the NBD model shows that there are systematic pattern between the key statistics (penetration and average purchases per household) and x=20. More importantly, if FMCG purchasing is indeed NBD, it would be extremely rare to observe an 80/20 concentration level, given the levels of penetration and avg.p/hh we normally observe. At the brand level some systematic relationships are uncovered using a special case of the DM/NBD. My empirical studies use two data sets; the IRI Factbook data, which has aggregate-level data for large number of categories, and the IRI Marketing Data Set, which contains household-level purchasing data for smaller number of categories over a six-year period. The investigations do confirm that in the FMCG purchasing the concentration is much lower than 80/20, in fact closer to 50/20. This indicates that heavy buyers of FMCG markets buy much less than portrayed by the conventional wisdom, the 80/20 rule. Other findings from the analytical analysis are also confirmed. Other related topics such as the structural, promotional, and demographic correlates of concentration and dynamics of concentration over several years are explored. In addition, concentration in terms of continuous quantities (such as sales volume and dollar value) are investigated using continuous type models.