Category expansion through cross-channel demand spillovers

Abstract

Does the local presence of premium branded stores with strong associations to a product group help promote the relevant category as a whole? Based on the Starbucks example, this paper documents such a demand spillover effect for coffee across channels and firms: The firm’s stores stimulate coffee demand in mass-market grocery channels, benefiting rival firms that target consumption at home. I show the spillover at the household level, as well as with retail scanner data, employing a demand model to account for supply-side responses. To establish causality, I use a strict fixed effects specification with trend controls, and also validate the findings using instrumental variables based on the supply-side advantage to operating chain stores in proximate markets. In a representative market, the presence of a Starbucks stores boosts rival packaged coffee sales by 1.2%. The increase appears consistent a consumption stimulation effect of Starbucks stores acting as environmental cues for coffee, their main product. Evidence from other chains confirms the spillover, mainly from more premium brands with high demand-stimulating potential to lower-end mass products. The effect builds over time, and as cue theories predict, interacts positively with past consumption, suggesting a reinforcing effect on consumption habits.