Store-Within-a-Store

Abstract:     
Under the store-within-a-store arrangement, retailers essentially rent out their retail space to manufacturers and give them complete autonomy over retail decisions like pricing and in-store service. This intriguing retailing format, also known as vendor shops, boutiques or manufacturer-managed retailing, is observed in an increasing number of large department stores all over the world. In this paper, the authors use a theoretical model to investigate the economic incentives that a retailer faces while deciding upon this arrangement. The retailer’s trade-off is between channel efficiency and inter-brand competition, moderated by returns to in-store service and increased store traffic. The retailer cannot credibly commit to the retail prices and the service levels that the manufacturers will effect in an integrated channel, so it decides, instead, to allow them to set up stores-within-a-store. This suggests that stores-within-a-store is a phenomenon that emerges when a power retailer, ironically, gives manufacturers autonomy in its retail space. An extension of the model to the case of competing retailers shows that the store-with-a-store arrangement can also moderate inter-store competition.

Keywords: distribution channels, contracting, retailing formats, power retailer, department stores

JEL Classification: L14, M31

Accepted Paper Series