A study from two marketing professors explores whether stores should just be leasing retail space to manufacturers. Although apparently only prevalent in cosmetics and high-end apparel, in some cases, in the U.S., the stores-within-a-store model is used across the board in more product categories in China and other Asian countries as well as Europe.
The study, Store-Within-A-Store, by Wharton marketing professor Z. John Zhang and Kinshuk Jerath of the Tepper School of Business at Carnegie Mellon University, notes that there are many variations of the store-within-a-store model. But the two focused on the most "autonomous" model where vendors determine pricing, own the inventory and manage in-store service while retailers collect rent. Theoretical models were built to explore many elements of the arrangement, including the type of product, the cost of providing service and the overall competitive retail climate.
Among the advantages, the store-within-a-store has the effect of stabilizing price competition across all retailers primarily because it reduces brand-on-brand competition, according to the study. The traditional retailer-resell arrangement also results in higher prices for consumers because the profit margin must be split between the manufacturer and the retailer. By comparison, manufacturers in the store-within-a-store arrangement compete against one another on price and on in-store service, but are willing to keep prices lower since the retailer does not take an additional markup. As a result, the study finds the selling space tends to reap higher sales and enjoy a stronger bottom line.
Another major finding was that in-store service levels within the store-within-a-store product are higher than that for the traditional retailer-resell product. That's primarily because the margin opportunity is greater.
A key variable, however, is the degree to which consumers can easily substitute one product for another, the professors found. That's why for most categories, like kitchenware and housewares, the standard retailer-resell arrangement exists.
"When the consumer perceives substitutability is low, that's when you will see the store-within-a-store," said Prof. Jerath in a statement. "With cosmetics -- a Chanel lipstick, for example -- substitutability is low, at least when compared to frying pans."
For retailers, the likelihood of using the store-in-store model increases if it turns out to be a good traffic driver, such as cosmetic counters for department stores. While a store-within-store setup appears to reflect the weakness of the retailer and the strength of the manufacturer, the arrangement is more prevalent at "power retailers" across the globe. Owning the coveted real estate, retailers have the leverage to charge higher rental fees if a manufacturer is doing well.
Indeed, the authors conclude that lower retail competition in the U.S. is probably why store-within-a-stores are more prevalent in Asia and Europe, where they feel retail competition is more fierce.
"In Asian markets, retail outlets are very close to each other, and it is a lot more important for the retailer to cushion its price competition by charging the manufacturer for entry into its floor space," said Prof. Jerath.
Discussion Questions: What do you see as the pros and cons of retailers renting retail space to manufacturers versus the traditional re-sell arrangement? If not straight-leased agreements, what hybrid arrangements do see becoming more popular in the years to come? What categories make most sense to sell under a lease arrangement?