Power and Dependence in Category Management

June 12, 2006

Dependence, Requisite to Power?

• The dependence of B on A is high when– B derives great utility from dealing with A and

cannot find that utility easily from A’s competitors.

– Real alternatives to A are few when there are few competitors or when B faces very high switching costs if it leaves A.

Power• The ability of one channel member to affect the

decision variables of another.• Is the channel an organized behavior system;

a super-organization? Can you compare it to an organization?– Can members agree on common goals? Threats?

Customers?

– Can they agree on win/win benefits from cooperation?

• Dyadic relationships– A has power over B

– B is dependent on A

Decision Variables

• Prices and margins

• Markets to be entered

• Extent of product line to be carried

• Customers– Territory– Sales volume

Power/Dependence Equivalence

• There is no importance to the concept unless there is dependence.

• Dependence—lack of alternatives

• “Bargaining power” in Porter’s Five Forces approach.

Bases/Dimensions of Power

• Mediated/(exercised)– Rewards– Coercion

• Non-mediated– Referent– Expert– Legal– Traditional

Dependence in Retailing

• B is the largest retailer of A’s line in a geographic market.

• A is B’s largest supplier in a line important to B.

Strategic Perspective

• Power is necessary for the “channel manager” to coordinate the activities and functions of channel members.

• Coughlin et al. approach the topic from the standpoint of increasing power (and increasing the dependence of other firms on their functions).

• Conversely, channel members may seek to reduce their dependence on other firms to increase their power.

Supermarket Concentration, 1997

Establishments Sales ($000s) %All firms 69,461 351,402,705 100.04 largest firms 4,171 73,243,220 20.88 largest firms 8,139 121,171,077 34.520 largest firms 11,248 171,565,746 48.850 largest firms 14,978 216,893,988 61.7

Supermarket Concentration, 2002

Establishments Sales ($000s) %All firms 66,150 395,233,897 100.04 largest firms 6,844 128,491,300 32.58 largest firms 10,498 180,061,944 45.620 largest firms 13,538 226,297,173 57.350 largest firms 16,735 270,004,583 68.3

• Depth, the number of different SKUs within a category.– Costs of depth

– Benefits of depth

• Dependence, the shares of SKUs that come different suppliers– Autonomy

– Profitability

• Differentiation, the uniqueness of the assortment with respect to competitors– Autonomy

– Profitability

Benefits of Increasing Assortment Depth

• “Mass” effect and the store’s trading area, as the number of unique items available in a trading area increases, the size of trading area increases.

• “Conversion” effect and consumer search, as the number of unique items increases, the likelihood that a consumer will find a satisfactory choice within that assortment will increase.

Costs of Increasing Assortment Depth

• Inventory effects– Prevention of “stock-outs:” Additional items

come at the expense of facings on other items.– Costs of space: Items come into an assortment,

and without sacrificing facings, will need additional space.

– Obsolescence of items, the longer an items goes without being sold, the chance that it will never sell increases.

Depth Management Under Constrained Space

• Category of SKUs provided a fixed amount of display space within the store.

• The number of facings available to an SKU is determined by its movement (unit volume) and the replenishment cycle to minimize stock-outs.

Inventory costs related to depth

Category revenue

Category gross marginOptimal range of depth

Retailer’s Optimal Depth

$

Increasing number of SKUs

Dependence and Profitability

• Monopoly: Single supplier will set profit maximizing price.

• Duopoly: Second competitor is likely to match price of monopoly supplier.

• Concentrated supply and brand loyalty, the absence of switching, or switching between two brands has the same effect.

Dependence and Autonomy

• No alternatives: no decisions possible, why not allow the supplier to manage the category?

• Retailers or “Depots:” Aspinwall posited a scenario where retailers are simply depots where consumer purchase pre-sold goods.

=1 = 0

Costs associated with depth

Category revenue

Category gross margin

Effect of Brand Concentration on Category Response to Depth

$

Increasing brand variety

=1 = 0

Costs associated with depth

Category revenue

Category gross margin

Effect of Brand Concentration on Category Response to Depth

$

Increasing brand variety

Differentiation and Retail Profitability

• Price matching among competing retailers on duplicated items:– Matched prices are lower in competitive retail

markets, the price distribution is “narrower”

– Gross margins are lower if all retailers are paying the same price for an item.

Differentiation and Supplier Control

• Supplier’s manufacturing costs are lowest when the number of SKU they manufacture is a minimum number of SKUs.

• Supplier’s gross margins would be largest when retailer gross margins are the lowest.

• Suppliers would prefer to have retailers with duplicated assortments.

Separate or Interdependent Issues?

• Depth and Differentiation?

• Depth and Supplier Dependence?

• Supplier Dependence and Differentiation?

Dependence and Differentiation

Single supplier provides retailer with unique

SKUs

Competing suppliers provide retailer with

unique SKUs

Single supplier provides retailer with overlapping

SKUs

Competing suppliers provides retailer with

overlapping SKUs

Dependence and Depth

Single supplier provides retailer with minimum

SKUs

Competing suppliers provide retailer with

minimum SKUs

Single supplier provides retailer with maximum

SKUs

Competing suppliers provides retailer with

maximum SKUs

Differentiation and Depth

Minimum number of all unique SKUs

Maximum number of all unique SKUs

Minimum number of all overlapping SKUs

Maximum number of all overlapping SKUs

Five Competing Retailers: Complete Differentiation

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Five Competing Retailers: Perfect Scalability

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Five Competing Retailers:

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Store 1 Store 2 Store 3 Store 4 Store 5