۱- Introduction

۲- Literature review

۳- Model description and setup

۴- The overall game: sequence of decisions and assumptions

۵- Results: calibrations of trade-offs

۶- Discussion and implications

۷- Limitations and future research

References

Abstract

The consolidation of retailers across markets has considerably altered the competitive dynamics between leading brand manufacturers and retailers. The era in which brand manufacturers dictate the game to compliant retailers is long gone. Nowadays, with more equal negotiation power retailers are no longer just channel partners but rather business partners with whom to build business-to-business relationships. This has become apparent especially since retailers have developed their own private label brands (PLB) and actively seek brand manufacturers to supply them. For brand manufacturers supplying PLB may bring potential benefits but may also harm profits. Thus, this research investigates conditions under which a leading brand manufacturer would be better or worse off in terms of profitability producing PLB for retailers. Using a game theoretic model, we calibrate the trade-offs between the shelf space devoted by the retailer to the manufacturer brand and the amount of profit required from supplying the PLB necessary to counteract cannibalization and to generate profits for the manufacturer, under different levels of uncertainty regarding the availability of alternative suppliers. Calibrating these trade-offs provides brand manufacturers clear guidelines for negotiations with retailers regarding shelf space allocation and wholesale prices to be profitable supplying PLB.

Introduction

The growth and consolidation of retailers across a large number of countries has reshaped the retail scenario and significantly altered the competitive dynamics between retailers and brand manufacturers. For many years, retailers were spectators in a market dominated by powerful brand manufacturers. Retail fragmentation and media concentration contributed to brand manufacturer’s growth (Kumar & Steenkamp, 2007). Today the situation has changed considerably. The process of consolidation of the retailing system has reinforced retailers’ competitive position (AIM, 2016) leading to an increase in their bargaining power with brand manufacturers, enabling retailers to control a number of key business decisions related to logistics, marketing and sales (Pauwels & Srinivasan, 2004; terBraak, Deleersnyder, Geyskens, & Dekimpe, 2013). For example, retailers strongly influence decisions about product assortments, shelf space allocation, shelf positioning, and the number and typologies of brands to be offered. This consolidation represents an important shift in the relationship between brand manufacturers and retailers (Sutton-Brady, Taylor, & Kamvounias, 2017). Retailers are no longer channel partners but rather business partners with whom to build business-to-business relationships. A key consequence from the consolidation of retailers is the development of their own brands. Relying on their bargaining power and scale, retailers have successfully developed private label brands (PLB) as a core strategy (Kim, Jung, & Park, 2015), becoming direct competitors to manufacturer brands (Pauwels & Srinivasan, 2004). The level and extent of PLB penetration across countries, industries and product categories presents a significant challenge to brand manufacturers. Specifically, they are present in more than 90% of consumer-packaged goods categories (Euromonitor, 2010; terBraak, Deleersnyder, et al., 2013). Market shares in the United States and across Europe have reached on average 16.7% (Nielsen, 2018) and 17.1%, (IRI, 2016), respectively, but enjoy higher shares in countries such as Spain (52%), Switzerland (50%), UK (46%), Germany (45%) and France (32%) (PLMA, 2017).