Store Within a Store

On a visit to any major U.S. department store, consumers can observe vendor shops (typically for cosmetics, apparel, apparel accessories, electronics, and toys), each selling a particular brand exclusively and designed to reflect the image of that brand. For these vendor shops, also called boutiques or "stores within a store," retailers rent out retail space to the respective manufacturers and give them complete autonomy over retail-level decisions, such as pricing and in-store service.

In this article, the authors use a theoretical model to investigate the economic incentives that a retailer faces when determining the store-within-a-store arrangement (compared with a standard arrangement, in which a retailer purchases goods from different manufacturers and assumes full control over selling them). Adopting this arrangement for a category leads to increased channel efficiency. However, because all manufacturers are located side-by-side and sell directly to consumers, it also leads to greater manufacturer-level competition, which can dissipate category profits. As a result of this trade-off, a retailer facing little competition will adopt the store-within-a-store arrangement for categories in which the consumer-perceived substitutability among manufacturers' brands is low, because in these categories, the benefits from increased efficiency dominate the adverse effect of increased competition. Therefore, the adoption of the stores-within-a-store arrangement also leads to lower prices, greater service provision, and increased sales. Furthermore, the authors find that in a market with multiple competing retailers, this arrangement helps moderate retailer-level competition because it allows every manufacturer to set retail prices jointly for their products in all its stores within stores across different retailers' outlets. Therefore, this retailing arrangement is more likely in markets in which retailers are more competitive.

The results of the analysis are in agreement with anecdotal observations in the marketplace. For example, consumer-perceived substitutability among brands in the cosmetics category likely is lower than in the kitchenware category, and stores within a store are more popular in cosmetics than in kitchenware, as predicted by the model. The authors also conduct interviews with several prominent retailing practitioners who broadly agree with the insights derived from the model.