Factors of consumers choices a reaveled preferences analysis for 3 in 1 coffee

In the above context of 3in1 coffee market, the main objective of this study is to identify the determinants of consumer’s choices in 3in1 coffee market such as price, main ingredients,

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FACTORS OF CONSUMER’S CHOICES:

A REVEALED PREFERENCE ANALYSIS FOR

3IN1 COFFEE

BY

NGUYEN VAN VIEN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, November 2016

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FACTORS OF CONSUMER’S CHOICES:

A REVEALED PREFERENCE ANALYSIS FOR

TRUONG DANG THUY

HO CHI MINH CITY, November 2016

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ACKNOWLEDGEMENT

I would first like to thank my thesis supervisor Dr Truong Dang Thuy of the Vietnam – The Netherlands Programme (VNP) at Ho Chi Minh City University of Economics He consistently allowed this paper to be my own work, but steered me in the right the direction whenever he thought I needed it

I acknowledge the contribution of Dr Nguyen Ba Thanh (IUH) as the second reader of this thesis, and I am gratefully indebted to him for his very valuable advices on building idea for this thesis

I would like to express my gratitude to the VNP officers who were involved in my thesis process by updating thesis schedule and providing good condition for my research process Without their passionate participation, the thesis process could not have been successfully conducted

Finally, thanks are also due to my classmates for providing me with unfailing support and continuous encouragement throughout my years of study and through the process of researching and writing this thesis This accomplishment would not have been possible without them Thank you

Nguyen Van Vien

Ho Chi Minh City, November 2016

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ABSTRACT

3in1 coffee is known as an important product of instant coffee market in Vietnam, especially

in Ho Chi Minh City The reason of that comes from the benefits which 3in1 coffee brings to consumers in term of convenience, product quality, and appropriate price In the above context

of 3in1 coffee market, the main objective of this study is to identify the determinants of consumer’s choices in 3in1 coffee market such as price, main ingredients, packaging, manufacturer, discount, and weight promotion

This study is a practical research with the basis of random utility theory Specifically, empirical result is produced from the estimation of conditional logit model for the dataset which is collected from consumers in Ho Chi Minh City in 2016 The survey process relies on the revealed preference method with several additional hypothetical scenarios

The main finding of this study emphasizes the importance of main ingredients, packaging, and manufacturers of 3in1 coffee in consumer’s choices It is recognized that price may not matter consumer’s choices However, consumers love discount and weight promotion In addition, several manufacturers enjoy positive marginal utility of price for consumers while the others enjoy the negative one On the other hand, price changes may give small effects on choice probability of 3in1 coffee products According to those empirical findings, implications have been employed for manufacturers in order to understand more about 3in1 coffee market, widen their market share, and increase their profits

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TABLE OF CONTENT

Acknowledgement i

Abstract ii

Table of content iii

List of tables .v

List of figures vi

1 Introduction .1

1.1 Research problem .1

1.2 Research objective .2

1.3 Scope of study .3

1.4 Thesis structure .3

2 Literature review .4

2.1 Random utility theory .4

2.2 Random utility model forms 9

2.3 Random utility model for beverage or food .11

2.4 The investigation of coffee’s attribute .12

2.5 Consumer’s social-demographic characteristics .16

3 Research methodology .18

3.1 Revealed preference method .18

3.2 Attributes of coffee .20

3.3 Choice set .21

3.4 Questionnaire .23

3.5 Survey process .24

3.6 Model specification 25

4 Data and empirical result .30

4.1 Data .30

4.2 Empirical result .39

4.2.1 Determinants of consumer’s choices for 3in1 coffee 39

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4.2.2 Price and consumer’s utility of 3in1 coffee by manufacturers .46

4.2.3 Price change and choice probability .49

4.2.4 Marginal utility of price for respondents .52

4.2.5 Discount and weight promotion and consumer’s utility for 3in1 coffee .54

4.2.6 Manufacturers, social-demographic characteristics and consumer’s choices for 3in1 coffee 55

5 Conclusion .58

Reference vii

Appendix xi

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LIST OF TABLES

Table 2.1 Importance of factor on consumer’s coffee preferences .14

Table 3.1 List of suggested attributes .21

Table 3.2 Volume share and value share of main manufacturers .22

Table 3.3 List of all available 3in1 coffee products .23

Table 3.4 Variable description .26

Table 4.1 District, super-market, and the number of respondents .31

Table 4.2 Descriptive statistics of the sample .32

Table 4.3 Frequency of social-demographic characteristics .34

Table 4.4 Factors of consumer’s choices for 3in1 coffee .42

Table 4.5 Marginal utility of price for respondents by alternative .53

Table A.1 All 19 alternatives and their attributes xii

Table A.2 Price fluctuation among super-markets xxi

Table A.3 Consumer’s choices change among various choice scenarios xxii

Table A.4 Regression result of equation (3.1) and (3.3) (specific choice set) xxiii

Table A.5 Regression result of equation (3.1) and (3.3) (single variable) xxiv

in case of all choice scenarios .51 Figure A.1 All 19 alternatives for survey process xi Figure A.2 Consumer’s utility along current price values .xxv

Based on the report of AC Nielsen (2015), 3in1 coffee market in Vietnam are contributed

by many manufacturers of which five main manufacturers are Vinacafe, Nestlé, Trung Nguyen, Fes Vietnam, and Tran Quang In 2015, total volume share of five main manufacturers is 88 percent (Vinacafe: 38%, Nestlé: 19%, Trung Nguyen: 14.6%, Fes Vietnam: 4.2%, Tran Quang: 12.2%) compared to about 99 percent in 2014 Moreover, in term of value share, 3in1 coffee products comprise 83 percent of total value of instant coffee market In term of package, bag, box, and sachet are three main kinds of package with 99.9 percent of volume share Therefore,

it is concluded that total demand of 3in1 coffee is relatively high compared to other instant coffee products and the competition among manufacturers is also intense in order to capture more market share

Due to the high demand of consumers, especially young consumers, many manufacturers have diversified their 3in1 coffee products in term of brands, prices, segments, packages, pack size, promotion, main ingredients For example, five main manufacturers including Vinacafe, Nestlé, Trung Nguyen, Fes Vietnam, and Tran Quang provide 27 different kinds of 3in1 coffee

in term of main ingredients, packaging, and brands Moreover, the competition among these manufacturers is also reflected in the aspect of prices and promotions Price increase could help manufacturers enjoy the benefits from the increase of profit; however, they may also suffer the decrease of quantity sold Beside price change, manufacturers could conduct promotion activities in order to increase the number of consumers who know about their products or their brand names Promotion activities are conducted through many forms such

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as weight promotion, additional sachets, or a gift of related product, for example, spoon, plastic cup, or glass cup Thus, two important questions are raised that:

(1) What are important factors which affect consumer’s choices?, and

(2) Do price changes and promotions possibly help one manufacturer to gain consumers from the others?

1.2 Research objective

According to Batsell and Louviere (1991), experimental methods relied on the framework of both econometric analysis and psychometric analysis and it is the most popular method to do researches about consumer’s preferences Experimental methods explain consumer’s preferences through the process of identifying the range of significant factors, generating hypothetical profiles, collecting consumer’s choices, and analyzing choice data The datasets

of experimental methods are collected from two main survey methods: revealed preference and stated preference methods Two main survey methods provide a wide application in understanding consumer’s preferences For example, Durevall (2007) investigated that decreasing price of coffee has less impact on coffee demand in the long term due to the combination of consumer’s preferences and population structure in Sweden In addition, Wolf

et al (2011) suggested that the interaction of product attributes also have significant impact on consumer’s preferences, beside prices

Therefore, the aim of this study is to achieve three research objectives:

(1) Identifying the key determinants of consumer’s choices for 3in1 coffee,

(2) Determining relationship between price and consumer’s utility for 3in1 coffee, (3) Evaluating the impact of discount, promotion, and price changes on consumer’s choices

First, beside price, several factors are claimed to be reliably important and influence the consumer’s choices Thus, identifying these factors provides deeply understanding about consumer’s preference in order to suggest both implication for instant coffee market and development strategy for manufacturers Second, it is said that determining the relationship between price and consumer’s utility plays an important role in finding out the effect of price change on consumer’s utility or choice probability of products for each manufacturer This finding gives manufacturers an evaluation about their advantages or disadvantages to get higher profits in the 3in1 coffee market compared to the competitors Finally, this study also

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considers the impact of discount, promotion, and price change on consumer’s choices Since 3in1 coffee market is oligopoly in Vietnam, any change of coffee attributes of one brand will have significant impact on its quantity sold Therefore, manufacturers could optimize their

marketing activities for capturing more market shares

1.3 Scope of study

This study is a practical research which relies on the basis of random utility theory The data collection of this study is conducted in super-markets in Ho Chi Minh City in 2016 by applying revealed preference method with the addition of several hypothetical choice scenarios Due to the limitation of finance and time span, a small sample of 197 respondents who are 3in1 coffee consumers is collected Each respondent is assumed to face all 19 surveyed alternatives in actual choice scenario, so the dataset of this study is treated as panel dataset

The contribution of this study is to investigate the association between consumer’s choices and coffee attributes such as price, main ingredients of coffee, packaging, and manufacturers

by using the revealed preference method From that, producers could understand more about the significance of several attributes, which may have heavy contribution to consumer’s choices Moreover, the relationship between prices and consumer’s utility could help producers

to evaluate the trust of consumers to their brands when market changes in term of prices, promotions, and discounts

1.4 Thesis structure

The remaining of this study includes four chapters Chapter 2 presents literature review, which comprises theoretical review and empirical review Chapter 3 presents research methodology, which describes the questionnaire design, survey process, and empirical model Chapter 4 presents the data description, regression result, and discussion Chapter 5 summarizes the conclusion, the implication, the limitation, and the further research direction of this study

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CHAPTER 2: LITERATURE REVIEW

In this chapter, the theoretical and empirical review have been summarized in order to provide the research framework for this study In particular, this chapter concentrates on: (1) the literature of random utility theory in term of a brief history, basic assumptions, random utility model and its estimation; (2) several random utility model forms and their application; (3) empirical result of random utility model for food and beverage; (4) relationship between coffee’s attribute and consumer’s choice; (5) relationship between individual characteristics and consumer’s preferences

2.1 Random utility theory

Probabilistic choice theories were the important parts in psychology They were developed to explain the inconsistency and non-transition of individuals’ preferences in experimental observations (Luce & Suppes, 1965) The inconsistency and non-transition of individuals’ preferences could be reflected through choice situations when individuals do not choose same alternatives in different choice situations or different sets of alternatives

Thurstone (1927) introduced the “law of comparative judgment” to apply to “the comparison of physical stimulus intensities and qualitative comparative judgments such as those of excellence of specimens in an educational scale, and the measurement of such psychological values as a series of opinions on disputed public issues” The process, in which individuals react differently to several stimuli to be suitable to their demand, is called the discriminal process Although various stimuli are judged by the same individual, their discriminal processes are different The difference between two alternatives is measured by a scale, which is called discriminal difference With specific specimen, discriminal processes are distributed by the standard deviation, which is called discriminal dispersion According to Thurstone (1927), each specimen, which is chosen by the individuals, is described by two components: a scale value, and a discriminal dispersion These two values could be determined In addition, in term of scale value, that value comprises two components: an origin with its specific unit of measurement, and the unknown correlation between discriminal deviations of two different stimuli Thurstone (1927) also assumed that the unknown correlation is constant for the whole series of stimuli

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Based on the “law of comparative judgment”, in order to measure and explain determinants

of individual choice, constant utility and random utility approaches were introduced by Luce and Suppes (1965) Constant utility approach, which was first introduced by Luce (1959), based on the assumption of fixed utilities of alternatives It meant that individuals did not choose alternative with the highest utility Choice probabilities for decision makers are expressed by a function in which utilities of alternatives are parameters On the other hand, Marschak (1960) first introduced an economic viewpoint of random utility approach which relied on Thurstone’s “law of comparative judgment” (1927) Random utility approach based

on the perspective that individuals choose alternative with the highest utility and utility is treated as a function of attributes plus a random component

Although Marschak (1960) interpreted Thurstone’s “law of comparative judgment” in the economics field, McFadden (1974a) introduced the general procedure in order to apply random utility theory for analyzing qualitative choice behavior From that, this theory is widely reviewed in the research of Danganzo (1979), Hensher and Button (2000), Train (2009) According to McFadden (1974a), conditional logit analysis is appropriate economic analysis method for consumer’s choices behavior The research of consumer’s choice behavior comprises three main problems: (1) type of alternative and sets of available alternatives to consumers, (2) observable attributes of alternatives to consumers, and (3) identifying the model

of consumer’s choice and behavior Each alternative gives a stimulus to decision makers, which economists considered as utility It is assumed that respondents are rational and they choose alternative which has the highest perceived utility In addition, perceived utility is treated as a function of two main components: deterministic component and stochastic component

The general hypothesis of the random utility theory is that individuals are rational makers, and they try to maximize their utility when facing a choice between multiple (mutually exclusive) alternatives In other word, they compare the utilities of alternatives, which they face and choose the alternative with the highest utility Luce (1959) introduced an important axiom of random utility approach, which expressed that the presence or absence of additional alternative did not influence the relative odds of chosen alternative over the second one McFadden (1974a) formalized this axiom into three below assumptions:

decision-Page 6

(1) Independence of irrelevant alternatives (IIA): the relative ratio of choice probability of one alternative over choice probability of another alternative is affected in equally proportion by the presence of the other alternatives

(2) Positivity: choice probabilities of all alternatives in all possible alternative sets are positive

(3) Irrelevance of alternative set effect: a weak identifying restriction

According to McFadden (1974a), the perceived utility U comprises two components: the systematic utility V and the error term  The systematic utility represents the utility, which

is perceived by decision makers in the same purchasing context Alternatives and attributes are known as important components to describe different purchasing contexts The error term represents the unknown deviation of utility perceived by decision makers from the utility Specifically, the error term captures the effects of all unobservable factors The relationship between the perceived utility U, the systematic utility V , and the error term  is expressed

by the below equation:

In the viewpoint of researchers, they could not observe the utility U of decision makers The researchers could observe the characteristics of decision makers and the attributes of alternatives which are faced by decision makers From that, they could estimate the choice probabilities According to McFadden (1981), choice probabilities have to satisfy two conditions: (1) choice probabilities are non-negative and sum to one; and (2) choice probabilities depend on both observable attributes of alternatives and characteristics of decision makers Moreover, researchers do not know the error term  which captures unobservable factors that affect utility of decision makers and are not included in the systematic utility V Thus, researchers treat the error term  as random component The distribution of the error term  mainly depends on researcher’s consideration of the deterministic component V

Suppose that, decision makers try to maximize their utility, and their utility is described by the utility function:

( , ) ( , ) ( , )

U s x V s x  s x (2.2)

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where s are measured attributes, x is chosen alternative from the alternative set by decision

makers Moreover, utility component V is the function of measured attributes S:

where S 1,2, ,n are measured attributes, and 1,2, ,n are estimated coefficients McFadden (1974a) suggested two lemmas in which the value of the error term is independently identically distributed with Weibull (Gnedenko, extreme value) distribution in the first lemma, and with Gumbel distribution (Extreme Value Type I) in the second lemma Under the condition of the second lemma, McFadden (1974a) proved that the choice probability of one alternative equals the proportion of exponential function of utility of this alternative over the exponential function

of utility of remaining alternatives in the alternative set McFadden’s (1974a) finding about choice probability is expressed by the following equation:

( , ) ( , )

where Bis alternative set; x y, are alternatives of alternative set B Then, the relative odds

of choices is expressed by the following equation:

n is:

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( )y ni

ni i

P

where yni 1 if respondent n chooses alternative i and yni  0 if respondent n does not choose alternative i, and yni 0 for all other alternatives Then, choice probability of each respondent in the sample of N respondents is:

1

( ) ( )ni

N

y ni

x ni

ni ni

n i N

ni ni ni

n i

y x dLL

2 1

dLL d



In addition, the predicted probabilities that are calculated from  are closet to the observed

choices (McFadden, 1974a)

McFadden (1974a) also pointed out the advantages and disadvantages of this estimation

method of choice probabilities based on the formula (2.4) In term of advantages, this

estimation could interpret the choice probabilities in term of the relative systematic utility of

alternatives Moreover, this estimation could estimate the effect of presence of new

alternatives Specifically, the choice probability of old alternative will proportionally equally

decrease by the choice probability of new alternative In addition, this estimation could

estimate the choice alternative effects without replication, and predict the choice behavior from

extrapolation of observed alternative sets On the other hand, McFadden (1974a) pointed out

that the limitations of this estimation related to the independence of irrelevant alternatives

axiom Based on that axiom, the alternative sets may include alternatives, which are close

substitutes

2.2 Random utility model forms

According to Train (2009), the variation of random utility model forms is derived under the

different distribution functions of unobserved factors, which are expressed by the function

( )

f  Train (2009) supposed that a sample of respondents face the same observed utility V,

however, the values of unobserved factors are different among respondents Thus, the function

( )

f  reflects the distribution of unobserved utility among respondents who face the same

observed utility within a sample

In this section, several popular forms of random utility model, which are widely used in

market research, are described They include logit model, Generalized Extreme Value (GEV)

Commented [TT1]: Who says this? Are all of them use

Extreme Value Type I? What distribution other than that?

Second, Generalized Extreme Value models, which are known as GEV models, are the generalization of standard logit model GEV models comprise mathematical formulation that describes different characteristic functions The key characteristic of GEV models is that the distribution of unobserved utility of all alternatives follows a generalized extreme value Moreover, that distribution allows the correlations among alternatives The disappearance of all correlations among alternatives will transform GEV models to standard logit model The

Fourth, mixed logit model, which was introduced by McFadden and Train (2000), is a model with high level of flexibility In mixed logit model, choice probability of alternatives is expressed as the following equation:

e P e



2.3 Random utility model for beverage or food

Schiffman and Kanuk (2000) defined perception as “the process by which an individual observes, selects, organizes and reacts to environmental stimuli in a meaningful way”

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Characteristics of products and consumers affect consumer’s preferences According to Issanchou (1996), these characteristics could be divided into two groups: intrinsic characteristics group and extrinsic characteristics group Intrinsic characteristics mainly reflect the sensory attributes of products such as appearance, texture, taste, after-taste, odor, aroma, feeling Extrinsic characteristics mainly reflect the factors that are outside the products, for example, personal attributes (age, gender, income, education), the situational attributes (the price, brand familiarity, environmental attributes, the availability of products) Thus, Cardello (1996) suggested that consumer’s preferences could be investigated through two linkages: (1) intrinsic characteristics and consumer’s preferences, and (2) extrinsic characteristics and consumer’s preferences

Facing with the abundance of products, consumers usually compared various attributes of products Trade-off problem among attributes appeared in consumer’s choices Trade-off problem could be analyzed by conjoint analysis, which is a multivariate technique This technique evaluates purchaser trade-off through the decision-making process of respondents when they face various hypothetical multi-attribute alternatives (American Marketing Association, 1992) Louviere and Hensher (1983) suggested that first choice of alternative brings out the highest utility for consumers The method in which consumers face multi-attribute alternatives and make a choice is likely useful approach for basic and applied consumer research

Because existing profile of available products is limited, hypothetical profiles of products are generated in order to find out the relationship between attributes of products and consumer’s preferences The hypothetical profiles of products are the combination of various attributes, which have ranges, and several levels Range of attributes should be wide enough

to capture consumer’s potential preferences, and narrow enough to assure the efficiency of estimation and the reality of hypothetical profiles toward to consumers (Bunch et al., 1993) For example, Mtimet and Albisu (2006) concentrated on four attributes of designation of origin (DO) wine including origin, price, wine aging, and the grape variety By applying the method suggested by Street, Burgess, and Louviere (2005), the final 27 choice sets are chosen with four levels of each attribute With the same procedure, Lockshin et al (2006) suggested price, region of origin, brand name, and award as important label information to consumer’s wine choices 20 choice tasks were generated by combining various levels of above attributes

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Beside hypothetical profiles, “not buy” choice is usually added to consumer’s choice tasks However, in many cases, hypothetical profiles bring out higher utility for consumers than “not buy” choice or “non-purchase” alternative (Mtimet & Albisu, 2006)

In term of methodology, the basic process based on random utility theory and it associated discrete choice models such as standard multinomial logit (MNL) model (McFadden, 1974a), nested multinomial logit (NMNL) model (McFadden, 1978), and multinomial probit (MNP) model (Daganzo, 1979) By applying random utility theory, Mtimet and Albisu (2006) found out that: (1) designation of origin, wine aging (+), and grape variety also play an important role

in consumer’s choices, and (2) price has optimal point at which respondent’s utility is highest

In addition, by combining random utility theory and simulation, Lockshin et al (2006) claimed that the contribution of price, region of origin, brand name, and award to consumer’s choices

is quite complex Moreover, price is also important factor, which matters purchase probability Beside attributes of products, social-demographic characteristics and frequency of product consumption of consumers are also considered in many researches Lockshin et al (2006) noted that frequency of wine consumption is divided into five levels: almost every day, two or three times per week, one time per week, two or three times per month, and one time or less per month Based on this experience, Mtimet and Albisu (2006) divided DO wine consumers into two segments due to the frequency of consumption including frequent consumption (every day, or two or three times per week), and occasional consumption With different groups of consumers, their perceived utility is different (Mtimet & Albisu, 2006) Specifically, under determined price level, occasional consumers enjoy higher utility than frequent consumers do However, the opposite trend is observed when price level is higher than determined price level

2.4 The investigation of coffee’s attribute

An important issue when doing researches about consumer’s choices of coffee is to find out the significant factors, which matter consumer’s choices Attributes of coffee could also be divided into two groups based on the consumer’s perceived value They are emotional and functional attributes However, according to Issanchou (1996), attributes of coffee could be divided into two groups: intrinsic attributes, and extrinsic attributes While intrinsic attributes related to characteristics of products such as prices, promotion, and sensory characteristics; extrinsic attributes related to outside characteristics of products such as characteristics of

in Table 2.1 From that result, it is realized that consumers evaluate quality, taste, and flavor are more important factors than the others are This conclusion is consistent with Geel, Kinnear, and Kock (2005) who pointed out that consumers rate instant coffee through three principal components: flavor, liking, and brand familiarity Because coffee is distinct product, consumers pay more attention on the feeling of eating instead of health and diet (Watanabe, Suzuki, & Kaiser, 1998) Moreover, it is realized that the fluctuation of coffee prices in the market are not enough large to influence consumer’s choices Geel, Kinnear, and Kock (2005) pointed out that consumers rate kinds of instant coffee through three principal components: flavor, liking, and brand familiarity

Table 2.1 Importance of factor on consumer’s coffee preferences

10 Promotions and discounts 26

11 Reputation of the supplier 23

12 Familiarity with the supplier 19

Source: Geel, Kinnear, and Kock (2005)

First, it is recognized that sensory characteristics have stronger association with consumer’s choices than other factors, especially with the case of coffee consumers Coffee is

a special food product because it brings out more emotional value than functional value to

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consumers Those values are enjoyed by consumers through sensory characteristics which could be divided into five categories: appearance, odor, flavor-by-mouth/taste, sound, and mouth-feel (Seo, Lee, & Hwang, 2009; Lazim & Suriani, 2009) In term of odor, Mayer and Grosch (2001) suggested that roasted coffee should have typical odor qualities including caramel like, roasty, sulphurous, and smoky Moreover, Ross, Pecka, and Weller (2006) claimed that aroma and bitterness are easily affected by storage condition, for example, temperature; and consumers appear to consider aroma and bitterness of coffee when they make

a choice among kinds of coffee

Second, price and promotion are also significant factors that matter consumer’s choices However, Srivastava (2007) investigated that price cuts and sales promotion may not improve brand loyalty In the short run, discount and promotion could attract consumers, especially

“new consumers” who first try to drink coffee or who do not have much coffee experience through try many kinds of coffee Nevertheless, in the long run, discount and promotion could not bring out the same effects as the beginning for several reasons First, manufacturers could not maintain discount and promotion for the long time due to the limitation of financial resources Second, consumers will re-perceive a brand’s value and brand loyalty will dominate consumer’s choices The reason is that brand loyalty is the reflection of habit information in the past, and past consumption behavior will directly influence present consumption behavior (Faria, 2003)

Third, beside above factors, brand is also recognized as important determinant of consumer’s choices Because profile of coffee is analyzed to be similar in term of many factors such as basic ingredients, prices, and consumer’s perceived benefits, consumers underlie the importance of brand reputation to their choices and their loyalty (Srivastava, 2007) These authors pointed out that the variation of new brands, the fall of consumer’s boredom threshold, the optimization of quality standards among brands, and the delay of innovation in many brands are important reasons for the explanation why the number of solely loyalty consumers diminishes over the time As the result, the appearance of new brands could become substitutes

to current brands in the market In fact, to date, consumers have usually considered several brands before making a choice This leads to the variation of consumer’s preferred choice sets Therefore, the identification of choice set is an important step in the researches of consumer’s choices

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2.5 Consumer’s social-demographic characteristics

Hanspal (2010) also found out the relationship between social-demographic characteristics of respondents and their coffee preferences According to the authors, the list of important factors includes education level, occupation, age, gender, and income For example, in term of education level, respondents with higher education level are likely to use more multiple coffee suppliers It means that they are willing to try other brands of coffee Otherwise, respondents with professional education level have stable preferences so that they are usually loyal with a specific coffee supplier Moreover, it is claimed that married consumers, consumers with high level of education, consumers in small families, or consumers with more free time have more motivation to be coffee drinkers (Watanabe, Suzuki, & Kaiser, 1998) In term of occupation, consumers who are employees in private sector, students, or experts consume more coffee compared to the others In term of age impact on respondent’s coffee preferences, respondents with age of 18-36 years have more demand on coffee However, that demand reduces with the increase of age On the other hand, in term of gender, empirical result showed that men tend

to consume more coffee than women do

In fact, the frequency of coffee consumption is also important determinant of consumer’s choices With the same kind of coffee, consumers could choose different pack sizes, which are appropriate to their frequency of consumption Geel, Kinnear, and Kock (2005) analyzed the data, which was collected from two groups of respondents: trained panelists and consumers Consumers have frequency of instant coffee consumption, which is equal or higher than one cup per day; and most of them are over 25 years old By using cluster analysis and internal preference mapping, Geel, Kinnear, and Kock (2005) divided consumers into four groups:

“pure coffee lovers”, “instant coffee blend lovers”, “not serious coffee drinkers”, and “general coffee drinkers” Moreover, the authors also described the preferences of each group of consumers

Four groups of coffee consumers include “pure coffee lovers”, “coffee blend lovers”, “not serious coffee drinkers”, and “general coffee drinkers” (Geel, Kinnear, & Kock, 2005) “Pure coffee lovers” are usually older consumers and their coffee preferences are stable In particular, they pay more attention on coffee attributes such as appearance, aroma, bitterness, and a little

of mouth-feel In addition, they prefer pure coffee and are insensitive to high price of pure coffee Besides, “coffee blend lovers” are described as people who have limited income and

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high level of sensitivity to price changes They usually like any kinds of coffee, which have less intense of coffee flavor and high intense of sweetness, for example, instant coffee.“Not serious coffee drinkers” do not like pure coffee are neutral between coffee blends and other hot drink such as tea, chocolate Moreover, they are usually in 15-24 years old in which they are in building process of coffee preferences and brand/manufacturer knowledge, and specifying their preferred coffee attributes

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CHAPTER 3: RESEARCH METHODOLOGY

In this chapter, research methodology of this study is discussed by several following important points such as: (1) advantage and disadvantage of revealed preference method; (2) the identification of coffee’s attributes; (3) the determination of consumer’s choice set; (4) the questionnaire design; (5) description of survey process; and (6) model specification

3.1 Revealed preference method

Experimental analysis of choice behavior has been widely interested from the 1970s in order

to develop model, analysis procedure, and experimental design Two popular methods using for collecting choice data are revealed preference and stated preference methods According to Louviere et al (2000), revealed preference method based on the strategy that “the world as it is”, while stated preference method based on the strategy that “the world as it could be” In this section, revealed preference method has been reviewed in term of advantages and disadvantages Moreover, several important issues in the data collection process should be clarified such as: (1) how to determine the alternatives, (2) how to identify consumer’s choice set, (3) how to collect consumer’s choices

The primary advantage of revealed preference method is that it relies on consumer’s actual behavior at specific period with existing prices Consumer’s actual decision is simpler to observe compared to hypothetical decision Moreover, hypothetical decision usually generates bias errors (McFadden, 1974) In that case, economic entities try to maximize their expected utility by comparing alternatives among the others to make decision, and focus on the actual risk to their welfare (McFadden, 1974a) In addition, because revealed preference method is nonparametric method, it can be applied in the case of a small number of observations, and does not base on any assumptions of functional forms (Louviere et al., 2000)

However, it is recognized that revealed preference method also suffers several disadvantages Revealed preference method is mainly applied to measure market value or use value (Adamowicz et al., 1994) Moreover, because revealed preference method based on existing products and specific consumption situation, consumers only face a small number of combination of attributes (Adamowicz et al., 1997) As a result, revealed preference method cannot be applied for prototype products or developing products because it is difficult to

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stimulate actual purchasing scenarios to directly observe consumer’s actual choices (Adamowicz et al., 1994) In fact, Ben-Akiva et al (1994) claimed that revealed preference method does not estimate demand for new products, which will be presented in stated preference method On the other hand, because purchasing behavior of consumers happens in reality without the controlling from researchers, unexpected externality may influence consumer’s choices For instance, without the controlling of researchers, consumer’s choices mostly depend on respondent’s market perception (Caldas & Black, 1997) Moreover, Ben-Akiva and Lerman (1985) also pointed out that higher cost is one of the reason why revealed preference method collects fewer observations than stated preference method does

The dataset of revealed preference method is collected from actual purchasing behavior of consumers According to previous studies, the variation of research subjects and respondents leads to different ways to collect the respondent’s choices For example, with non-market value, respondent’s choices are mainly collected from the diary, which records what alternatives respondents actually choose With market value, respondent’s choices are mainly collected through direct observations of their purchasing scenarios Generally, because 3in1 coffee is commercial product, respondents of this study should be identified as the consumers who buy the products at the purchasing place However, it is emphasized that the consumer may not the decision maker Thus, additional question should be added to the questionnaire in order to identify whether respondent is decision maker or not

In addition, several important issues have been raised during the data collecting process of revealed preference method First, it is necessary to identify specific purchasing context This condition should be consistent among all consumers in term of purchasing place, temperature, and the number of available alternatives At least, the difference of purchasing context among consumers should be small For example, all purchasing scenarios are observed at the same place such as super-market, traditional market, or convenience store Second, in order to assure the actuality of purchasing activity, purchasing behavior of consumers are observed in silence According to Adamowicz (1994), in the revealed preference method, the individuals choose one alternative from all alternatives being available to them The order and the number of alternatives are chosen by consumers are also noted Third, a significant problem is the identification of consumer’s choice set This identification depends on the researcher’s arguments which base on specific research context In particular, consumer’s choice set may

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be the subset of all available products in the market, or all available products that they face at the purchasing place, or all available products in the market Based on that identification, the dataset would be treated as panel data in which decision makers face all alternatives their choice set, and each alternative is an observation

3.2 Attributes of coffee

In the market valuation literature, three main groups of attributes are monetary, non-monetary, and environmental attributes (Bunch et al., 1993) The interaction of these attributes influences the choice preferences of consumers In the case of 3in1 coffee, three groups of attributes could explain consumer’s choices and predict the consumption trend in the future First group of attributes comprises the monetary attributes relating to prices and product’s main ingredients such as the content of coffee, sugar, and non-diary creamer These ingredients play an important role in consumer’s choice behavior Second group of attributes comprises non-monetary attributes such as the number of packs per alternative, the weight of alternative, the way to open the pack These attributes focus more on the convenience aspect of alternatives Because 3in1 coffee is one kind of instant coffee, the convenience of product gives high level

of effects on consumer’s choices Third group of attributes comprises other characteristics of alternatives such as promotion, brand, and appearance

According to Bunch et al (1993), key attributes of alternatives could be identified through focus groups process and pre-survey process Beside our suggested attributes, potential attributes are also noted as important ones For example, potential attributes of promotion, environment protection level, and convenience level also matter consumer’s choices However, the number of attributes should be minimized as much as possible in order to avoid complex choice task for consumers, and reflect the difference among various brands According to McFadden (1986), the number of attributes, which are the outcome of screening process, should be less than ten

According to Adamowicz et al (1998), attributes of alternatives are selected by the responses of experts or who have used products with high level of frequency These attributes are modified by using focus groups Focus groups will discuss to finalize the list of attributes Moreover, levels of attributes are identified by asking respondents the highest and lowest levels

of attributes at which they agree to buy that product The highest and lowest levels of attributes may be different from current level of existing products The range of attributes reflect both

Table 3.1 List of suggested attributes

Weight of alternative gram/alternative

Number of sachets per alternative sachet/alternative

Packaging (paper, plastic)

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choosing is complicated Choice set is the subset of all available products in the market place, and choice set is the way in which consumers reduce the complexity of choice process However, in some cases, respondents said that they do not care about other alternatives because they just like a specific alternative The assumption of that case is that consumers have finalized

a final product after the experience process for a long time

In market research, size of choice set of each respondent is affected by the number of available products in the market, the importance of product category, education level of consumers, brand loyalty, consumer’s age, and consumer’s income (Gruca, 1989; Howard & Sheth, 1969) For example, Jarvis and Wilcox (1973) claimed that size of choice set may be negatively affected by the importance of instant coffee category However, in Vietnam, consumer’s preferences of 3in1 coffee is built up through the long time of using and trying many kinds of 3in1 coffee The reason is that 3in1 coffee is popular and its price is also cheap for all people Therefore, it is assumed that the choice set of each respondent comprised all 19 alternatives

3in1 coffee products are considered in this study belong to four main manufacturers in Ho Chi Minh City Table 3.2 presents the volume share and value of those four main manufacturers, which include Vinacafe, Nestlé, Trung Nguyen, and Fes Vietnam It is realized that the order in term of volume share and value share of those manufacturers are the same Vinacafe leads in both volume share and value share in 2014 and 2015 The remaining manufacturers are followed by Nestlé, Trung Nguyen, and Fes Vietnam From that, it is claimed that the difference among products in the aspect of price is small That supports the remark that 3in1 coffee market is more competitive and is the oligopoly market

Table 3.2 Volume share and value share of main manufacturers

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Nielsen (2015), the volume share of these 3in1 coffees is over 0.1 percent All brands that have volume share, which is less than 0.1%, are excluded from this list It is recognized that manufacturers have diversified their products in term of brands, packaging, and weight of sachet Thus, consumers may face a product with various packaging Moreover, Table A.1 presents a summary of all 19 alternatives and their attributes such main ingredients, packaging, and manufacturer

Table 3.3 List of all available 3in1 coffee products

1

Vinacafe

Vinacafe Vinacafe Gold original Box – 20 sachets 20 grams

3

Chất Chất – Hanoi Box – 15 sachets 21 grams

5

Wake-up Wake-up – Sai Gon café Bag – 24 sachets 19 grams

7

Nestlé

Nescafe red

Nescafe red – Rich aroma Box – 15 sachets 17 grams

10

Nescafe green

Nescafe green – Rich taste Box – 15 sachets 17 grams

13

Trung Nguyen G7

18

Fes Vietnam Maccoffee Café Pho Box – 10 sachets 22 grams

3.4 Questionnaire

The questionnaire of this study is presented in the Appendix The questionnaire is divided into three main parts In the first part, actual purchasing scenario of respondent is noted in term of alternative (called actual alternative) that respondent chooses, the identification of decision maker, and the relationship between decision maker and respondent In the second part, social-demographic information and coffee usage of respondent are noted Specifically, social-demographic information of respondent includes name, gender, age, religion, marital status, living place, schooling year, occupation, and income Coffee usage of respondent includes the

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frequency of 3in1 coffee consumption and the number of sachet(s) for each time The third part of questionnaire starts with the identification of substitute alternative(s) by asking respondent: “Suppose that your actual alternative does not exist at the super-market, which alternative you will choose to replace it?” Then, five or seven hypothetical scenarios are shown

to respondent In each choice scenario, respondent makes a choice after considering two or more alternatives including actual alternative and substitute alternative(s) with the appearance

of discount, weight promotion, and price increase

3.5 Survey process

Based on the literature of revealed preference method, data of this study should be collected

by observing the actual purchasing behavior of consumers and the information in the label of all alternatives in the market The survey process is conducted outside the super-market and after the purchasing context The collected data is divided into three groups of information First, the choice of consumer and price of all available alternatives in the super-market are collected If consumers choose two or more alternatives, it is considered that two or more respondents are collected in the dataset It is noted that consumer’s choices include the actual choice and the hypothetical choices The second group is the social-demographic information

of respondents such as name, gender, age, religion, marital status, schooling year, living place, occupation, income The third group is the information of using 3in1 coffee such as frequency

of 3in1 coffee consumption, and the number of sachet(s) for each time

In term of survey place, it is suggested that there are three main places that sell 3in1 coffee

in Ho Chi Minh City such as super-markets, traditional markets, grocery stores or convenience stores Those purchasing places are different in term of purchasing context and price of products Table A.2 shows the fluctuation of price of 3in1 coffee among various super-markets However, it is claimed that super-market is the most appropriate place in the case of this study for several reasons First, a specific booth is prepared for many kinds of 3in1 coffee in the super-markets The number of kinds of 3in1 coffee in the super-markets is more than traditional markets and grocery or convenience stores That may affect consumer’s preferences in making decision because they have an opportunity to face and consider many kinds of 3in1 coffee in the same place In contrast, consumers usually choose a specific kind of 3in1 coffee before they come to grocery or convenience stores Second, super-markets provide a better and more

be collected through the buyer Moreover, we assume that buyer would be representative for decision maker to make choices in hypothetical choice scenarios The reason is that buyer usually has closed relationship with decision maker, and he/she chooses exactly alternative which decision maker wants For a long time, buyer could understand deeply preference of decision maker In addition, in reality and survey process of this study, it is recognized that the rationale of buyer is consistent with other buyers who are decision makers Therefore, it is suggested that buyer who is not decision maker could be representative for decision maker in the case of this study

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Table 3.4 Variable description

Plastic packaging pla_pack 1=yes, 0=no

1=<5 million, 2=5-<10 million, 3=10-<15 million, 4=15-<20 million, 5=20-<25 million, 6=25-<30 million, 7=30-<35 million, 8=35-<40 million, 9=40-<45 million, 10=45-<50 million, 11=>50 million Frequency of 3in1 coffee

consumption fre_coffee

1=everyday, 2=several times per week, 3=several times per month

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In the dataset, choice of respondent is considered as dependent variable in the equation (3.1) The attributes of alternatives which are considered as explanatory variables in the equation (3.1) include price of alternative, bitterness, sweetness, fat, weight of alternative, number of sachets per alternative, manufacturers (Vinacafe, Trung Nguyen, Nestlé, and Fes Vietnam), and material of packaging (plastic, paper) Moreover, controlling variables include stable characteristics of respondents such as social-demographic characteristics (gender, marital status, schooling year, occupation, income), and habit of using products (frequency of 3in1 coffee consumption, number of sachet(s) for each time)

Moreover, according to McFadden (1974a), it is noted that conditional logit model uses fixed effects It means that effects of attributes on consumer’s choices do not change over the time for all respondents In addition, fixed effects methods estimate the impacts of attributes

on consumer’s choices within individual, and ignore all the difference among consumers Stable characteristics of respondents such as social-demographic information and frequency of 3in1 coffee consumption are controlled and not estimated If the variation among respondents

is greatly higher than the variation within individual over the time, the estimation of fixed effects method could be bias Then, the choosing between fixed or random effects methods is recognized as trade-off problem between biasness and efficiency Therefore, in this study, fixed effects method may provide the assurance for efficiency of estimated result by controlling omitted variable bias

On the other hand, one of the most important result of conditional logit model is marginal utility of price for respondents In order to calculate marginal utility of price for respondents, another form of conditional logit model is generated by adding interaction of price and other variables into the equation (3.1) Thus, modified equation is expressed as:

U   X   X    X   PX   PX    PX   (3.2) where: U is utility, 1,2, ,k and 1,2, ,k are coefficients, X1,2, ,k are attributes of alternatives including price of alternative, bitterness, sweetness, fat, weight of alternative, number of sachets, paper packaging, Vinacafe, Trung Nguyen, Nestlé, squared price, and squared bitterness; PX1,2, ,k are the interacted variables between price and other variables including

in term of price to generate the small difference among prices of alternatives in the same kinds, the value of manufacturers may affect consumer’s preferences in term of price It means that consumers may evaluate value of different manufacturers through price of products Moreover,

it is noted that male and female may have different evaluation about price For example, female may usually care about price more than male, and the interaction between gender and price may matter consumer’s choice In addition, price and income, or price and occupation may interact together to give impacts on consumer’s choices The income variation or occupation variation of respondents may matter the choice of coffee based on price Those above arguments mostly depend on consideration about consumer’s preferences in specific market place on the specific period

During the survey process, due to the problem of modification, first 69 respondents face five choice scenarios, last 128 respondents face seven choice scenarios The actual choice is considered as first choice scenario for all respondents Other four or six choice scenarios are considered as hypothetical choice scenarios Each hypothetical choice scenario comprises two

or more alternatives in which one alternative is chosen in the actual purchasing scenario, and other alternative(s) is/are identified by asking respondent about the substitute alternative(s) in the case first actual alternative does not exist Moreover, discount, weight promotion, and price increase are also added into hypothetical scenarios In particular, choice scenario 2 and 3 are generated by giving a discount of price to substitute alternative(s) following by 10% and 20% discount of current price Choice scenario 4 and 5 are generated by giving weight promotion

to substitute alternative(s) following by 10% and 20% weight promotion of current weight of alternative Finally, choice scenario 6 and 7 are generated by giving an increase of price to actual alternative following by 20% and 50% increase of current price

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Moreover, with the appearance of discount and weight promotion, equation (3.1) will be modified in order to estimate the impact of weight promotion and discount on consumer’s utility Thus, the modification of equation (3.1) is expressed as the following equation:

where: U is utility, 1,2, ,k are coefficients, X1,2, ,n are attributes of alternatives including price

of alternative, weight promotion, discount, bitterness, sweetness, gat, weight of alternative, number of sachets, paper packaging, Vinacafe, Trung Nguyen, Nestlé, squared price, squared bitterness;  is the error term

Then, with the addition of weight promotion and discount, utility will be calculated as the following equation:

U   X   X    X   PX   PX    PX   (3.4) where: U is utility, 1,2, ,n and 1,2, ,n are coefficients, X1,2, ,n are attributes of alternatives including price of alternative, weight promotion, discount, bitterness, sweetness, fat, weight of alternative, number of sachets, paper packaging, Vinacafe, Trung Nguyen, Nestlé, squared price, and squared bitterness; PX1,2, ,n are the interacted variables between price and other variables including manufacturers, income level of respondents, occupation of respondents, gender of respondents, and frequency of 3in1 coffee consumption of respondents;  is the error term

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CHAPTER 4: DATA AND EMPIRICAL RESULT

In this chapter, findings of this study are produced by analyzing collected data and discussing regression results Specifically, regression results are discussed to find out: (1) the determinants of consumer’s choices; (2) relationship between price and consumer’s utility for each manufacturer; (3) the relationship between price change and choice probability; (4) marginal utility of price for respondents; (5) the impact of discount and weight promotion on consumer’s choices; and (6) the linkages between social-demographic characteristics in the interaction with price of alternative and consumer’s choices

4.1 Data

For collecting data, survey process is conducted in two rounds separately in two periods The first round has surveyed the sample of 46 persons who have different frequency of 3in1 coffee consumption in Ho Chi Minh City on October 2015 Most of them drink 3in1 coffee every day

In particular, respondents will answer the questionnaire through Internet and papers According

to Fleming and Bowden (2009), and Marta-Pedroso, Freitas, and Domingos (2007), the difference between online survey and conventional paper survey is not statistically significant The result of first round is analyzed to determine the final list of attributes that may affect consumer’s choices of 3in1 coffee As we mention in the above section, those attributes are characteristics of alternatives, could be measured or be available in the label of alternatives

In the second round, data of this study is collected through survey process mainly based on revealed preference method The survey process is conducted at four main super-market systems in Ho Chi Minh City including BigC, Coop Extra, Coopmart, and Metro on the time from June 18, 2016 to August 16, 2016 The respondents of this survey are consumers who have bought products that are included in the list of survey products (Table 3.3 or Figure A.1) The final dataset contains the surveyed information of 197 consumers in Ho Chi Minh City Table 4.1 presents detail information of the number of respondents for each super-market system for each district In addition, it is recognized that the final data of this study is treated

as panel data because each consumer will make a choice after facing 19 alternatives or less which belong to four manufacturers: Vinacafe, Nestlé, Trung Nguyen, and Fes Vietnam

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Table 4.1 District, super-market, and the number of respondents

respondents BigC Coop Extra Coopmart Metro

19 alternatives in this survey in the case of actual choice scenario In the case of hypothetical choice scenarios, the number of alternatives of choice set is relied on consumer’s perception Specifically, choice set of hypothetical choice scenarios includes actual alternative(s), which is/are bought by consumers in actual choice scenario, and substitute alternative(s), which is/are bought if actual alternative(s) disappear(s)

The difference between actual choice scenario and hypothetical choice scenarios are in not only term of choice set but also the appearance of discount and weight promotion In particular, positive value of discount variable is equivalent to price decrease, negative value of discount variable is equivalent to price increase, and positive value of weight promotion variable is

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equivalent to weight of promotion In this study, discount and weight promotion are understood

as the percentage change of price and weight of alternative compared to current price and

current weight of alternative, respectively For example, specific alternative has current price

of 40000 VND and value of discount variable is 10%, it means that price of this alternative

decreases to 36000 VND in hypothetical choice scenario

Table 4.2 Descriptive statistics of the sample

Weight of alternative 5,837 gram/alternative 417.7 189.8 220 800

Number of sachets 5,837 sachet/alternative 23.27 11.60 10 50

Note: there are 197 respondents in the sample Each respondent faces 5-7 choice scenarios, which

comprise one actual choice scenario and 4-6 hypothetical choice scenarios With actual choice

scenario, respondents face all 19 alternatives With hypothetical choice scenarios, respondents face

two or more alternatives based on their consideration

Moreover, in term of price, it is realized that the fluctuation of price among various

super-markets is small and may not affect consumer’s choices This fluctuation of price depends on

the policies of super-market systems In addition, it is noted that main ingredients of various

alternatives of the same manufacturer are similar That similarity is one of the proofs for the

Commented [TDT2]: You should add somewhere in your

thesis (or appendix) the list of the 19 alternatives with their attributes