Study Sees Upside of Store-Within-The-Store Concepts

Sep 11, 2009
Tom Ryan

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.

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?

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13 Comments on "Study Sees Upside of Store-Within-The-Store Concepts"

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Anne Howe
11 years 8 months ago

I believe there are many powerful CPG brands that would jump at the chance to have more control over the branded shopping experience in US retail stores today and in the future. The concept gives brands a chance to hold on to or help redevelop the lower propensity to be substituted by private label products. Will the entire model become commonplace in US retail? Don’t think so. But I would like to see and to be a part of a trial of the concept. It also tickles my brain to ask if the branded stores that were developed for Second Life have any application here? just a thought….

Len Lewis
Len Lewis
11 years 8 months ago

I’ve seen this type of rental or fee for space arrangement in a number of places over the years. It can work to stabilize pricing. but you’re also taking the consumer out of the equation by force feeding them one brand over another. When you do this, do you run the risk of losing them to another retailer that gives them greater freedom of choice?

However, I think the concept may be better suited to general merchandise items and some HBC, like cosmetics. It works for department stores. But they lease to so many cosmetics companies that they are bound to win.

Gene Hoffman
Gene Hoffman
11 years 8 months ago

There will be some appropriate opportunities for some CPG companies to place a store-within-a-store but there must be quality compatibility between the two entities. That would seem to limit the scope. To illustrate the downside of this potential paradigm, consider this:

Will P&G ever have the hots
To put a store within Big Lots?

Warren Thayer
11 years 8 months ago

Cynics and those with a keen sense of sarcasm would say that this model already exists, at least to some degree, in U.S. supermarkets. I do see a move for more manufacturers to go straight to the consumer and bypass the retail store, especially with private label being so strong (and getting stronger). But for mainstream products, on a large scale, I don’t see this catching on here. Too many cultural barriers on all sides.

Ralph Jacobson
11 years 8 months ago

This model has worked for years in the grocery industry outside the US. A large part of a major retailer’s gross profit in the Middle East is from leased space in the store. I would not set limitations for the categories to participate. For those stores with the volume, even housewares, etc can be candidates, as department stores have done this already. Grocers need to look at department/apparel stores for best practices here. It is all transferable to their business. CPGers have the marketing funds to drive the in-store activity, so a new look would be very welcome in the store. Can you imagine a Coca-Cola Store within a store?! They would do a fantastic job. Drinks, apparel, etc.

Gene Detroyer
11 years 8 months ago
The store-within-the-store concept makes perfect sense for many retailers. It provides the retailer with a way to not only expand their offerings, but to do it in a high service manner. The critical aspect though is the choice of partner and the working relationship. The SWTS must fit into the entire brand aspect of the retailer. If contrary, it will only confuse the consumer and create conflict. An everyday-low-price retailer must take great care in the scope of pricing of the SWTS. Similarly, the higher-end retailer must not allow a schlock SWTS. From a business point of view, any service the retailer can add that is outside of its core strength is helpful. Not every retailer can do it all like a Wegman’s. But, an independent retailer can certainly take on a Wegmans by leasing out those non-core activities that a Wegmans provides. The other opportunity for a SWTS is the ability to make the shopping trip easier for the customer. They have been around for years, but the offering of business services, dry cleaning,… Read more »
Herb Sorensen
11 years 8 months ago
Thinking in terms of location [real estate in the store] not only requires a paradigm shift, but it opens the doors to new types of questions about merchandising. In fact, merchandising a single category or section can be thought of as the management of a “micro-store.” For this purpose we can think of a single supermarket as being a microcosm that parallels a single shopping mall. Just as a shopping mall has a few anchor stores, so the supermarket has a few “anchor departments.” This includes items that are thought to be powerful enough forces to attract shoppers to their locations, things such as produce, meat, dairy, and bakery. Anchor stores in the mall and “anchor departments” in the supermarket are thought to be traffic builders and thus are dispersed around the property for the convenience of the owners and managers not really for the convenience of shoppers. Whether this is a good idea or not is probably an open question. Has anyone every really tried to build a store just the way shoppers might… Read more »
John Boccuzzi, Jr.
John Boccuzzi, Jr.
11 years 8 months ago

Overall, I like the idea. What this will take is strong brands and categories leading the way and retailers willing to put up with some trial and error. The real key to success is the stores-within-the-store need to be fully managed and run by that company. Starbucks proved this with their less than successful attempt of running coffee houses inside of Stop & Shops. I believe this could have been a huge success, but Starbucks would have had to have full control and responsibility for hiring and managing employees. Part of the Starbucks experience was lost when you did not have a true Barista behind the counter who reported to Starbucks management. I know this from my own personal experience.

Creating a model that works in the US will take some time and some additional trial and error. In the next five years I envision several retailers getting it right and leading the way.

Dick Seesel
11 years 8 months ago

Most department stores have moved to this model, whether consciously or not. They may lease space to vendors or (more likely) simply present shops by brand in order to present lifestyle collections for national vendors or their own private labels. (Think of INC shops at Macy’s in addition to well-known brands like Calvin Klein.) I may be in a minority, but I feel that lifestyle vs. category merchandising has helped lead to the breakdown of dominant presentations in department stores, has made them more difficult for shoppers to navigate, and has contributed to their long-term loss of market share. The entire concept needs to be re-addressed, whether the financial arrangement involves leased space or not.

Sandy Miller
Sandy Miller
11 years 8 months ago

This will work in certain cases, with very strong brands. But it seems the retailers should spend more time creating their own retailer brands with selected manufacturers.

Marge Laney
11 years 8 months ago

Store-In-Store is not new, it can be said that department stores are nothing more than a bunch of specialty retailers under one roof. But I think it’s time to bring it back in its purest form. The economic downturn has changed the way consumers shop. The consumer is looking for great value and they need to be sold. What better way to do that than by pitting brands against each other in a competitive selling environment? The customer wins two ways; they have access to brands at a better price and are sold and serviced by sales associates that know the products inside and out.

Yes, I said the “S” words: Sell and Service. I know it has fallen out of fashion in brick and mortar retail, but make no mistake competitive selling and great service are alive and well online! Brick and mortar may not like the sounds of this but…if they ignore it they will be ignored.

Bill Bittner
Bill Bittner
11 years 8 months ago

The thing I find interesting about this article is that it really reflects on the success of Walmart. With their RetailLink website putting manufacturers in charge of their own inventory management, Walmart has encouraged them to think like a retailer in order to minimize out of stocks and damaged goods or price reductions (excess inventory). Walmart gives their suppliers the tools they need to see what is going on at store level. After all, it is the manufacturer who loses most if the consumer buys a competitor’s product or substitutes another category. With everyday low prices and minimal promotional campaigns, Walmart offers manufacturers a level playing field where their products can compete directly with the competitors’. Maybe that explains their success?

Bill Emerson
Bill Emerson
11 years 8 months ago

There’s a practical side to this question that hasn’t been mentioned.

With the potential of a chronically lower sales base driven by continued high unemployment and increased savings, retailers have cut their inventories dramatically. This has lead to real challenges in filling floor space and avoiding the “Zombie Store” effect that Ted Hurlbut spoke so well of recently. Introducing categories, brands, and/or services that are not currently part of the offering can potentially bring incremental traffic and margin to an otherwise barren sales floor.

The key word is “potentially.” As noted above, these additions have to be consistent with the brand proposition, they have to be a win/win for both retailer and manufacturer, and they must be additive (vs. competitive) to the offering.

I don’t see this as a broad-based solution, but assuming there are situations that meet the criteria above, it is definitely worth looking into.


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