Study Sees Upside of Store-Within-The-Store Concepts
By Tom Ryan
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
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.
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?
- The Economic Incentive of the ‘Store-within-a-Store’
Retail Model – Knowledge@Wharton