Featured faculty: Choi Sungwoo, Kim Keongtae, Francisco Cisternas, Philip Zhang, Michael Zhang
Written by Pan Jingyi

Technology has been playing a pivotal role in shaping the business landscape in 2025. The world’s first law to regulate artificial intelligence (AI) by the EU is expected to be fully in force this year, while AI companies like Google, DeepSeek, and OpenAI have rolled out their latest models in rapid succession. Down under, Australia has also made history as the first country to ban social media for kids.

Meanwhile, US and Chinese companies have ramped up AI integration in their e-commerce to make “apps for everything,” and Nvidia’s CEO says quantum computing, which can solve problems too complex for classical computers, is approaching a critical turning point from early research to practical, scalable application. In hardware side, robotic companies around the world are vying for dominance.

Building on this surge, we bring together insights from the Chinese University of Hong Kong (CUHK) Business School faculty on how technology will redefine the future of business in China and beyond. In the second part, we will also share perspectives on other hot topics relevant to economics and consumer behaviour.

1. Future service robots: Humanlike interactions vs. humanlike bodies

Robots are no longer merely helpful assistants in factories. They have also become tireless servers at restaurants and dazzling performers on stage. A Morgan Stanley report estimates that the number of humanoid robots, or robots that mimic the human body, will likely reach nearly 1 billion by 2050, with China expected to have the highest number by then.

However, for human-centric service industries, such as hospitality and tourism, Choi Sungwoo, Assistant Professor of the School of Hotel and Tourism Management, offers another perspective: “I don’t necessarily think humanoid robots represent the primary direction for the future of service robotics.”

His recent research examined how assistive robots can empower employees with disabilities, but also highlights the importance of personal interaction. Robots can help with daily tasks, but customers still crave genuine human interactions and emotional connection, something that robots can’t truly replicate. Therefore, hiring humans in the hospitality industry remains crucial, even with the rise of robotic technology.

“Although a large body of research has demonstrated the benefits of humanoid robots, the goal of most companies is not to make robots physically resemble humans. Rather, it is to enable machines to interact with customers in more natural and humanlike ways, through tone, language, and behaviour.”

Therefore, Professor Choi expects AI-powered chatbots to lead the way in hospitality and tourism by increasingly interacting with customers, moving beyond simple tasks to take on more engaging roles. “By handling routine call centre-type tasks like answering frequently asked questions, handling bookings and check-ins, and scheduling appointments, chatbots can help free human staff to focus on more value-added and personalised services to create memorable experiences.”

2. Blockchain-verified AI agents bolster stablecoin safety

Blockchain is a decentralised digital ledger that records transactions across many computers, making it secure and transparent. As AI spreads across industries, its combination with blockchain could reshape finance by making systems more autonomous and interoperable, according to Kim Keongtae, Professor of the Department of Decisions, Operations and Technology.

His previous study shed light on the rising cryptocurrency and its influences on other technologies, underscoring the impact and functionality of blockchain on a wide range of applications. As AI takes on human tasks like trading and customer service, its ability to operate across platforms securely becomes critical, but without a universally accepted and verifiable digital identity, the AI programme cannot easily interact with other platforms.

“Blockchain provides the missing infrastructure, a neutral and verifiable identity layer for AI agents,” Professor Kim says. “The synergy extends to fraud detection and trust assurance. As AI models detect anomalies and suspicious behaviour, blockchain provides a tamper-proof source of truth to verify and cross-reference identities, transactions, and behavioural patterns.”

This secure, interoperable foundation also matters for a type of cryptocurrency called stablecoins, which are pegged to a stable asset like a fiat currency or commodities. As Hong Kong implemented a new regulatory framework for stablecoin issuers in August 2025, Professor Kim notes that its smooth launch is crucial for accelerating broader blockchain adoption and establishing the city as a regional leader in digital finance.

A cautious start by limiting issuance to a few trusted and well-funded companies can help establish standards for governance. “Over time, a broader range of HK$‑ or Chinese yuan‑pegged stablecoins could unlock local use cases and reduce reliance on US$‑backed stablecoins,” he adds. “In the near to medium term, investment and trading purposes are likely to remain the dominant use of stablecoins.”

3. More personalised e-commerce experience and smarter algorithms

E-commerce platforms nowadays deliver not just personalised product suggestions, but entire experiences tailored to consumers’ interests, making shopping feel personal, fast, and seamlessly woven into everyday life. Looking ahead, the momentum will only build.

Francisco Cisternas, Senior Lecturer of the Department of Marketing, anticipates that smarter models fuelled by richer data will allow more accurate predictions and better-timed offers. His recent study proposed a new budget-conscious model that can make the online retail recommendations more accurate. “Most routine tasks, such as recommending products, setting prices and designing creatives, are now already handled by algorithms,” he adds.

While AI is moving from a helpful assistant to the main decision-maker in e-commerce, Dr Cisternas points out that this doesn’t mean humans are out of the loop. AI often outperforms humans on repetitive and data-rich tasks, but it can falter when preferences are diverse or the data is scarce. “AI will be the central engine for many day-to-day decisions, while human and AI hybrids are the optimal mode,” he says.

In China, e-commerce giants have built a thorough ecosystem that integrates shopping, payments, logistics and social media under one roof. In the future, the country’s retail sector will continue to push the boundaries of seamless multi-channel integration, Dr Cisternas notes.

However, e-commerce must pivot from the old “right product, right moment” mantra to “right relationship, right lifetime” as shoppers look for more than just a quick purchase. “Personalisation that focuses on building long-term relationships with customers will outperform aggressive one-time price promotions,” Dr Cisternas adds.

4. Low-effort entertainment content dominates on social media

For most of us, social media isn’t just for connecting with friends, but also to see the world. Yet, it also often harbours a darker side that harms mental health and well-being. The Australian ban on social media has highlighted how “predatory algorithms” encourage youth to spend excessive time on screens.

This ban sheds light on the crucial role of humans as social media continues to evolve. “In the age of AI-driven tools flooding social media, humans will not compete with technology, but rather to distinguish themselves through superior judgment by knowing which content truly matters and defining the values and priorities that guide meaningful discourse,” says Philip Zhang, Associate Professor of the Department of Decisions, Operations and Technology.

Professor Zhang’s recent study shows that although AI can generate content and enhance social media consumption by filling missing metadata, it still falls short of matching the boundless creativity of humans. Human role would be even more crucial in the future, as Professor Zhang anticipates that social media will increasingly prioritise effortless consumption.

“If I were to imagine boldly, social media might instead evolve into a brain-computer interface one day,” he says. A brain-computer interface creates a direct communication channel between the brain and an external device, allowing users to control machines with their thoughts.

To complement the preference for low mental effort, simpler and more entertaining content would flourish greatly. This will make it harder for serious material to compete for attention—but not impossible.

He cites a podcast as an example and highlights the needs of seeking uninterrupted and insightful experiences. “While different platforms converge on similar features, the key is to identify niche audiences with specific and underserved needs.”

5. AI won’t fundamentally transform most industries yet

As elaborated above, AI has been used across industries. Our other recent articles have also explored how AI has and will continue to change our lives, from doing our jobs, data analysis, to supply chain management, with the vast majority of AI adoption remaining in early stages, rather than enterprise-wide scaling that reshapes core operations.

While there is lingering concern over the so-called “AI-winter”, where funding, interest, and excitement in AI dwindle, Michael Zhang, Wei Lun Professor of Business AI of the Department of Decisions, Operations and Technology, remains optimistic about its near-term impact. “Over the next few years, AI will undoubtedly boost productivity, especially in language and data-related tasks, but it is unlikely to fundamentally transform most industries, as current large language models still lack robust logical reasoning capabilities,” he says.

“Sectors closely tied to text and language processing, such as content creation, translation, legal documentation, and customer service, will experience the most transformative impact from AI in China,” Professor Zhang adds.

The post China Business Knowledge’s 5 tech waves to watch in 2026 first appeared on China Business Knowledge.

Featured faculty: Francisco Cisternas
Written by Sally Ho

When it comes to e-commerce, China stands unmatched. As the country’s online retailers like Alibaba, JD.com, and Pinduoduo compete both domestically and overseas, the key to winning market share may lie in providing users with seamless and hyper-personalised digital experiences.

From suggesting a shirt that matches the previously purchased jeans to predicting next week’s groceries, recommendation systems are paramount to creating customised retail experiences. While algorithms called next-basket recommendation (NBR) systems have made these suggestions more and more sophisticated, it is still common for users to see irrelevant products on the screen.

As consumers rarely buy items in isolation but shop in bundles, either to save on delivery costs and time, to reach minimum purchase quantities for a discount, or simply due to habit, keeping products in the virtual basket or cart before checking out is the norm. So far, the existing recommendation systems have only considered product choices at the item level and baskets level by incorporating purchase patterns and history with users’ sequential behaviour across transactions.

“One critical factor that is often overlooked is the price,” says Francisco Cisternas, Senior Lecturer of Marketing at the Chinese University of Hong Kong (CUHK) Business School. “Price is a key factor in consumer decision-making, yet incorporating price into recommender systems is challenging due to its complexity, which varies across consumers and product categories.”

In a recent study titled Basket-enhanced heterogenous hypergraph for price-sensitive next basket recommendation, Dr Cisternas and his co-authors introduced a novel approach that integrates price sensitivity, dubbed the basket-augmented dynamic heterogeneous hypergraph (BDHH). “We aimed to address this gap by incorporating price sensitivity and enhancing the connections among users, items and baskets to better align recommendations with real-world shopping behaviour,” he says.

“Price is a key factor in consumer decision-making, yet incorporating price into recommender systems is challenging due to its complexity, which varies across consumers and product categories.”

Dr Francisco Cisternas

Recommendations that enhance user experience

In developing the model, Dr Cisternas and research assistant in the same department, Zhou Yuening, along with Wang Yulin at Dalian University of Technology, Cui Qian at China’s largest movie ticketing app Maoyan and Guan Xinyu at China’s tech giant Tencent, construct a network where users’ past preferences, items and shopping baskets are all connected, especially considering prices, in a dynamic, evolving web.

Importantly, the model doesn’t just treat each connection equally, but also factors in pricing data. By doing so, the model can accurately understand how sensitive different shoppers are to cost, as well as how this informs what they’re likely to buy.

The team tested their model across a range of benchmark datasets and compared it to existing recommendation systems. In nearly all cases, BDHH outperformed traditional models, especially in scenarios where price sensitivity played a major role. That means it was not only better at predicting what someone might buy next, but also when it comes to understanding why they might buy it.

In practical terms, the system can understand that a particular user often buys a particular cereal when it’s on sale, or that another consumer tends to switch brands of liquid detergent depending on price fluctuations. This ability to recognise deeper purchasing patterns enables smarter basket predictions that align with individual budgets and tastes, which could then translate into an enhanced shopping experience for users.

“E-commerce platforms increasingly aim to deliver highly personalised experiences, and integrating the BDHH model can help achieve that by accounting for users’ price preferences,” says Dr Cisternas.

“Our empirical results showed that incorporating price sensitivity leads to better prediction accuracy compared to benchmark models, indicating its practical value. However, key challenges such as data availability, scalability, and maintaining model performance in real-time applications should be considered in future settings.”

Benefits for e-commerce

Beyond offering smarter product bundles to consumers, the benefits of BDHH could extend to the bottom line of businesses, too, especially when it comes to widely used online marketplaces.

For instance, accurate predictions of product combinations can aid in inventory planning and management, ensuring that frequently co-purchased items are stocked together, reducing both out-of-stock and overstock situations. Insights from the BDHH model can also inform targeted promotions and discounts, focusing on product combinations that resonate with specific customer segments.

As e-commerce continues to evolve, incorporating more sophisticated recommendation systems that increase customer satisfaction could also translate into higher rates of loyalty for brands and marketplace apps.

A step closer to understanding consumer behaviour

Beyond its immediate applications, the findings of this paper open the door for further exploration into consumer psychology and behaviour modelling. It raises questions about how factors like price perception, loyalty or external events like inflation or supply chain issues could be integrated into even more robust systems in the future. To keep up with these factors that influence shopping trends, Dr Cisternas highlights that machine learning models must be designed with adaptability and real-time learning in mind.

“Consumer behaviour is indeed dynamic, and static models can quickly become outdated. Approaches like online learning or time-aware embeddings can help maintain model relevance over time,” he adds.

Dr Cisternas also notes that the study could provide us with insights into other sectors where consumers make decisions. “Travel, subscription services and healthcare sectors also involve cost-sensitive choices. Our approach can support personalised recommendations and pricing in these areas by accounting for context and user-specific preferences.”

In the future, the research team is eager to explore other dimensions which could improve recommendation techniques. “Looking ahead, we are interested in exploring other dimensions such as promotional sensitivity, brand loyalty or temporal purchase patterns into recommendation techniques,” he adds.

What’s clear for now is that as e-commerce continues to grow and competition intensifies, tools that help platforms better anticipate and serve customer needs, especially with budget considerations in mind, will be more valuable than ever.

The post A smart way to predict online buyers’ next purchase first appeared on China Business Knowledge.

By Pan Jingyi, Principal Writer, China Business Knowledge @ CUHK

From cultivation to consumption at the dining table, every stage of food production can create greenhouse gases that exacerbate global warming. Around a third of all human-caused greenhouse gas emissions are associated with food production, such as methane from cattle’s digestive process and carbon dioxide from deforestation, according to the United Nations’ Intergovernmental Panel on Climate Change (IPCC).

As the popularity of eco-friendly food grows, the IPCC also underscores the imperative of shifting consumer diets to fulfil the Sustainable Development Goals. Nevertheless, most studies exploring the impact of dietary changes on global warming centred around Western consumer habits.

Therefore, Francisco Cisternas, Assistant Professor in the Department of Marketing at the Chinese University of Hong Kong (CUHK) Business School, investigated whether Asian consumers are willing to alter dietary patterns to mitigate climate change and the factors influencing their choices.

“Our findings suggest that younger generations are increasingly considerate of environmental factors when making food choices.”

Professor Francisco Cisternas

He conducted a study titled Cultural and generational factors shape Asians’ sustainable food choices: Insights from choice experiments and information nudges, along with his PhD student Sun Chongyan, and CUHK scholars from different institutes, namely Carolina Contador, Lam Hon Ming, and Tse Lap Ah. Scholars from other universities in mainland China, Canada, the UK, and Vietnam also took part.

“Our findings reveal that Asian consumers are largely unwilling to deviate from current dietary habits, particularly regarding the consumption of animal proteins,” Professor Cisternas says.

However, presenting messages in a way that highlights personal benefits is found to resonate well and motivate Asian consumers to change their dietary habits. For example, instead of saying the dangers of global warming, the impetus should focus on how dietary changes can lead to better health or quality of life.

Not just that. With the growing trend of environmental certifications, the study found different acceptance across countries and generations, underscoring the complexity of dietary transitions in Asia and the need for targeted strategies that resonate with cultural and individual motivations.

Dietary choices of three Asian economies

The researchers recruited more than 5,000 participants from mainland China, Japan, and Vietnam. In general, the research shows that meat (including pork, chicken, fish, and beef) is the top choice, followed by price and environmental certification as crucial attributes when consumers decide what to eat. While similarities exist in food preferences among consumers in these nations, variations in socio-economic and cultural factors lead to differences in their dietary selections.

Cow farming significantly contributes to greenhouse gases, and beef is often regarded as a premium choice among Asian consumers. The study confirmed a direct correlation between household incomes and the inclination towards beef, with lower-income households showing a preference for chicken and fish. However, this tendency is moderated by the age of the respondents. Older Asian consumers prefer traditional dietary habits focusing on pork and rice.

Many believe that consumer demand for pork and beef in China significantly contributes to global agricultural greenhouse gas emissions, but the research reveals that Chinese consumers prioritise fish and chicken over pork compared to their Vietnamese and Japanese neighbours. However, when pricing comes into play, Asian consumers across three countries will consider chicken or fish over pork or beef.

Sustainable certifications or labels for food products are welcome in Western markets, but this trend is quite different in Asia. More than half of Vietnamese and Chinese respondents put their trust in government certification schemes for sustainable foods, whereas only 26 per cent of Japanese respondents share this sentiment.

However, this trust in government certifications can diminish over time as the economies develop, especially if consumers perceive these certifications as less credible or effective. “Existing sustainability-labelling schemes across Asia may lose their anticipated effects on consumer behaviour over time and with economic development,” Professor Cisternas says.

Younger consumers and households with children care more about certified environmental and health attributes. Participants in the 18 to 30 age group are more willing to pay for food with environmental certification. “Our findings suggest that younger generations are increasingly considerate of environmental factors when making food choices,” Professor Cisternas adds.

Self-enhancement framing is more effective

Although much research has explored how presenting information subtly – or as the study says, information nudge – influences people’s choices on health, environment, and climate change towards dietary choices, Professor Cisternas’ research is among the first to provide cross-national empirical evidence.

Furthermore, the researchers used different ways to test whether sharing information about climate change, environmental harm, or health impacts of certain foods from intense farming can encourage individuals to choose a sustainable diet.

“We found that information nudges are not an effective tool for shifting consumer choice behaviour toward more sustainable diets,” says Professor Cisternas, adding that self-centred and caring motives may play a role in individual decision-making.

Encouraging dietary changes shouldn’t rely solely on environmental concerns for Asian consumers. Greater motivation for diet transition can be achieved by highlighting the negative personal health consequences of current consumption habits, particularly among older consumers.

Strategies tailored for different groups

As sustainable diets are pivotal in curbing global greenhouse gas emissions, it is imperative for policymakers and businesses to promote them effectively. Despite the increasing favour of animal-based protein, beef consumption in Asia has not reached the levels observed in Western economies, giving a window of opportunity to shift the trend by appealing to food culture and traditions.

Asian consumers are receptive to adopting sustainable food practices if they are informed about their personal well-being and associated health benefits. These motives also depend on their demographic characteristics, such as age and income level.

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“We argue that the policies should be tailored to different population groups, emphasising their own motives. For example, health motives could be highlighted for the elderly, while younger and relatively wealthy populations may respond better to food certification emphasis,” Professor Cisternas adds.

When talking about the younger generation’s reluctance to change dietary habits, even though they demonstrate an increased concern for the environment, Professor Cisternas suggests encouraging sustainable food choices from a young age. “By integrating education about sustainable eating into schools and communities and providing engaging experiences with sustainable foods, we can help foster lasting changes in dietary habits.”

The post Are you ready to eat green for a sustainable future? first appeared on China Business Knowledge.

To light up the way ahead for business leaders and entrepreneurs, we have compiled this year’s 10 most popular articles, showcasing our cutting-edge research and expert insights.

By China Business Knowledge @ CUHK

The post China Business Knowledge @ CUHK’s Top 10 Articles in 2023 first appeared on China Business Knowledge.

By Lisa Kennedy

The 17 Sustainable Development Goals (SDG), which form the United Nations’ Post-2015 Development Agenda, are designed to provide a blueprint for achieving global peace and prosperity by 2030. Central to the agenda is the second SDG, which aims to “end hunger, achieve food security and improved nutrition, and promote sustainable agriculture.”

Meeting such policy objectives is critical to the prospects of many developing countries, as well as emerging economic powerhouses such as China, but they also pose a formidable challenge. Global food production is predicted to more than double by 2050, to meet growing demand that comes mainly from developing countries, as the world’s population, which reached eight billion in 2022, expands by around 0.8 percent per year.

“The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively.”

Prof. Francisco Cisternas

Not only does the speed of population growth make the goal of food security hard to achieve, but demand for carbon-intensive meat products in developing countries tends to increase as they become richer. This trend, which is accelerating in China, following decades of rapid economic growth, can result in significant environmental damage, thereby frustrating the goal of making agriculture more sustainable.

A Growing Demand of Animal Protein

As populations switch to a Western-style diet, there is also a growing demand from consumers for beef and dairy products instead of other forms of animal protein. However, previous research shows that cattle farming results in eight times more greenhouse gas emissions per 100g of protein than the production of chicken or fish.

So how can food production be made more environmentally sustainable and resilient, while also feeding more people more effectively? A novel approach to cracking this conundrum that has emerged over recent years is focused on changing consumption patterns away from carbon-intensive foods such as meat and dairy products and towards sustainable foodstuffs. But can consumers actually be motivated to change their behaviour?

A timely new study from the Chinese University of Hong Kong (CUHK) has addressed this question by investigating the factors that motivate consumers in China to purchase food which is produced in a way that protects the environment, conserves natural resources such as air, energy and water, and uses less energy.

Entitled The future of sustainable food production in China, the study was conducted by Francisco Cisternas, Assistant Professor in the Department of Marketing at CUHK Business School; in partnership with five other CUHK academics. They are Prof. Lam Hon Ming and Dr. Carolina Andrea Contador Sariego of School of Life Sciences; Prof. Shelly Lap-Ah Tse, Dr. Shuyuan Yang and Dr. Zhiguang Liu of the Jockey Club School of Public Health and Primary Care; Scholars from other universities in China, Canada and the UK also took part.

Attitudes and Social Norms Affect Consumer’s Choice

The researchers theorised that consumers’ willingness to purchase environmentally friendly food is determined by their intentions, which in turn are affected by their attitude towards such purchasing behaviour; the social norms to which they are exposed; the degree of perceived control over their ability to make such purchases; and their perceptions of the food’s quality.

To test out the theory, they conducted a face-to-face survey of 2,422 Chinese consumers in rural and urban districts across five provinces, spanning northern and southern China, who formed a representative sample of the whole population. The five cities involved – Beijing, Nanchang, Xi’an, Taiyuan, and Shenyang – were chosen to reflect different income levels across China.

Respondents’ behavioural attitudes were measured in terms of their degree of concern about deforestation, drying lakes and rivers, and other damage caused by the use of land and water resources for agricultural production; while social norms were assessed by examining the extent to which participants were influenced to buy sustainable food by pressure from government bodies, the media, experts, international agencies, and social media commentators.

Perceived behavioural control was measured in terms of the cost and convenience of making purchases and participants’ views on certification systems and purchase conditions. The perceived quality of sustainable food was assessed by examining their views on the ingredients, nutritional values and health benefits of the food, plus their degree of trust in certification schemes.  Certification agencies involved in the study included international agencies, the Chinese central government, and local universities and scientific institutions.

Consumers Prioritise Environment in Food Purchases

“The results confirm that Chinese consumers are inclined to purchase sustainable food,” says Prof. Cisternas. “Among the four factors, behavioural attitude contributed most to people’s willingness to buy sustainable food.

“These consumers are highly concerned about the impact of their food consumption on the environment, rather than simply considering personal benefits such as food safety. They limit their demand for non-sustainable food and replace their needs with sustainable alternatives.”

Prof. Cisternas says this willingness to spend more for sustainable food may be a form of the sort of “green consumerism” that prompts people to buy fair trade products, which cost more without necessarily offering better quality, yet still provide consumer satisfaction.

The second biggest impact on people’s willingness to purchase sustainable food was from social norms, with government promotions, and information in the media and on social media from experts, academics and commentators all influencing their readiness to pay more for environmentally friendly food, the study found.

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Perceived quality also played a part, with nutritional values, and health and nutritional benefits having more impact than the simple ingredients of the food, while lower levels of perceived behavioural control – partly measured by the distance between a participant’s home and markets stocking sustainable food – had the expected negative impact.

Enhancing Food Certifications Builds Trust in Sustainable Consumption

“The result showed that greater difficulty in accessing sustainable food reduced participants’ willingness to purchase such food,” says Prof. Cisternas. “This indicates that making it more convenient to purchase sustainable food would boost consumers’ intention to buy these items.”

The study also found that participants’ willingness to buy sustainable food was affected by the type of certification scheme it was covered by, with consumers placing most trust in certification by the Chinese central government. However, compared to consumers in other countries, Chinese consumers had a lower level of trust in food certification schemes overall.

Prof. Cisternas says the findings, which can be generalised to the whole population of China – and similar countries and regions – due to the representative nature of the survey, have implications for food policy.

“Information disseminated through the media and social media by government bodies, experts, international agencies, and commentators is more likely to influence consumers, when the organisations concerned are considered trustworthy,” he says.

“The government should work together with other agencies to boost consumers’ trust in sustainable food by ensuring that the information provided is scientifically-based, accurate, comprehensive and communicated effectively. Further improvements to certification schemes and better regulation and compliance monitoring may also help to build trust.”

The post Putting Healthy, Low-emission Food on the Menu first appeared on China Business Knowledge.

By China Business Knowledge@CUHK

The post China Business Knowledge@CUHK’s Top 10 Articles in 2021 first appeared on China Business Knowledge.

By Jaymee Ng, Principal Writer, China Business Knowledge@CUHK

In-store product displays are powerful tools marketers can use to directly influence our decision to purchase. That is probably why, for example, in the winter holidays, chocolates and biscuit gift packs are often placed in the most prominent areas in supermarkets. Given the importance of shelf design to driving sales, a new research study has sought to look at the proximity of products on the shelves – how close the products are to each other – and how this can increase profits both in physical and online stores.

The study, entitled “Influencing Competition Through Shelf Design”, is a joint effort by Francisco Cisternas, Assistant Professor in the Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School, Ph.D. candidate Wee Chaimanowong at the University of Melbourne and Prof. Alan Montgomery at Carnegie Mellon University. Through manipulating the proximity of products on display, the researchers were able to gain a 3 percent increase in profits.

“The proximity of products on a store shelf can also affect product demand in the digital world.”

Prof. Francisco Cisternas

“Products located next to each other are naturally compared more often than when they are placed far apart,” Prof. Cisternas says. “We developed a model that leverages this feature and which can drive up product demand through increased competition between products that are located closer together.”

Competition Vs Visibility

In seeking to understand the decision-making processes that consumers undertake in purchases, marketers have in the past turned to different statistical models. One of the most popular is called multinomial logit (MNL). However, the model has a known flaw – it fails to account for similarities between different options. Take for example, an issue researchers have coined the “Red Bus/Blue Bus” problem in which commuters are asked to choose from taking a private car, a red bus or a blue bus. The MNL model predicts a 33.3 percent chance for private car and 66.7 percent for the red and blue bus combined. This is unrealistic because in reality, the chances that a commuter takes a private car versus a bus should be 50-50. It is highly unlikely that more commuters would choose to take the bus just because one is painted red and the other blue.

In their study, Prof. Cisternas and his co-authors introduced a variation of the nested logit model that he named Neighborhood-induced correlation logit model (NCL), which not only takes into account the similarities between alternatives but the location of competitors. This model allows for the design of product displays taking into consideration both the relative position of the products to other products and the attractiveness of the specific location within the display, in addition to considering the inherent value of each product.

The researchers found that when a consumer is considering buying a product, he or she is likely to consider and compare a group of products in the close distance as well. Two factors would influence the consumer’s decision – competition and visibility. Competition between the products intensifies when they are closely placed near each other, which can have a negative effect on product demand. However, being compared more often would increase the product’s visibility in consumers, meaning that the products are being seen more by consumers. Increased visibility can have a positive effect on product demand.

According to the study, displaying a product of average desirability in a prominent position on a product shelf and close to other products which are highly desirable will reduce the demand for the average product due to high competition. This will happen even though the average product has more exposure among consumers because of its better location on the shelf. This is an example of how the competition effect dominates the visibility effect for an average product. However, when the same prominent shelf space is occupied by a highly desirable product, and this is placed close to products of above-average attractiveness, it can improve the demand of the highly desirable product. This is because consumers will still tend to choose the highly desirable product over competitors. In this scenario, the competition between products leads to higher visibility that would increase product demand.

Online Retail Stores

Prof. Cisternas and his collaborators tested their theoretical model using sales data from two product staples, paper towels and toilet tissues, from a supermarket chain with over 100 stores in the U.S. city of Chicago. The store originally organised the products by their brands. The researchers rearranged the shelves according to their new model, placing products of high profitability and low desirability in the centre of the shelf, and products of high desirability and relatively high profitability in the left or the right end of the shelf. Then, they filled the rest of the shelf with products of low desirability and low profitability. This shelf design was able to produce a 3.003% increase in profits compared to the original shelf layout.

“The proximity of products on a store shelf can also affect product demand in the digital world. On a screen, products still need to be shown to consumers in a specific order, and in some cases, like Amazon or Walmart, the number of products can be much larger than in a physical store, making this effect potentially even more prominent,” Prof. Cisternas explains.

The researchers tested the effect with two common types of product arrangements used in online shops, with products either in a column or a row, or as a matrix with 9 to 12 products shown simultaneously on one page. They examined categories such as candy bars, soft drinks and cheese and found that this proximity effect is stronger when the products are organised in matrix form.

Practical Implications

Another important finding from the study is that by ignoring the effect of the proximity of different products, traditional choice models such as MNL can overestimate the price sensitivity of different products. A high price sensitivity means that consumers will likely reject purchasing a product because they don’t think the product is good value for money. Low price sensitivity means that consumers would be more willing to pay more for the product. Consequently, having a wrong price sensitivity can lead retailers and manufacturers into making poor decisions in terms of pricing and promotions.

Comparing to traditional choice models, the researchers think the NCL model can better predict sales and anticipate changes in demand for new shelf designs. Regarding real-world applications, they suggest that when a product generates high satisfaction among consumers, then they should be placed in prominent locations in shelves and near other attractive products. The increased visibility this brings will increase the demand for this product. For products that are less desired by consumers, they should be placed among other less desirable products.

To maximise profits, highly desirable and profitable products should be placed throughout a shelf. Or, such products can be placed around products which are of above-average desirability but are not as profitable. This will likely induce comparison between the two products and ultimately increase profits through more sales of the products that are both highly desirable and profitable. Similarly, profits can also be increased by placing products of low desirability and high profitability next to products of low desirability with low profitability.

“This research is an important step in understanding competition induced by how product is presented to customers. We showed that this aspect is relevant and important to be understood as a separate effect from location attractiveness and product assortment,” Prof. Cisternas and his co-authors write in the study.

The post Improving Sales Through Better Store Shelf Design first appeared on China Business Knowledge.