How much do loyalty programs cost the supermarkets?A deterministic and stochastic mathematical excel model exercise.

Your neighbor supermarket business is a low-margin operation, with theaverage profit margin of2 percent.In analyzing historical sales data for the past 5 years, you noticed weekly sales have been declining about 2-5% due to new local competition.You realized that one of your competition has put in place a 'reward' loyalty card program.In order to stop sales decline, you decide to follow suite and put in place a reward loyalty card program too.But, you want to estimate the impact to your average profit margin.

Monthly Average Sales from Regression Analysis

Supermarket Regression Analysis Data.xlsx

Assignment:Your are to build an excelmath model sheet of the supermarket annual business results based on the attached sales history.The sales history file isbased on a regression analysis performed by the sales business analyst department.It has Average (Mean) monthly sales from past five years.

Loyalty Card - you expect that 63% of your customers will sign up.The loyalty card will give them 4% off their sales order.

Helpful Guidelines:

For the Deterministic Model, use the Average Weekly Sales.To get discount per week,multiply each average weekly sale by the average discount of 0.63 * 0.04.Calculate new sales, and then the difference in profit margin (The cost of the Loyalty Program).Tabulate it.

For the Stochastic Model, use a Normal Distribution Curve, with the Mean being the Average Weekly Sales, and the weekly Standard Deviation being $5,000.That is, all weekly sales will fall between the Average - 3 Standard Deviation and Average + 3 Standard Deviation.For example, if average weekly says is 100,000 then the 99% of weekly sales would fall between 85,000 and 115,000.Use the RANDBETWEEN function in excel to get this random sales number.To get discount per week,once again use a RAND () function to get a 0 (no loyalty card) or a 1 (loyalty card) and calculate the random discount based on loyalty card info.Calculate new sales, and difference in profit margin (The cost of the Loyalty Program).Now, since this is a stochastic model, you need to run it three times (use the F9 function to re-calculate spreadsheet).Make sure you tabulate each iteration so you can get a MEAN of the Cost of Loyalty Program.

Calculate the new profit margin based on the results from your deterministic model and your stochastic model.

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