A new study in the Strategic Management Journal written by Heewon Chae helps shed light on how the COVID-19 crisis influences retail firms’ business portfolio and product offerings.

In this study, Chae investigated how residents’ income and education levels of a city are associated with restaurants’ scope of offerings and their engagement in spanning multiple culinary categories. Using a sample of 6,072 restaurants in a broader Washington DC metropolitan area and a large-scale survey, she found that the strong purchasing power of high-income communities reduces the need for firms to operate in multiple categories. Generally, higher-income communities have a greater and more stable aggregated demand for each culinary category (e.g., American, Chinese, French) so a restaurant’s need to span multiple categories would be smaller. By contrast, demand for each culinary category in low-income communities is small and unstable. Targeting a specific niche, accordingly, may not enable a restaurant to garner enough demand to survive. Thus, restaurants would be more likely to target a broader niche by providing offerings from multiple culinary categories to accumulate greater attention from potential customers. This finding has an implication for the retail firms that target local residents during the COVID-19 crisis as many communities experience sudden change in income levels that may have an impact in consumers’ purchasing power and demand.

“The restaurant industry got hit hard during the pandemic and ended 2020 with total sales that were $240 billion below the pre-pandemic forecast for the year by the National Restaurant Association…To overcome sudden decrease in consumer demand and purchasing power, restaurants have streamlined menus to be cost effective. They also provide more typical food as consumers look for comfort food such as burgers and pizza.”

In addition to the finding that a local community’s income level has a negative effect on restaurants’ category spanning, the study found a contrasting effect of residents’ education levels; educated elites tend to be culturally omnivorous and they like to seek novelty and diversity while those with less education find comfort in familiar objects. As such, educated elites enjoy experiencing and understanding offerings that present a challenge to easy classification. This omnivorous preference, thus, encourages retail firms’ spanning and makes them provide hybridized items as well as various offerings from multiple categories.

Source: Chae, H. Forthcoming. Income or education? Community-level antecedents of firms’ category-spanning activities. Strategic Management Journal. https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.3328

Author Bio

Heewon Chae is an Assistant Professor in Management and Entrepreneurship at the W. P. Carey School of Business, Arizona State University. Her research interests lie in the area of strategy, organizational theory, and international business, with a specific focus on organizational identity, audience heterogeneity, and market categorization. Taking sociocognitive perspectives, she examines how organizational audiences such as investors, local communities, and consumers influence firms’ strategies and their consequences.

Picture: https://www.capradio.org/news/insight/2020/07/29/covid-19-impact-on-california-restaurant-industry/