Forward Buying by Retailers

Abstract

Conventional wisdom in marketing holds that retailer forward buying (1) is a consequence of manufacturer trade promotions and (2) stockpiling units helps the retailer but hurts the manufacturer. This paper provides a deeper understanding of forward buying by analyzing it within the context of manufacturer trade promotions, competition and demand uncertainty. We find that regardless of whether the manufacturer offers a trade promotion or not, allowing the retailer to forward buy and hold inventory for the future can, under certain conditions, be beneficial for both parties. Disallowing forward buying by the retailer may lead the manufacturer to lower merchandising requirements and change the depth of the promotion. In competitive environments, there are situations in which retailers engage in forward buying due to competitive pressures in a prisoners’ dilemma situation. Finally, when we consider the case of uncertain demand, we find further evidence of strategic forward buying. In particular, we find cases in which the retailer orders a quantity that is higher than what it expects to sell in even the most optimistic demand scenario.