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Market-Based Solutions to Vital Economic Issues
Research
Sep 1, 2014

Gains and Losses of Exclusivity in Grocery Retailing

Abstract

Conventional wisdom dictates that convenience goods should be distributed as intensively as possible. Still, exclusivity arrangements are rapidly gaining way in grocery retailing. We discuss the possible performance outcomes of exclusivity deals, and propose a unified framework (i) to quantify the gains and losses of such arrangements in consumer-packaged-goods markets, and (ii) to decompose the total monetary gains and losses into a variety of sources. Our framework considers both the manufacturer and the retailer granted the exclusivity right, and accounts for the fact that both dyad parties may be active in multiple, inter-related, categories. We illustrate the proposed approach in the context of Unilever s decision to limit the distribution of five of its (sub-)brands to a single retailer in the Dutch market, and derive the sales and profit implications for the parties involved. In all instances, we find that intensive distribution generates higher sales for the manufacturer than the exclusive arrangement, while such an arrangement is typically appealing for the retailer granted exclusivity. To come to a win-win situation, a variety of compensatory arrangements are considered. While manufacturers should not try to have leading incumbent products de-listed, we show how extra feature support for the exclusive brand may make an otherwise harmful arrangement beneficial for the manufacturer. In addition, we show how, in a number of instances, the total dyad profitability increases under exclusive arrangements, which offers rooms for margin re-negotiations.

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