The Effects of Menu Costs on Retail Performance: Evidence from Adoption of the Electronic Shelf Label Technology

Abstract

We use the adoption of electronic shelf labels (ESLs) by an international grocery retailer in 2015 to identify the effects of physical menu costs (i.e., labor and material costs of price adjustment) on retail performance. We find that the installation of ESLs increased gross margins substantially, which implies profit gains that go far beyond labor cost savings. We also explore the mechanism behind this effect. We find that the lift in gross margins was associated with an increase in quantity sold and a decrease in price per unit sold, and that the lift primarily came from low-shelf life product categories. Moreover, we find that more and smaller price changes occurred with ESLs. These additional price changes were mostly price decreases, and were dispersed in time. Our findings are consistent with reductions in both variable and fixed menu costs (i.e., both costs that scale with the number of products affected and costs that do not).

Keywords: Menu Cost, Dynamic Pricing, Ordering, Revenue Management, Welfare Analysis