Research

The relationship between manufacturer advertising and retail gross margins.

Type of Report
Analysis of empirical data.
Objective
To test the proposition that highly advertised brands are sold at prices that yield lower retail gross
profit margins compared to less advertised or unadvertised brands.
Method
Information on retail sales and margins and manufacturer advertising expenses was obtained for 51
product categories and 488 brands sold by a representative supermarket chain. Effects of
advertising share, household penetration level, total advertising dollars, and food versus nonfood
product on a brand gross margin ratio (BGMR) variable were analyzed.
Findings
 For the supermarket data base, manufacturer advertising results in lower retail gross margins for the more
advertised brands compared to the unadvertised and less advertised brands in the same product category.

 The analysis shows a connection between high advertising and low retail margins that is independent of the
effect of advertising on unit sales.

 Although the strength of the relationship varies among product categories (e.g., it is highest for those with high
household penetration), the basic conclusion holds true for almost all types of product studied.

 The evidence regarding the possibility of a "threshold effect" of advertising on retail gross margins is mixed.
The authors conclude that it is important for marketers and policymakers alike to consider the effects
of manufacturer advertising on retail price competition in examinations of marketing and distribution
systems. They also conclude that the long-term effects of advertising for the individual firm may be
underestimated with conventional budgeting techniques if the impact of advertising on retail price is
not considered.
Target Audience/Applicability
Marketers of consumer goods, retailers, academics, and policymakers.