18/ Journal of Marketing,October 2001
FIGURE 2The Competitive Retail Structure
including target gross margins, return on inventory goals,service levels, and so forth.
Step 5: category strategies
. Typical category strategiesinclude cash generating, excitement creating, profit generat-ing, traffic building, and so forth. For example, a traffic-building strategy is focused on drawing consumer traffic tothe store and into the aisle, and a profit-generating strategyseeks to increase category gross margin percentage andgross profit dollar.
Step 6: category tactics
. This step involves the determi-nation of optimal category pricing, promotion, assortment,and shelf management that are necessary to achieve theagreed-on role, scorecard, and strategies. “Pricing policiesshould be applied to the current prices to develop
and set overall price changes for the category. Pro-motional policies should be applied in the development of apromotional plan that includes frequency of promotions andrecommended price points” (
Category Management Report
1995, p. 45).
Step 7: plan implementation
. An implementation plangenerally includes what specific tasks are to be done, wheneach task should be completed, and who is to accomplisheach task. The plan should also note the start date of eachtask.
Step 8: category review
. This step involves the regularmanagement of the intended results of the overall plan.Reviews should be scheduled at established intervals andlisted in the implementation plan.An inspection of the CM framework reveals that oncethe category definition (Step 1) and the category role (Step2) are chosen, the bulk of the action lies in determining thecategory strategy (Step 5) and then executing the specificcategory tactics (Step 6). Although different strategies maybe appropriate for different categories, retailers predomi-nantly practice CM to increase profits and sales. AsACNielsen (1998, p. 5) notes in its
Eighth Annual Survey of Trade Promotion Practices
, “Retailers practice categorymanagement with several ends in mind, but increasing prof-itability, increasing revenue and optimizing item mix are …the most important motivators.” For example, 97% of retail-ers surveyed indicated that the top priority for practicingCM is increased profitability. Similarly, the retailer exam-ined in this study employed a variety of strategies, includinga profit-generating strategy, consistent with CM. For model-ing purposes, we assume that the retailer sought to buildprofits by CM.We use the components of the strategic framework of CM to develop and analyze a model of a decentralized dis-tribution channel that consists of two competing retailers,Retailers A and C, each carrying two differentiated nationalbrands that are produced by competing manufacturers M1and M2, as shown in Figure 2.
Note that most trading areas are more complex than the oneshown in Figure 2 and are composed of multiple retailers(e.g., Winn-Dixie, Kroger, Safeway, Albertson’s) that sellmultiple brands in a product category, which are producedby multiple manufacturers. However, replacing the 2
2structure (2 manufacturers, each produces 1 brand, 2 retail-ers) with a more complex structure (e.g., a 2
2 struc-ture) would not change the substantive nature of the resultsfrom the present modeling framework. Because the benefitsof greater realism in the form of more manufacturers andbrands are outweighed by the costs of a more analyticallycomplex model that does not alter our predictions about theeffects of retailer adoption of CM, we opted for a simplerstructure. The study focuses on the demand-side implica-tions of a retailer’s shift from BCM to CM. In keeping withthis thrust, we assume that the manufacturers are symmetricwith respect to their costs of production and that the manu-facturers’marginal costs of production are constant; for easeof exposition, manufacturers’marginal costs of productionare set equal to zero. We also assume that the manufacturerssell their brands to the retailers at a constant per-unit charge(i.e., the wholesale price) and the retailers incur no othercosts of acquisition. Last, we assume that each manufacturersells its brand at the same wholesale price to each retailer.This is in keeping with legal restrictions against discrimina-tory price discounts by manufacturers that exist in practice(see, e.g., Ingene and Parry 1995; Kotler and Armstrong1996, p. 88).Our investigation employs the traditional game-theoreticapproach to analyzing problems of channel price coordina-tion and competition (e.g., Choi 1991; Coughlan and Wern-erfelt 1989; Ingene and Parry 1995; Jeuland and Shugan1983; McGuire and Staelin 1983; Raju, Sethuraman, andDhar 1995; Trivedi 1998; Zenor 1994). As do many previ-ous researchers who model decentralized channels in thisstream of literature, we assume, first, that each manufacturerdetermines the wholesale prices to maximize its profits.Given these wholesale prices, managers at the two retailersdecide on the retail prices to maximize their respectiveobjective functions. The manufacturers know each retailer’spricing decision rule and take these into account when set-ting their wholesale prices. That is, we assume that the inter-action between the firms is such that each manufacturer actsas a Stackelberg leader in setting its wholesale price, and theretailers follow with their retail price decisions. Adopting amanufacturer–Stackelberg rather than retailer–Stackelbergperspective is reasonable, because no store brands are