Manufacturer-owned retail stores
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Manufacturer-owned retail stores Yusong Wang & David R. Bell & V. Padmanabhan
Published online: 3 January 2009 # Springer Science + Business Media, LLC 2008
Abstract Increasingly, manufacturers sell their products in their own retail stores, and many of these stores appear to be in direct competition with independent retailers; i.e., both types of retail stores are physically co-located. We analyze one way this practice affects the retail market. We find that, when independent retailers compete against company stores (instead of just against other independent retailers), they (1) charge higher prices and (2) are more willing to engage in marketing efforts on behalf of the manufacturer’s brand. Furthermore, when company stores and independent retailers compete in the same market, the company store charges higher prices and provides more marketing effort. Anecdotal data are consistent with these model predictions. Keywords Branding . Distribution channels . Retailing Traditional roles for manufacturers and retailers are blurring, and their activities are becoming more intertwined. One prominent and largely unstudied phenomenon that exemplifies this trend is “partial forward integration” (PFI) by manufacturers. In general, PFI describes a setting where the manufacturer sells to end consumers not only through traditional independent retailers but also through company-owned stores. A shopper strolling down the major boulevards in cities around the world might encounter stores owned by Apple, Bally, Nike, Ralph Lauren, and more Y. Wang (*) School of Management, Fudan University, 670 Guoshun Road, Shanghai 200433, China e-mail: [email protected] D. R. Bell The Wharton School, University of Pennsylvania, 700 Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, PA 19104, USA e-mail: [email protected] V. Padmanabhan INSEAD, 1 Ayer Rajah Avenue, Singapore 138676, Singapore e-mail: [email protected]
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Market Lett (2009) 20:107–124
recently, even automobile manufacturers such as Audi, to name just a few. Similarly, shopping malls in the USA routinely have a substantial number of manufacturerowned retail stores. We focus on a specific type of PFI: The manufacturer-owned stores and independent retailers co-exist in the same physical location and therefore potentially serve the same customer base.1 In this paper, we term this arrangement the company store (CS) channel. Our goal is straightforward: to understand how the CS channel affects outcomes in the retail market, in particular, prices charged and levels of marketing effort placed behind the manufacturer’s brand. We use a standard modeling approach (e.g., Lal 1990; McGuire and Staelin 1983) to derive retail market outcomes under two regimes: 1. Independent structure (I). Manufacturing and selling are delineated. The manufacturer produces the good and contracts with retailers who sell it to consumers. 2. Company store structure (CS). Independent retailers still sell the product, but in addition, the manufacturer supports a physically co-located ret
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