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  How to Optimize Your Assortment Strategy to Reduce Suppliers' Prices 

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How do retailers' decisions about their product assortment affect the competition between their suppliers and, consequently, their prices? A study by Sebastian Heese and IESE's Víctor Martínez de Albéniz examines this question.

According to the authors, the manufacturers vying for space on retailers' shelves or in distributors' catalogs face two different competitive pressures: on the one hand, there's the external threat of being excluded from the assortment; and on the other, there's the internal competition among the selected suppliers for more market share.

Which of these two effects is greater? According to this study, it depends on the degree of differentiation between products offered in the retail setting.

When products are very similar, the risk of being excluded from the assortment leads manufacturers to reduce how much they markup prices to optimize profits. That is to say, the threat posed by the best manufacturer to be omitted from the assortment dominates the competing manufacturers' pricing strategies and that can be beneficial to the retailer. As a result, there's an incentive here for the retailer to limit the assortment of similar products -- and to let the manufacturers know about it.

Conversely, when manufacturers offer distinct products, the external threat is minimal and manufacturers set their prices primarily to optimize their market share. In this case, those excluded from the assortment do not put much pressure on pricing, so inventory reduction does not make much sense for retailers or distributors.

The Case of a Shrinking Supermarket Inventory
The results of this research are in line with what has occurred in recent years in retailing. One good example, say the authors, is seen at Spain's largest supermarket chain, Mercadona.

In 2009, Mercadona announced it was dropping 600-800 products from its shelves, out of a total of 9,000. In this assortment reduction, the supermarket chain said it was eliminating products that were very similar to each other, an approach consistent with the findings of this study.

This rationalization of its assortment intensified the competition between manufacturers to keep their products on Mercadona's many shelves (not even the leading brands were safe), which led to a price war and a general decrease in the manufacturers' margins.

With the threat of being left out of its assortment looming, Mercadona was able to negotiate more advantageous agreements with suppliers and benefit from prices that were significantly lower than its competitors'.

Methodology, Very Briefly
The authors propose a theoretical model in which the retailer controls the assortment and final retail prices, while manufacturers set their wholesale prices competitively, and customers make their purchase decisions based on the logit choice model.
This article is based on:  Effects of Assortment Breadth Announcements on Manufacturer Competition
Publisher:  Informs
Year:  2018
Language:  English

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