Market

Market Power
Power and
and Performance:

Performance:
Performance:
A Cross-Industry Analysis of
Cross-Industry Analysis of
of

Manufacturers
Manufacturers and
and Retailers

Retailers
Retailers

KUSUM L.
KUSUM L. AILAWADI
AILAWADI
Dartmouth College
Dartmouth College

NORM BORIN
NORM BORIN
California Polytechnic
California Polytechnic and
and State University
State University

PAUL W.
PAUL W. FARRIS
FARRIS
University of
University of Virginia
Virginia

Two recent
Two recent studies of manufacturer
studies of manufacturer and
ofmanufacturer and retailer
retailer profitability
profitability in the food
in the industry have
food industry have raised
raised questions
questions
about whether
about the widely
whether the widely cited,
cited, but empin’cally untested,
but empirically untested, shift of power
shift of powerfrom
ofpower from manufacturers
manufacturers to retailers
to retailers
has really occurred. Has the marketing community been operating under a misconception or are these
has really occurred. Has the marketing community been operating under a misconception or are these
studies
studies flawed? This paper
flawed? This uses more
paper uses complete measures
more complete measures of exercised and
ofexercised
of exercised and potential market power
potential market power andand
aa broader
broader sample
sample of industries and
ofindustries
of industries and retail
retail classes
classes toto address
address this
this critical question. Not
critical question. Not only
only do our mea­
do our mea­
sures have strong
sures have theoretical grounding
strong theoretical grounding in in the industrial organization,
the industrial organization, finance
finance andand accounting
accounting
literature, they incorporate in them the
literature, they incorporate in them the impact ofimpact of actions
ofactions that have been commonly
actions that have been commonly cited as cited as illustrations
illustrations
of a
of a power
power shift. Our analysis
shift. Our analysis ofof 14
14 consumer
consumer goodgood industries
industries shows
shows that only a
that only a few
few ofof them
them exhibit
exhibit aa
shifr
shift in market power towards retailers. Further this apparent shift is highly influenced by a small num­
in market power towards retailers. Further this apparent shifr is highly influenced by a small num­
ber of
ber of retailers
retailers within
within aa single retail class.
single retail class.

The ideal of a system in which market values alone control, is impossible

The ideal of a system in which market values alone control, is impossible of
of realization
realization
because goods always move through a power structure and not through the neutral type of
because goods always move through a power structure and not through the neutral type of
facility which may be suggested by the term “marketing channel. ”
facility which may be suggested by the term "marketing channel. "
-Wroe Alderson
-Wroe Alderson ((1955)
1955)

At no time has the balance of power between manufacturers and retailers received more atten-
At no time has the balance of
ofpower
power between manufacturers and retailers received more atten­
tion than in recent years. Beginning with articles in the business press, statements about a
tion than in recent years. Beginning with articles in the business press, statements about a
shift in power from manufacturers to the trade have slowly but surely made their way into
shift in power from manufacturers to the trade have slowly but surely made their way into
the academic literature as well (see Alpert, Kamins and Graham, 1992; Chu, 1992; Buzzell,
the academic literature as well (see Alpert, Kamins and Graham, 1992; Chu, 1992; Buzzell,

Kusum L. Ailawadi, Amos Tuck School of Business Administration, Dartmouth College, 100 Tuck Hall,
Kusum L. Ailawadi, Amos Tuck School of Business Administration, Dartmouth College, 100 Tuck Hall,
Hanover, NH 03755. Norm Borin, California Polytechnic and State University, Department of Business
Hanover, NH 03755. Norm Borin, California Polytechnic and State University, Department of Business
Administration, San Luis Obispo, CA 93407. Paul W. Farris, Darden School of Business Administration,
Administration, San Luis Obispo, CA 93407. Paul W. Farris, Darden School of Business Administration,
University of Virginia, PO. Box 6550, Charlottesville, VA 22906-6550.
University of Virginia, P.O. Box 6550, Charlottesville, VA 22906-6550.
Quelch
Quelch and and Salmon,
Salmon, 1990; 1990; Olver
Olver and and Farris,
Farris, 1989
1989 forfor some
some examples).
examples). Increasing
Increasing retailerretailer
concentration,
concentration, access access to scanner
scanner technology,
technology, eroding brand loyalty
eroding brand loyalty due
due to increases
increases in price price
promotions and
promotions private labels
and private labels areare the
the commonly
commonly mentioned
mentioned causes causes of of the
the rise
rise in retailer
retailer
power relative to manufacturers.
power relative manufacturers. However, However, concrete
concrete empirical
empirical evidence
evidence in in support
support of of this
this
purported power
purported power shift
shift has
has not been provided.
not been provided. In In fact,
fact, two
two recent
recent empirical
empirical studies
studies of of the
the food
food
industry
industry (Farris
(Farris and
and Ailawadi,
Ailawadi, 1992; 1992; Messinger
Messinger and Narasimhan, 1995)
and Narasimhan, 1995) andand one one analytical
analytical
paper (Kim
paper (Kim andand Staelin,
Staelin, 1994)
1994) have
have raised
raised questions
questions aboutabout whether
whether this power shift
this power shift has
has really
really
occurred. Neither empirical
occurred. Neither empirical studystudy waswas able
able to verify
verify thethe shift
shift of
of market power through
market power through anal­
anal-
yses of
yses of changes
changes in profitability.
profitability. Has Has thethe entire
entire marketing
marketing community
community been been operating
operating under under
a serious
serious misconception,
misconception, or or are
are the
the studies
studies that
that have
have questioned
questioned the the power
power shiftshift flawed?
flawed? It It
would
would seemseem that
that the
the answer
answer to this this question
question is critical
critical for both academics
for both academics and practitioners.
and practitioners.
Three
Three major
major objections
objections can can bebe raised
raised about
about these
these studies
studies that
that deserve
deserve further
further investiga­
investiga­
tion.
tion TheThe first
first is that
that they
they used
used the the wrong
wrong measure
measure of profitability. Accounting
of profitability. Accounting rates rates ofof
return,
return, such
such as those
those analyzed
analyzed by by these
these authors,
authors, have have historically been criticized
historically been criticized as weak weak
indicators
indicators of of "true"
“true” economic
economic profit.profit. TheThe second
second is that profit alone,
that profit alone, however
however measured,
measured, is
an
an incomplete
incomplete measure
measure of power. Although
of power. Although profitprofit is a commonly
commonly used used indicator
indicator of of market
market
power in
power in the
the economic
economic and and industrial
industrial organization
organization literature,
literature, market
market powerpower may may not not bebe
immediately
immediately reflected
reflected in profitability. Further,
in profitability. Further, while profitability is a well-accepted
while profitability well-accepted indica­ indica-
tor of
tor of market power in
market power in the
the economic
economic and and industrial
industrial organization
organization literature,
literature, the behavioral
the behavioral
view
view of power has
of power has traditionally
traditionally been been different.
different. Third,
Third, manymany major
major shifts
shifts have
have been been occur­
occur-
ring
ring outside
outside traditional
traditional supermarket
supermarket channels
channels that that may may make
make supermarkets
supermarkets a poor
poor
barometer for
barometer broader trends
for broader trends in in retailing.
retailing. ForFor example,
example, Wal-Mart
Wal-Mart is not not a part
part of of the
the super­
super-
market
market sample,
sample, but but it is clearly
clearly one one ofof the
the firms
firms that
that is mostmost often
often cited
cited as an an example
example of of
the power shift.
the power shift. In
In fact,
fact, measures
measures of power which
of power which do not not show
show increases
increases for for this
this company
company
would
would lacklack face
face validity
validity in the the view
view of of most
most marketers.
marketers.
A broader
broader sample
sample and better measures
and better measures are are needed
needed to address
address these
these issues.
issues. In In this paper we:
this paper we:

1. discuss
discuss some
some ofthe
of the shortcomings
shortcomings of of using
using accounting
accounting ratesrates of
of return
return such
such ROS
ROS and
and
ROA
ROA as indicators
indicators of of market power;
market power;
2.
2. distinguish between exercised
distinguish between exercised and potential power,
and potential power, integrating
integrating thethe behavioral
behavioral and
and
economic
economic viewsviews of power into
of power into our
our conceptual
conceptual framework;
framework;
3.
3. use
use measures
measures with
with a strong
strong theoretical base in
theoretical base in the
the industrial
industrial organization,
organization, finance
finance
and
and accounting
accounting literature,
literature, that
that have
have recently
recently gained prominence in the
gained prominence business
the business
press, to assess
press, both exercised
assess both exercised and potential power;
and potential power; and and
4.
4. examine
examine trends
trends in
in these
these measures
measures and and other
other relevant
relevant variables
variables for
for a wide
wide variety
variety of
of
consumer goods industries and different retail classes.
consumer goods industries and different retail classes.

MARKET
MARKET POWER AND PERFORMANCE:

POWER AND PERFORMANCE:

THE
THE THEORETICAL
THEORETICAL FOUNDATION

FOUNDATION

Transactions
Transactions between
between two
two operating systems always
operating systems always involve
involve the two factors of
two factors of economic
economic val­
ues and
and the balance
balance of
ofpower.
power.
of powel:
-Alderson
-Alderson (1955)
( 1955)
In
In this
this section,
section, we briefly review
we briefly review some
some key
key concepts
concepts from
from the behavioral channels
the behavioral channels litera­
litera-
ture
ture and
and economic
economic theory
theory thatthat are
are relevant
relevant to to our
our work
work onon the
the market power of
market power of
manufacturers
manufacturers versus
versus retailers.
retailers. Our
Our objective
objective is to integrate
integrate the
the two
two views
views to the
the extent pos­
extent pos-
sible
sible and utilize them
and utilize them in the
the development
development of of our
our measures,
measures, while
while also pointing out
also pointing out the
the main
main
differences.
differences.

Power
Power and
and Economic
Economic Theory
Theory

The relative power of

relative power of the retailing
retailing and
and manufacturing stages determines
manufacturing stages determines the distribution
distribution ofof
rents
rents between stages.
between stages.
-Porter
-Porter (1974)
( 1974)

In industrial
industrial organization
organization theory, theory, thethe use
use of profit to assess
of profit assess market power dates
market power dates backback to
Lerner's
Lemer’s original measure of
original measure of monopoly
monopoly power power (1934)-the
(1934)-the long-term
long-term difference between
difference between
price and
price and marginal
marginal cost, cost, as a ratio
ratio of price, called
of price, called thethe Price-Cost
Price-Cost Margin.
Margin. This This relationship
relationship
between market
between market power power and profit has
and profit been formalized
has been formalized in in the
the well-known
well-known Structure-Con­
Structure-Con­
duct-Performance
duct-performance paradigm, pioneered
paradigm, pioneered by by Bain
Bain (1968).
(1968). According
According to to this paradigm,
this paradigm,
increased
increased industry
industry concentration
concentration (structure) permits firms
(structure) permits firms within
within an industry
industry to collude
collude and and
decrease
decrease competition.
competition. This This confers
confers monopoly
monopoly power power on on thethe firms
firms that
that is evidenced
evidenced or or mea­
mea-
sured
sured by by their
their high
high economic
economic profitprofit rates.
rates. Although
Although industrial
industrial organization research has
organization research has
evolved
evolved from from a searchsearch for for empirical regularities in
empirical regularities in cross-industry
cross-industry studies studies to industry-spe­
industry-spe-
cific
cific models
models where where the regularities can
the regularities can bebe tested,
tested, overover the past decade
the past decade (Sutton,
(Sutton, 1991),
1991), thethe
basic relationship
basic relationship between between marketmarket power
power and and economic
economic profit profit has has not
not been
been questioned.
questioned.
This
This economic
economic concept concept of power has
of power has also been applied
also been applied to channels
channels of of distribution
distribution by by sev­
sev-
eral
eral researchers
researchers (e.g., (e.g., Porter,
Porter, 1974;
1974; Reekie,
Reekie, 1975; 1975; Steiner,
Steiner, 1978;
1978; Albion
Albion and and Farris,
Farris, 1981;
1981;
Grant,
Grant, 1987).
1987). For For instance,
instance, Porter
Porter (1974,
(1974, 1976)1976) argues
argues thatthat the rates of
the rates of return
return obtained
obtained by by
manufacturers
manufacturers decrease decrease as the the bargaining
bargaining power power of of retailers
retailers increases.
increases. Dickson,
Dickson, Schneier,
Schneier,
Steidtmann
Steidtmann and and Farris
Farris (1994)
(1994) study
study the balance of
the balance of market
market powerpower and profit between
and profit between sup­ sup­
pliers and
pliers buyers in
and buyers in anan experimental
experimental economics
economics framework.
framework. Economic Economic modelsmodels of of channel
channel
relationships
relationships and and coordination,
coordination, where where the balance of
the balance power is a determinant
of power determinant of of how
how total
total
channel profits are
channel profits are divided between channel
divided between channel members,
members, are are also
also relevant
relevant in in this
this context
context
(e.g.,
(e.g., Kim
Kim and and Staelin,
Staelin, 1994;1994; Ingene
Ingene and and Parry,
Parry, 1995;
1995; Chu,Chu, 1992;1992; McGuire
McGuire and and Staelin,
Staelin,
1986;
1986; Jeuland
Jeuland and and Shugan,
Shugan, 1983).1983). To summarize
summarize the the Structure-Conduct-Performance
Structure-Conduct-Performance par­
par-
adigm
adigm in in thethe context
context of of manufacturers
manufacturers and
and retailers,
retailers, increased
increased retailer power over
retailer power over
manufacturers
manufacturers should
should be be accompanied
accompanied by reduced
by reduced inter-retailer
inter-retailer competition
competition and
and and
and
increase
increase in in retailer
retailer margin,
margin, whilewhile at the the same
same timetime leading
leading to higher higher inter-manufacturer
inter-manufacturer
competition
competition and and lower
lower manufacturer
manufacturer margin. margin.
In
In discussing
discussing available measures of
available measures of the price-cost margin,
the price-cost margin, Bain Bain (1968)
(1968) noted
noted thatthat the
the
main difference between accounting costs
main difference between accounting costs and “economic” costs liesand "economic" costs lies in the fact that the
the fact that the lat­ lat­
ter
ter includes
includes the the value
value of of the
the services
services of of funds
funds invested
invested by by the
the owners,
owners, and and is measured
measured as
an
an interest
interest return
return on on owners'
owners’ investment,
investment, calculated
calculated at the best net
the best net interest
interest rate
rate they
they could
could
earn
earn elsewhere.
elsewhere. Thus, Thus, excess
excess or or residual profits are
residual profits are earned
earned only only to the the extent
extent thatthat the
the
accounting
accounting profit profit exceeds
exceeds this this interest
interest raterate times
times the the value
value of of owners'
owners’ investment.
investment.
 There
There has been some
has been some debate
debate overover cross-sectional
cross-sectional comparisons
comparisons of of accounting
accounting rates rates of
of
return.
return. Some
Some researchers
researchers have have noted
noted that that these
these returns
returns may may suffer
suffer from
from differences
differences in in
accounting practice and
accounting practice and other
other firm
firm specific biases that
specific biases that we
we are
are unable
unable to observe
observe or or even
even
predict the
predict the direction
direction of of (Fisher
(Fisher andand McGowan,
McGowan, 1983; 1983; Benston,
Benston, 1985).
1985). Unfortunately,
Unfortunately, these these
authors
authors do do not provide a solution
not provide solution to the problem, and
the problem, and the
the debate
debate over
over thethe extent
extent to which
which
accounting profits can
accounting profits can be be used
used as indicators
indicators of of economic
economic profitprofit continues
continues (see (see Martin,
Martin,
1984;
1984; Long
Long and and Ravenscraft,
Ravenscraft, 1984 1984 for for opposing arguments). We note
opposing arguments). note two
two important points
important points
in this
this connection.
connection. First,
First, the
the fact
fact that some measure
that some measure of profit is a valid
of profit valid indicator
indicator of of market
market
power is not
power not at issue.
issue. Second,
Second, firmfirm specific biases in accounting
specific biases accounting returns
returns that that affect
affect cross­
cross-
sectional
sectional studies
studies are
are not
not a concern
concern in in time
time series
series trends
trends at the the aggregate
aggregate industry
industry level.
level. In
In
fact,
fact, examining
examining changes
changes overover time
time is a commonly
commonly used used approach
approach to econometrically
econometrically con­
con-
trol
trol for
for firm-specific biases (see,
firm-specific biases (see, forfor example,
example, Boulding
Boulding and and Staelin,
Staelin, 1990).
1990). EvenEven inin the
the
unlikely event
unlikely event that
that there
there are
are systematic
systematic differences between the
differences between the accounting practices of
accounting practices of
manufacturers
manufacturers and and retailers
retailers in each
each of of the
the industries
industries we we examine,
examine, the the time
time trends
trends of of their
their
relative profitability cannot
relative profitability cannot be be affected,
affected, and and certainly
certainly notnot reversed.
reversed.
For
For the purposes of
the purposes of our
our work,
work, thethe major
major conclusions
conclusions that that we
we draw
draw from
from this
this literature
literature are:
are:

1. As
1. As the
the market power enjoyed
market power enjoyed by by a channel
channel member,
member, relative
relative to another,
another, increases,
increases,
one
one would
would expect
expect its relative
relative economic
economic profit
profit to also
also increase.
increase.
2.
2. Accounting
Accounting rates
rates of
of return
return ignore
ignore anan important
important component
component of of a company's
company’s cost
cost
structure,
structure, the cost of
the cost of its invested
invested capital.
capital. The
The effectiveness
effectiveness with
with which
which a company
company
employs
employs its capital
capital must
must enter
enter into
into an
an evaluation
evaluation of of its profitability.
profitability.

Power
Power and
and Behavioral
Behavioral Theory
Theory

Power refers
Power refers to the
the ability
ability of
of one
one channel
channel member
member to induce
induce another
another channel
channel member
member to
change behavior in favor
change its behavior favor of
of the objectives
objectives of
of the channel
channel member
member exerting
exerting influence.
influence.
-Wilemon
-Wilemon (1972)

There
There is a large
large literature
literature inin marketing
marketing on on the
the definition,
definition, dimensions, bases and
dimensions, bases and measure­
measure-
ment
ment of power in
of power in channels
channels of of distribution.
distribution. Although
Although it is not not our
our intent
intent to provide
provide a
comprehensive
comprehensive reviewreview of of this
this literature,
literature, we present a brief
we present brief discussion
discussion of of some
some key key issues
issues
which
which are
are relevant
relevant to the the development
development of of our
our measures
measures of of retailer
retailer versus
versus manufacturer
manufacturer mar­ mar-
ket power.
ket power.
The
The theoretical
theoretical foundations
foundations for much of
for much of the
the work
work on on channel power lie
channel power lie in
in the
the original
original
work
work on power by
on power by researchers
researchers like like French
French andand Raven
Raven (1959)
(1959) andand Emerson
Emerson (1962).
(1962). French
French
and
and Raven
Raven provided typology of
provided a typology of five bases of
five bases power while
of power while Emerson's
Emerson’s dependence
dependence frame­frame-
work
work suggests
suggests that
that the
the dependence
dependence of of one party in
one party in a dyad provides the
dyad provides basis for the
the basis power
the power
of
of another,
another, and
and incorporates
incorporates all all the bases of
the bases power within
of power within it.
El-Ansary
El-Ansary and and Stern
Stem (1972) provided a definition
(1972) provided definition of power which
of power which continues
continues to be be widely
widely
accepted
accepted inin the
the channels
channels literature:
literature: "The“The ability
ability ofof a
u channel
channel member
member to control
control the deci­
deci­
sion variables
sion variables in the the marketing strategy of
marketing strategy of another
another member
member in a givengiven channel
channel at at a
different
diRerent level
level ofof distribution
distribution”(p. "(p. 47).
47). As
As is clear
clear from
from this
this definition,
definition, the
the channels
channels litera­
litera-
TABLE1
TABLE
Environmental
Environmental Changes
Changes Bases of
Bases of Power
Power Means of
of Exercising
Exercising Power
Power
Pricing
Allowances
Allowances
Store
Store Concentration
Concentration Reward,
Reward, Coercion
Coercion
Ordering
Ordering Schedule
Schedule
Delivery
Delivery

Inventory
Inventory
Scanner
Scanner Data
Data Expert,
Expert, Reference
Reference Product Assortment
Product Assortment
Shelf Space
Shelf Allocation
Space Allocation

Credit
Credit
Store loyalty
Store Loyalty legitimacy
Legitimacy Private
Private labels
Labels
Training

ture
ture examines
examines channelchannel power power at the the firm-level
firm-level dyad dyad (individual
(individual suppliersupplier versus
versus channel
channel
member),
member), and and is best
best suited
suited to empirical tests of
empirical tests of firm-level
firm-level hypotheses,
hypotheses, although
although its impli­impli­
cations
cations maymay be be extended
extended to industry-level
industry-level analyses
analyses as well. well.
El-Ansary
El-Ansary and and Stem
Stern alsoalso developed
developed a comprehensive
comprehensive measure measure of of channel
channel powerpower for for such
such
firm-level
firm-level empirical
empirical analyses.
analyses. The The measures
measures assess assess control
control over over 13 marketing
marketing strategy
strategy
variables:
variables: inventory policy, order
inventory policy, order size,
size, pricing,
pricing, sales
sales promotion,
promotion, cooperative
cooperative advertising,
advertising,
distribution
distribution policies
policies (e.g.,
(e.g., selective
selective versus
versus extensive),
extensive), delivery,
delivery, credit, quality of
credit, quality of installa­
installa­
tion
tion work,
work, salesmen's
salesmen’s training,
training, salessales meetings,
meetings, service
service schools,
schools, and participation in the
and participation the
activities
activities of professional associations.
of professional associations. Although
Although the the specific
specific measures
measures were were weak,weak, as is to
be expected of
be expected of early
early attempts
attempts at operationalization,
operationalization, they
they link
link the bases and
the bases and definition
definition of of
power to its application
power application and and formform thethe foundation
foundation for for subsequent
subsequent work work on on channel
channel powerpower
measurement.
measurement. As As wewe wiJI
will see
see in in the
the next
next section,
section, these
these measures
measures enable enable us to relate relate thethe
exercise of
exercise power to economic
of power economic goals. goals. Similarly,
Similarly, Gaski's
Gaski’s (1988)
(1988) operationalization
operationalization of power
of power
encompassed
encompassed five five activities performed by
activities performed by the
the channel
channel members-pricing,
members-pricing, ordering
ordering sched­
sched­
ule,
ule, inventory, product assortment,
inventory, product assortment, and and customer
customer service.
service. He He tootoo measures
measures power power as the the
extent
extent to which
which one one channel
channel membermember can can influence
influence another's
another’s actions
actions in in the realm of
the realm of these
these
activities.
activities. Messinger
Messinger and Narasimhan (1995)
and Narasimhan (1995) havehave framed
framed the the environmental
environmental changes changes that that
are
are often
often cited
cited to support
support the the contention
contention thatthat retailer
retailer power
power is increasing
increasing in in the context of
the context of
French
French and and Raven's
Raven’s bases bases of power. Table
of power. Table 1 combines
combines these these withwith El-Ansary
El-Ansary and and Stem's
Stern’s
measures of
measures of exercised
exercised power.power.
In recent
recent years,
years, Emerson's
Emerson’s (1962) ( 1962) dependence
dependence approachapproach has has received
received a lot lot ofof emphasis.
emphasis.
His
His framework
framework views power as a potential
views power potential influence,
influence, and and is the basis for
the basis much of
for much of the
the work
work
on potential or
on potential or unexercised
unexercised power power in the the channels
channels literature
literature (Frazier,
(Frazier, 1983;
1983; GaskiGaski and and
Nevin, 1985).
Nevin, 1985).
The
The role
role ofof relative performance of
relative performance of the
the dyad
dyad members
members in in this
this literature
literature has has been
been rather
rather
limited.
limited. In In examining
examining performance,
performance, channelschannels researchers
researchers have have concerned
concerned itself itself more
more withwith
channel
channel performance
performance from from the perspective of
the perspective of the
the manufacturer
manufacturer than than thethe retailer.
retailer. In In other
other
words,
words, it examines
examines how how weJIwell thethe channel
channel contributes
contributes to the performance/profitability of
the performance/profitability of the
the
supplier
supplier (Gaski, 1984; Gaski and Nevin, 1985; EI-Ansary
(Gaski, 1984; Gaski and Nevin, 1985; El-Ansary and Stern, 1992; Kumar, Stem and Stem, 1992; Kumar, Stem
and
and Achrol,
Achrol, 1992).
1992). Further, profitability is viewed
Further, profitability viewed as an “outcome” of
an "outcome" of the
the cultivation
cultivation and and
use of power (Frazier
of power (Frazier and
and Summers,
Summers, 1984;
1984; Boyle,
Boyle, Dwyer,
Dwyer, Robicheaux
Robicheaux and
and Simpson,
Simpson,
1992), but not
1992), but not as an
an indicator
indicator of power.
of power.

Behavioral Versus Economic

Behavioral Versus Economic Theory:
Theory: Bridging
Bridging the
the Gap
Gap

The
The above
above discussion
discussion highlights
highlights some
some key
key differences between the
differences between the economic
economic and behav­
and behav-
ioral
ioral views:
views: (1)
(1) the
the aggregate,
aggregate, industry
industry level
level focus
focus of
of the
the former
former versus
versus the
the dyadic,
dyadic, firm­
firm­
level
level focus
focus of
of the
the latter;
latter; (2) the
the difference between exercised
difference between exercised and potential power;
and potential power; (3) the
the
appropriateness
appropriateness of profit as an indicator
of profit indicator ofof market power. We discuss
market power. discuss each
each issue below.
issue below.

Firm Versus
Versus Industry
Industry Level Analyses
Level Analyses

Both
Both firm-level
firm-level dyadic
dyadic analyses
analyses and and more
more aggregate
aggregate industry-level
industry-level analyses
analyses make
make
important
important contributions
contributions to the the literature.
literature. The
The issue
issue is not
not which
which is better,
better, but
but which
which is more
more
appropriate
appropriate for for testing
testing the
the specific
specific hypotheses
hypotheses in in a given
given study.
study. Thus,
Thus, we we view
view this not as
this not
a disagreement between the
disagreement between the two
two streams
streams of of literature but as a difference
literature but difference in emphases.
emphases. OurOur
concern
concern in in this
this study
study is with
with the
the alleged
alleged shift
shift in
in market power from
market power from manufacturers,
manufacturers, in in gen­
gen­
eral,
eral, to retailers,
retailers, in in general,
general, not
not with
with specific pairs of
specific pairs of firms.
firms. Consequently,
Consequently, we we conduct
conduct anan
industry
industry level
level analysis.
analysis. Dyadic
Dyadic aspects
aspects ofof the power balance
the power between individual
balance between pairs of
individual pairs of
firms
firms will
will certainly provide valuable
certainly provide valuable insights
insights about
about specific
specific firms, but such
firms, but such an
an examination
examination
is outside
outside the
the scope
scope of of our
our study.
study.

Exercised
Exercised Versus
Versus Unexercised
Unexercised Power
Power

As
As noted
noted above,
above, the
the channels
channels literature
literature makes
makes an an important
important distinction between potential
distinction between potential
power and
power and exercised power. In
exercised power. In contrast,
contrast, economic
economic theory
theory implicitly
implicitly concerns
concerns itself
itself only
only
with
with exercised power and
exercised power and its consequences.
consequences. In In fact,
fact, the
the only reference to this
only reference this issue
issue that we
that we
were able
were able to find
find appears
appears in the original
in the work of
original work of Lerner:
Lemer: "The
“The unused
unused monopoly power will
monopoly power will
be
be there.
there, but
but being
being unknown
unknown and and unused
unused it is.
is, economically,
economically, as as ifif it were
were not
not there. For
there. For
practical purposes,
practical purposes, we we must
must read
read monopoly
monopoly powerpower notnot as potential monopoly,
as potential monopoly, but but as
monopoly
monopoly in jorce"(p. 170).
inforce”(p. 170). We believe
believe it is important
important to distinguish between potential
distinguish between potential and
and
unexercised power and
unexercised power and return
return to this
this issue
issue in
in the
the next
next section.
section.

Profit
Profit and
and Market
Market Power
Power

This
This leads
leads us to the
the third point of
third point of departure between the
departure between the two
two views-the
views-the adequacy
adequacy of of
profitability as an
profitability an indicator
indicator of
of market power. Clearly,
market power. Clearly, economic
economic theory
theory views profitability,
views profitability,
appropriately
appropriately measured, indicator of
measured, as an indicator of market power. However,
market power. However, as noted
noted above,
above, we we
need
need measures
measures of both exercised
of both exercised and potential market
and potential power. Current
market power. profitability is
Current profitability
clearly
clearly not
not a suitable
suitable measure
measure of potential power-another
of potential power-another measure
measure is needed.
needed. Whether
Whether
current profitability is a good
current profitability measure of
good measure of exercised power depends
exercised power depends upon
upon how
how well
well it cap­
cap-
tures
tures the
the means
means through
through which power is applied.
which power applied. These
These issues playaa central
issues play central role
role in
in the
the next
next
section,
section, where
where we
we develop
develop measures
measures of both exercised
of both exercised and potential power
and potential power for
for our
our indus­
indus-
try-level
try-level analysis.
analysis.

Assessing
Assessing Exercised
Exercised Market
Market Power
Power

Since
Since thethe initial
initial workwork by by Bain
Bain nearly
nearly thirty
thirty years
years ago,ago, thethe costcost ofof capital
capital has been widely
has been widely
incorporated
incorporated into into the the literature,
literature, especially
especially in finance finance and and accounting.
accounting. Some Some recent
recent exam­
exam-
ples of
ples of research
research addressing
addressing this this issue
issue include
include Feltham
Feltham and and Ohlson
Ohlson (1994),
(1994), MegnaMegna and and
Mueller
Mueller (1991),
(1991), Grabowski
Grabowski and and Vernon
Vernon (1990),(1990), OhlsonOhlson (1994), (1994), Gitman Gitman and and Mercurio
Mercurio
(1982),
(1982), Grabowski
Grabowski and and Mueller
Mueller (1978).(1978). Much Much more more recently,
recently, the importance of
the importance of estimating
estimating
the
the cost
cost ofof capital
capital invested
invested to generategenerate accounting
accounting profits profits has has also been recognized
also been recognized by by prac-
prac­
titioners
titioners and and the business press
the business press (Stewart,
(Stewart, 1991; 1991; Tully,
Tully, 1993;
1993; Coca Coca Cola Cola Co.Co. Annual
Annual Report,
Report,
1993).
1993).
As
As a result,
result, there
there is now now widespread
widespread agreement agreement in both the
in both the academic
academic literature
literature and and indus­
indus­
try
try that
that subtracting
subtracting the the cost
cost of of capital
capital employed
employed from from accounting
accounting profit profit provides
provides a betterbetter
measure
measure of of "true profitability". This
“true profitability”. This is termed
termed economic,
economic, residual,residual, or or abnormal
abnormal profitprofit in thethe
academic
academic literature
literature and and Economic
Economic Value Value Added Added (EVA) (EVA) in in the
the business
business press.press. Studies
Studies of of
performance in
performance in the
the marketing
marketing literature
literature have have not not caught
caught up up withwith the the importance
importance of of the
the cost
cost
of
of capital,
capital, however,
however, and and thethe twotwo studies
studies by by Farris
Farris and and Ailawadi
Ailawadi (1992) (1992) and and Messinger
Messinger and and
Narasimhan (1995)
Narasimhan (1995) that that have
have examined
examined the the retail power shift
retail power shift in in thethe food
food industry
industry are are nono
exception.
exception.
We believe
believe that that it is particularly
particularly important
important and and useful
useful to includeinclude the the cost
cost ofof capital
capital in an an
evaluation
evaluation of of market
market power power of of manufacturers
manufacturers versus versus retailers.
retailers. Capital
Capital includes
includes equipment,
equipment,
real
real estate
estate etc.,
etc., which
which is expectedexpected to be be productive
productive long long afterafter it is purchased,
purchased, as well well as
working
working capitalcapital in in cash,
cash, inventories,
inventories, receivables
receivables etc. Several of
etc. Several of the phenomena that
the phenomena that have
have
been cited
been cited as evidence
evidence of of retailers'
retailers’ growinggrowing power power affectaffect components
components of
of capital.
capital. For For
instance,
instance, the concept of
the concept of residual
residual profit profit or or EVA
EVA is especially
especially consistent
consistent with with many
many of of the
the
innovations
innovations in supply supply chain chain management
management that that focus
focus on on the
the reduction
reduction and and inter-channel
inter-channel shift shift
in
in inventory-carrying
inventory-carrying costs
costs and and other
other forms
forms of of working
working capital. capital. Retailers
Retailers are are very
very con­
con-
cerned about the amount of capital tied up in the products
cerned about the amount of capital tied up in the products they sell. Two measures of retail they sell. Two measures of retail
productivity that
productivity that are are increasing
increasing in popularitypopularity reflect
reflect this this concern.
concern. The The first
first is Gross
Gross Margin
Margin
Return
Return on on Inventory
Inventory Investment
Investment (GMROI), (GMROI), the the importance
importance of of inventory
inventory in which which is self­self-
explanatory. The
explanatory. The second second is Direct Product Profitability (DPP),
Direct Product Profitability (DPP), which deducts from gross which deducts from gross
margin
margin several
several costs costs incurred
incurred in in the
the distribution
distribution process,process, including
including a charge charge for for inventory
inventory
holding.
holding. Further,
Further, Toys Toys R Us Us andand Wal-Mart
Wal-Mart have have asked
asked for for suppliers
suppliers to provideprovide more more goods
goods
on
on a consignment
consignment basis, basis, a phenomenon
phenomenon that that has been cited
has been cited as one one of of the
the indicators
indicators of of an
an
increase
increase in in retailer power. In
retailer power. In fact,
fact, a focus
focus on on lowering
lowering the the costcost of of capital
capital is said
said to be be driv­
driv­
ing many
ing many new new initiatives
initiatives in
in the
the foodfood industry,
industry, such such as Efficient
Efficient Consumer
Consumer Response Response
(ECR),
(ECR), which which are are designed
designed to reduce reduce inventory
inventory and and lower
lower transactions
transactions costs costs (Sansolo,
(Sansolo,
1993). According to a recent
1993). According recent article
article (Tully,
(Tully, 1993)1993) on on the
the importance
importance of of EVA
EVA to business,
business,
"[Tradeloading]
“[Tradeloading]
damages damages long-termlong-term returns. returns. An An important
important reason reason is that that it demands
demands so so

much
much capital. Pumping up sales
capital. Pumping sales requires
requires many many warehouses
warehouses (capital) (capital) to hold hold vast
vast tempo­
tempo-
rary
rary inventories
inventories (more (more capital)
capital).....
capital).......... ItIt took
took EVA EVA to spotlight
spotlight the problem" (p. 48).
the problem” 48).
TABLE
TABLE2

Components
Components of
of Economic Value Added
Economic Value Added
Elements
Elements CahJ/ation
Calculation Measure
Measure
(S)
Sales (5) ._------­
5s - COGS
COGS Gross Margin
Gross Margin

Cost of
Cost of Goods
Goods Sold
Sold (COGS)
(COGS) 5S (GM/S)
(GM/5)
COGS -OC
5s - COGS -0c Return on Sales
Return
Operating Costs
Operating Costs (OC)
(OC)
S
S (ROS)
(R05)
s - COGS
S COGS -OC
-0c Return on Investment
Return Investment
Invested Capital
Invested Capital (lC)
(IC)
IC (ROI)
(ROil
s-COGS-oc
S-COGS-OC Return on Assets
Return Assets
Total Assets
Total Assets (TA)
TA
TA (ROA)
(ROA)
Economic Value
Economic Value Added
Added
S - COGS - OC - CC
s-COGS-oc-cc
(EVA)
WA)
Cost of Capital
Cost of Capital (CC)
s-COGS-oc-cc
S-COGS-OC-CC EVA/Sales
EVN5ales
5S (EVA/S)
(EVNS)

Thus,
Thus, thethe explicit
explicit incorporation
incorporation of of the
the cost
cost of
of capital
capital in
in EVA
EVA hashas two
two advantages.
advantages. First,
First,
it counters
counters a major
major drawback
drawback in accounting
accounting rates
rates ofof return
return as indicators
indicators of of economic profit,
economic profit,
noted
noted by by researchers.
researchers. Second,
Second, it integrates
integrates the
the economic
economic and behavioral literature
and behavioral literature since
since it
is directly
directly influenced
influenced by by some
some ofof the
the means
means through
through which
which retailers
retailers can
can exercise
exercise their
their
alleged power. Thus,
alleged power. Thus, it is a more
more complete
complete indicator
indicator of of whether
whether or notnot market power has
market power has
shifted
shifted towards
towards retailers.
retailers. Table
Table 2 depicts
depicts the
the costs
costs components
components that that are
are captured
captured by by each
each ofof
the
the traditional
traditional accounting
accounting measures
measures and and EVA.
EVA.

Assessing
Assessing Potential
Potential Market
Market Power
Power

EVA
EVA captures
captures thethe historical
historical application
application of power better
of power better than
than traditional
traditional rates
rates ofof return.
return.
However,
However, there there is also
also the question of
the question of whether power is being
whether power being accumulated
accumulated but but not
not imme­
imme­
diately
diately exercised,
exercised, in orderorder to preserve
preserve it for
for the
the future.
future. Why
Why might
might retailers
retailers not
not want
want to use use
their power to increase
their power profitability? One
increase profitability? One answer
answer maymay lielie in Alderson's
Alderson’s "power principle",
“power principle”,
which
which suggests
suggests thatthat the
the action
action chosen
chosen in the the current
current situation
situation should
should be be such
such as to broaden
broaden
freedom
freedom of of choice
choice inin the
the future
future and
and avoid
avoid the
the risk
risk of
of losing power by
losing power by pushing
pushing it tootoo far.
Professor
Professor Raymond
Raymond Corey,Corey, in a conversation
conversation with one of
with one of the
the authors,
authors, captured
captured thisthis in
in his
his
statement
statement thatthat "if
“if you
you use power, you
use power, you use up." It
use it up.” It might
might be be that
that retailers
retailers are
are not
not exercising
exercising
power in
power in the
the short
short term
term so as not not toto "use
“use it up".
up”. One
One example
example of of such
such a strategy
strategy is that that
retailers
retailers sometimes
sometimes nurture
nurture small brands. The
small brands. The leading brands have
leading brands have more
more distribution,
distribution, and, and,
consequently,
consequently, their
their advertising
advertising is more efficient. Increased
more efficient. Increased distribution
distribution can can also
also cause
cause
inter-retailer price competition,
inter-retailer price competition, makingmaking the brand more
the brand more attractive
attractive to consumers.
consumers. Over Over time,
time,
some retailers may
some retailers may trytry to escape
escape thethe intense price pressure
intense price typical of
pressure typical of widely
widely distributed
distributed
brands by
brands by trying
trying to nurture
nurture private labels or
private labels or smaller
smaller competitive brands. For
competitive brands. For instance,
instance, some
some
building supply
building supply companies
companies favoredfavored Makita power tools
Makita power tools over
over Black
Black & Decker products
Decker products
when
when thethe latter
latter were
were available
available inin too
too many
many outlets.
outlets. By
By nurturing
nurturing small brands, over
small brands, over whom
whom
they
they presumably
presumably have have the greatest
greatest power,
power, retailers
retailers may may be able able to preserve
preserve futurefuture alterna­
alterna­
tives
tives versus
versus large,
large, more
more powerful
powerful brands.
brands.
It may
may alsoalso be that retailers
retailers such
such as Wal-Mart,
Wal-Mart, who who almost
almost everybody
everybody agrees agrees are indeedindeed
gaining
gaining power,
power, are strong
strong marketing
marketing strategists
strategists who who invest
invest in growth
growth for long-term
long-term success,
success,
and
and the
the results
results ofof their
their choice
choice maymay become
become fully fully apparent
apparent in futurefuture rather
rather thanthan contempo­
contempo­
raneous
raneous monetary
monetary returns.
returns. In other
other words,
words, whilewhile exercised
exercised market
market powerpower is reflected
reflected in
achieved
achieved EVA, EVA, unexercised
unexercised market market power
power increases
increases the the potential
potential for future
future EVA. Fortu­ Fortu­
nately,
nately, a measure
measure of of the
the potential
potential for for future
future EVA EVA is also also available
available in in the
the finance
finance and and
accounting
accounting literature.
1iterature:We We discuss
discuss it below.
below.
There
There is a growing
growing stream
stream of of financial
financial accounting
accounting literature
literature which
which reveals
reveals the the relation­
relation-
ship
ship between
between expected
expected future
future EVA and and market
market value.value. TheThe classical
classical dividend
dividend capitalization
capitalization
model
model equates
equates market
market valuevalue to thethe discounted
discounted present present valuevalue ofof the
the expected
expected dividend
dividend
stream
stream (Williams,
(Williams, 1938).1938). In recent
recent years,
years, researchers
researchers have have drawn
drawn on this this model
model to develop
develop
the
the relationship
relationship between
between market
market value
value andand expected
expected profit profit in the future,
future, as well well as between
between
market
market valuevalue and
and expected
expected residual
residual earnings
earnings or or EVA
EVA in in the
the future
future (see
(see Stickney,
Stickney, 1995 1995 forfor
a good
good overview).
overview). Peasnell
Peasnell (1981,1982)
(1981,1982) shows shows that,that, as long
long as the
the Clean
Clean Surplus
Surplus Relation
Relation
(CSR)
(CSR) in in accounting
accounting holds,holds, the
the difference
difference between
between the the market
market value
value of of a firm
firm and
and itsits book
book
l
value
value is equal
equal to thethe present
present value
value of
of future
future expected
expected EVA EVA of of the firm.
firm.’ Recent
Recent theoretical
theoretical
models
models of of market
market valuation
valuation based
based upon
upon accounting
accounting information,
information, by by researchers
researchers like like Ohlson
Ohlson
(1994),
(1994), Feltham
Feltham and and Ohlson
Ohlson (1994),
(1994), andand Fairfield
Fairfield (1994),
(1994), further
further build
build upon
upon this this work.
work. TheThe
difference
difference between
between market
market andand book
book value
value is termed
termed "goodwill"
“goodwill” in in the
the literature
literature (Peasnell,
(Peasnell,
1981,
1981, Ohlson,
Ohlson, 1994),
1994), and and has
has recently
recently begun
begun to receive
receive attention
attention in in the
the business
business press press
under 2
under the name name Market
Market ValueValue Added
Added or MVA MVA (Stewart,
(Stewart, 1991;1991; Walbert,
Walbert, 1993).1993). Thus:
Thus:2

Market
Market Value Added,r = Market
Value Added Market Value,
Valuer - Book Value,
Valuer

r= T EVA,
f=T EVA
r
I - -r (1)
r=I(1+r)
= 2(l+
where r = Discount Rate
= Discount

MVA serves
MVA indicator of
serves as an indicator of market
market powerpower which
which is being
being accumulated
accumulated for for future
future eam­
earn­
ings. If
ings. retailers have
If retailers have indeed
indeed been
been increasing
increasing their
their market
market power
power and and therefore
therefore their
their ability
ability
to increase
increase EVAEVA inin the
the future,
future, then
then efficient
efficient capital
capital markets
markets should recognize this
should recognize this potential
potential
for future earnings and market participants should incorporate this knowledge
for future earnings and market participants should incorporate this knowledge in their val­ in their val­
uation of retailers. Thus, we expect an increase in market power which
uation of retailers. Thus, we expect an increase in market power which may not have been may not have been
exercised yet,
exercised yet, but
but holds
holds the
the potential
potential for for future
future increases
increases in in EVA,
EVA, to to be
be reflected
reflected in in higher
higher
MVA.
MVA.
Two points
Two points deserve
deserve mention
mention about
about MVA.MVA. The The first
first is its
its advantage
advantage over over ratio
ratio measures
measures
such as Market/Book
such MarketIBook ratios
ratios in
in that
that itit represents
represents the
the amount
amount of of wealth
wealth that
that a firm
firm is is expected
expected
create. Thus,
to create. Thus, firms
firms that
that grow
grow their
their investments
investments effectively
effectively forfor future
future EVAEVA (e.g.,
(e.g., Wal-
Wal­
Mart) will
Mart) will have
have higher
higher MVAs
MVAs while
while their
their Market/Book
MarketIBook ratiosratios stay
stay steady
steady or or even
even decline.
decline.
Of course,
Of course, growth
growth perper se
se should
should not not and
and does
does not
not increase
increase MVA.
MVA. If If additional
additional capital
capital
invested by the firm does not bring future earnings in excess of the cost
invested by the firm does not bring future earnings in excess of the cost of the capital (i.e.,of the capital (i.e.,
positive future
positive future EVA),
EVA), then
then the
the market
market valuevalue ofof that
that capital
capital will
will be
be equal
equal to to its
its book
book value
value
(Stewart, 1991;
(Stewart, 1991; Stickney,
Stickney, 1995).
1995). Consequently,
Consequently, MVA MVA will will remain
remain unchanged.
unchanged. In In other
other
words, growth
words, growth in in investments
investments willwill increase
increase MVA
MVA only
only ifif the
the investments
investments are are effectively
effectively
made in
made in that
that they
they are
are expected
expected to to bring
bring positive
positive future
future EVA.
EVA.
The second
The second point
point isis aa caveat
caveat which
which recognizes
recognizes that
that the
the market
market efficiency
efficiency hypothesis
hypothesis is is
controversial. Of
controversial. Of the
the three
three forms
forms ofof the
the market
market efficiency
efficiency hypothesis,
hypothesis, the the weak-form
weak-form
(which states
(which states that
that capital
capital markets
markets fully
fully incorporate
incorporate the
the information
information inin past
past stock
stock prices)
prices) and
and
semi-strong form
semi-strong form (which
(which says
says that
that capital
capital markets
markets fully
fully incorporate
incorporate all all publicly
publicly available
available
information) have
information) have plenty
plenty of of empirical
empirical support.
support. The
The strong
strong form
form (which
(which states
states that
that all
all infor­
infor­
mation is incorporated, public or private) does not seem to be widely
mation is incorporated, public or private) does not seem to be widely substantiated by substantiated by
empirical evidence
empirical evidence (Ross,
(Ross, Westerfield
Westerfield and and Jaffe,
Jaffe, 1993).
1993). Information
Information aboutabout market
market power
power
of retailers
of retailers versus
versus manufacturers
manufacturers can can bebe considered
considered public
public thus
thus making
making the the less
less question­
question­
able semistrong
able semistrong
semi strong form
form applicable.
applicable. However,
However, as as noted
noted byby a reviewer,
reviewer, itit is
is possible
possible for
for market
market
participants to
participants to be
be influenced
influenced by by “street
"street talk”
talk" about
about the
the power
power shift.
shift. It is important
It is important to to bear
bear
this caveat
this caveat inin mind.
mind.

Summary: Market
Summary: Market Power and Performance
Power and Performance

In this
In this section,
section, wewe have
have provided
provided an an overview
overview of of the
the channels
channels and and economic
economic literature
literature on on
the subject
the subject ofof power
power and and attempted
attempted to integrate
integrate them
them inin our
our conceptual
conceptual framework
framework and and thethe
development of
development of our
our measures.
measures. Economic
Economic Value Value Added
Added is a measure
measure of of historical
historical perfor­
perfor­
mance which
mance which reflects
reflects exercised
exercised powerpower moremore completely
completely than than dodo accounting
accounting rates of return.
rates of return.
Market Value
Market Value Added Added is a forward-looking
forward-looking measure that assesses EVA
measure that assesses EVA expected in expected in the
the
future
future as a result of potential power that may not yet have
result of potential power that may not yet have been exercised. been exercised.
Table
Table 3 summarizes
summarizes this this discussion
discussion by by integrating
integrating the the marketing
marketing strategy
strategy variables
variables
through
through which
which retailers
retailers can can accumulate
accumulate and and exercise
exercise power
power (see(see Stem
Stern andand EI-Ansary,
El-Ansary,
1972;
1972; Gaski,
Gaski, 1988)
1988) with
with thethe corresponding components of
corresponding components of EVA
EVA andand MVA
MVA on which which theythey
would
would have
have the
the biggest
biggest impact.
impact. For For instance,
instance, retailers
retailers can
can wield
wield their
their power
power overover manufac­
manufac­
turers
turers byby negotiating
negotiating lower
lower prices
prices and
and trade
trade allowances
allowances from from them, impact of
them, the impact of which
which
should
should be be seen
seen inin relative
relative Gross
Gross Margins
Margins and Advertising & Promotion
and Advertising Promotion expenses.
expenses. TheyThey
should
should be be able
able to reduce
reduce theirtheir inventory
inventory and and administrative
administrative costs
costs either
either by by transferring
transferring
them
them to manufacturers
manufacturers or by reducing reducing total
total system
system costs
costs through
through better
better information
information use use and
and
3
category
category management
management and and techniques
techniques suchsuch as JIT etc.3 The
JIT etc. The extent
extent to which
which theythey are able
able to
differentiate
differentiate themselves
themselves through
through better
better informed
informed and and skilled
skilled managers
managers and and successful
successful pri­pri-
vate
vate labeling
labeling should
should improve
improve their their future
future profit
profit making
making potential,
potential, andand therefore
therefore their
their
market
market value.
value.

MEASUREMENT
MEASUREMENT OF
OF VARIABLES
VARIABLES FOR
FOR EMPIRICAL
EMPIRICAL ANALYSIS
ANALYSIS

We
We use
use financial
financial data
data for
for the
the period
period 1982-1992
1982- 1992 from
from the
the COMPUSTAT
COMPUSTAT and and University
University of of
Chicago
Chicago CRSP
CRSP databases
databases for our
our empirical
empirical analyses.
analyses. The
The Standard
Standard Industry
Industry Classification
Classification
coding
coding manual
manual was
was used
used to categorize
categorize companies
companies with
with specific
specific SIC
SIC codes
codes into
into various
various
TABLE3
TABLE
The
The Performance
Performance Impact
Impact of
of Marketing Activities
Marketing Activities
Marketing Activities
Marketing Activities Affected Components
Affected Components impact of
Expected Impact of Relative Market
Market Power
Power

Pricing
Pricing Gross Margin/Sales
Gross Margin/Sales Retailers should negotiate
Retailers should negotiate lower
lower prices
prices from
from manufac­
manufac-
Private labels
Private turers, thus
turers, thus increasing
increasing their
their GM/S,
GM/S, but only
only if they
they do
not correspondingly
not correspondingly lower
lower their
their selling
selling prices
prices (which
some retailers
some retailers do as a deliberate
deliberate competitive
competitive strategy).
Private labels should
Private should also increase
increase retailer
retailer gross
gross mar­
mar-
gins.
gins.

Allowances
Allowances Advertising Promotion/
Advertising & Promotion/ Retailers should
Retailers should negotiate increased trade allowances
Sales from manufacturers,
from manufacturers, thus
thus increasing
increasing manufacturer
manufacturer
A&P/S.
A&P/S.

Ordering Schedule
Ordering Schedule SG&#Sales
SG&NSales Retailers should
Retailers should negotiate more
more favorable terms
terms that
Delivery
Delivery transfer such administrative
transfer administrative overheads
overheads to manufactur­
manufactur­
Shelf Space
Shelf ROS
ROS ers, thus
ers, thus decreasing
decreasing their %X&A/S and increasing
their SG&NS increasing their
their
ROS.
ROS.

Inventory
Inventory Inventory/Sales
Inventory/Sales Retailers should
Retailers should either
either transfer
transfer inventory
inventory carrying
carrying costs
costs
Product Assortment
Product Assortment manufacturers, thus
to manufacturers, thus decreasing
decreasing their
their 1/5,
I/S, or
or systems
systems
Mgmt)
(Category Mgmt) ROA
ROA like EDI,
like EDI, )IT
JIT etc. should
should reduce total system
system costs,
costs,
decreasing 1/5
decreasing I/S for
for both manufacturers
manufacturers and retailers.
retailers.

Credit
Credit EVA Retailers should
Retailers should negotiate more
more favorable credit
credit terms
terms
which reduce their
which their administrative
administrative costs and reduce
their cost of working
their working capital, thus
thus increasing
increasing EVA.

Training
Training Management Skills
Management Skills Better training
Better training and improved
improved information
information systems
systems
Scanner Information
Scanner Information Stock Price
Stock Price should improve
should improve management
management skill,
skill, thus
thus increasing
increasing the
Private Labels
Private Labels MVA
MVA potential of retailers
potential retailers for
for long term
term profitability,
profitability, and
therefore higher
therefore higher MVA.
MVA. Successful
Successful private
private labels
labels
should reduce dependence on manufacturers
should manufacturers and
increase potential
increase potential for
for future
future profit.
profit.

industries.
industries. Our Our sample
sample contains
contains 909 909 manufacturers
manufacturers and
and 274274 retailers.
retailers. Table
Table A-I
A-l in in the
the
appendix
appendix lists
lists the
the SICs
SICs included
included in in each
each industry.
industry.
Along
Along with
with EVAEVA and and MVA,
MVA, we we also
also analyze
analyze Gross
Gross Margin/Sales
Margin/Sales (GM/S),
(GM/S), Advertising
Advertising
& Promotion/Sales
Promotion/Sales (A&P/S),
(A&P/S), Selling,
Selling, General
General & Administrative
Administrative Expenses/Sales
Expenses/Sales (SG&A/
(SG&A/
S), Return
Return onon Sales
Sales (ROS),
(ROS), Return
Return on on Assets
Assets (ROA),
(ROA), Return
Return on on Investment
Investment (ROI)
(ROI) and
and Inven­
Inven-
tory/Sales
tory/Sales (I/S). As shown
(I/S). As shown in Table 1, some
in Table some of of these
these variables
variables areare logically prior components
logically prior components
of
of the
the others.
others. For
For example,
example, a measure
measure like like EVA/Sales
EVA/Sales is calculated
calculated as GM/S GM/S minus
minus various
various
operating
operating costs
costs like
like SG&A/S
SG&A/S and and A&P/S,
A&P/S, and and a charge
charge for
for capital,
capital, one
one component
component of of which
which
is Inventory.
Inventory. Therefore,
Therefore, examining
examining the the components
components and and the
the composite
composite measures
measures is more more
informative
informative than than only
only considering
considering trendstrends in,in, say, EVA
EVA andand MVA.
MVA. EVA/S
EVA/S might
might exhibit
exhibit a
decreasing
decreasing trend because GM/S
trend because GM/S decreased
decreased and and the
the other
other cost
cost components
components did did not
not decrease
decrease
enough
enough to offset
offset the
the loss
loss ofof margin,
margin, or or it might
might increase
increase due
due to higher
higher operating
operating costs,
costs, despite
despite
an increase
increase inin GM/S.
GM/S. Trends
Trends in in components
components help help us understand
understand which which ofof these
these and
and other
other
alternative
alternative explanations
explanations is valid.valid. This
This is particularly
particularly important
important in the the context
context of
of our
our analysis
analysis
since
since giant
giant retailers
retailers like
like Wal-Mart
Wal-Mart are are said
said to be be lowering
lowering their
their selling prices and
selling prices and therefore
therefore
their
their gross
gross margins
margins as a deliberate
deliberate strategy,
strategy, while
while keeping
keeping their
their operating
operating costs
costs low.
low. Simi­
Sirni-
larly,
larly, the
the components
components can can show
show the
the full
full impact
impact of
of increased
increased sales promotion both
sales promotion both in
in the
the
potential lowering
potential lowering of of manufacturer
manufacturer gross
gross margins
margins vis
vis a vis
vis retailers
retailers and
and the potential increase
the potential increase
in the
the retailer's
retailer’s cost
cost of
of inventory
inventory due
due to
to forward buying. Thus,
forward buying. Thus, wewe examine
examine trends
trends in
in the
the mean
mean
values
values of of all
all these
these variables
variables for
for retailers
retailers and
and manufacturers
manufacturers in in each
each industry.
industry. Means
Means of of all
all
the
the ratio
ratio variables
variables are
are weighted
weighted byby their
their denominator.
denominator. Thus,
Thus, variables
variables like
like GM/S, A&P/S,
GM/S, A&P/S,
and
and ROS
ROS are are weighted
weighted byby Sales,
Sales, ROA
ROA is weighted
weighted by by Assets
Assets and
and ROI
ROI is weighted
weighted by by
Investment.
Investment.

Measurement of
Measurement of Economic
Economic and
and Market
Market Value
Value Added
Added

While
While all
all other
other variables
variables are
are self-explanatory,
self-explanatory, our
our measures
measures of
of EVA
EVA and
and MVA
MVA require
require
explanation.
explanation.

Economic Valued Added

Economic Added

Capital
Capital consists
consists of
of two parts, debt
two parts, debt and
and equity.
equity. The
The cost
cost of
of debt
debt (both
(both long
long term
term and
and short
short
term)
term) is approximated
approximated by by interest
interest expense
expense adjusted
adjusted for
for its tax
tax deductibility.4
deductibility.4 We use use the
the
Capital
Capital Asset
Asset Pricing
Pricing Model
Model to obtain
obtain the
the risk
risk adjusted
adjusted rate
rate at which
which cost
cost of
of equity
equity must be
must be
calculated:5 5
calculated:

r = Risk Free Rate + P

p (Average
( Average Stock Return
Return - Risk Free Rate) (2)
(2)

An
An annual
annual "beginning
“beginning of year” P
of year" b is calculated
calculated for
for each
each COMPUSTAT
COMPUSTAT firm firm in our
our sample
sample
for
for which
which monthly
monthly stock
stock returns
returns are
are available
available on
on the
the CRSP
CRSP database
database for at least
least the previ­
the previ­
ous
ous three
three years.
years. Five
Five years
years of
of data
data are
are used
used where available. B for
where available. for the
the i'th
i’th firm
firm in
in the
the t'th
r’th
year
year is estimated
estimated as:

covariance (R
covariance R,)m )
(R,i , R
Pit
Pit == variance
variance (R
(R,)m )
(3)

where
where RjR; represents
represents the
the monthly
monthly returns
returns for
for the
the i'th
i’th firm
firm over
over the previous 3-5
the previous 3-5 years
years and
and R,Rm
represents
represents the
the monthly
monthly return
return for
for the
the market
market as a whole
whole over
over the
the same
same time period. For
time period. For
firms whose P
firms whose p is not
not available,
available, we use the
we use the average
average of of the
the industry
industry andand channel
channel to which
which that
that
firm
firm belongs.
belongs.
We use
use the
the average
average return
return onon the
the I-year
l-year Treasury
Treasury Bill
Bill as the
the risk-free
risk-free rate
rate for
for our
our analy­
analy­
sis
sis of
of yearly
yearly data.
data. Since
Since the
the intermediate
intermediate termterm equity
equity risk premium is approximately
risk premium approximately 7.57.5%%
(SBBI
(SBBI 1994
1994 Yearbook,
Yearbook, Ibbotson
Ibbotson Associates),
Associates), Equation
Equation I1 simplifies
simplifies to:

r = I1 Year T.Bill Rate + P(7.5%)

p(7.5%) (4)
(4)

The
The cost
cost of
of equity
equity is simply
simply the book value
the book value of
of common
common equity
equity times
times this rate "r".
this rate “r”. EVA
EVA is
calculated
calculated as Net
Net Income
Income After
After Interest
Interest Expense
Expense and
and Taxes but before
Taxes but before Extraordinary
Extraordinary Items
Items
minus
minus the
the above
above Cost
Cost of
of Equity.
Equity.
Market Value
Market Added
Value Added

The
The calculation
calculation of
of MVA
MVA is relatively
relatively straightforward:
straightforward:

MVA = Market
Market Value
Value of
of Equity
Equity - Book
Book Value
Value of
of Equity
Equity (5)
(5)

The
The market
market value
value of
of equity
equity is calculated
calculated as the product of
the product of share price at the
share price the close
close of
of each
each
fiscal
fiscal year
year and
and the
the number
number ofof common
common shares
shares outstanding
outstanding at that
that time.
time.

Dollar and
Dollar Ratio Measures
and Ratio Measures

Note that
Note that we useuse two
two EVA
EVA basedbased measures
measures in in our
our analysis-Dollar
analysis-Dollar EVA
EVA and and EVA
EVA as a
percentage of
percentage of Sales.
Sales. TheThe latter
latter corrects
corrects ROS
ROS for for the
the cost
cost of
of capital,
capital, while preserving its
while preserving
ratio
ratio view.
view. However,
However, DollarDollar EVA provides us with
EVA provides with information
information aboutabout thethe "value"
“value” being
being
created
created by by a firm,
firm, that
that the
the ratios
ratios maymay obscure.
obscure. For
For example,
example, consider that it is quite
consider that possible
quite possible
for
for a company
company whose whose sales
sales areare falling
falling every year and
every year and that has almost
that has almost beenbeen forced
forced out
out of
of the
the
market,
market, to have
have a rate
rate of
of return
return that:
that: (1)
(1) stays
stays steady
steady overover time;
time; and
and (2) is comparable
comparable to that that
of
of a high-growth
high-growth competitor
competitor with with a major
major share
share of of the market.
market. On On the
the other
other hand,
hand, Dollar
Dollar
EVA
EVA forfor the
the two
two companies
companies would would be be quite
quite different
different as would
would its value
value for
for the
the dying
dying com­
com-
pany over
pany time. We believe
over time. believe thatthat important
important as ratios
ratios are,
are, it is also
also important
important to be be able
able to
distinguish between scenarios
distinguish between scenarios such such as thethe two
two described
described above.
above. Similarly,
Similarly, ratios
ratios may
may notnot
fairly
fairly represent
represent the effectiveness of
the effectiveness of companies
companies that that are
are investing
investing strongly
strongly in growth
growth andand
therefore
therefore havehave stable
stable or or even
even declining
declining profit
profit ratios.
ratios. Trends
Trends in in the
the Dollar
Dollar EVAEVA of of such
such
companies
companies will will show
show whether
whether their their investments
investments have been wisely
have been wisely made
made in thatthat they
they earn
earn
more
more than
than the
the cost
cost ofof the
the capital
capital invested.
invested.

RESULTS
RESULTS

In
In this
this section,
section, we present the
we present the results
results of
of our
our empirical
empirical analysis
analysis starting
starting with
with an aggregate
aggregate
view of
view of all
all manufacturers
manufacturers vis vis a vis
vis all
all retailers,
retailers, across
across these
these industries.
industries. Table
Table 4 presents
presents
trend regression coefficients
trend regression coefficients forfor several
several of
of our performance measures,
our performance measures, while
while Figures
Figures 1 andand
2 depict
depict relative trends in EVA
relative trends EVA and and MVA
MVA forfor manufacturers
manufacturers and and retailers.
retailers. Recall
Recall that
that all
all
ratio
ratio measures
measures are are weighted
weighted by by their
their denominator.
denominator.
The
The data
data suggest
suggest that
that retailers
retailers are
are not
not significantly
significantly better
better off
off compared
compared to manufacturers
manufacturers
on
on any
any of
of the performance measures.
the performance measures. Retailer
Retailer EVA
EVA and and MVA
MVA havehave increased
increased at a signifi­
signifi­
cantly
cantly slower
slower rate
rate than
than manufacturers.
manufacturers. These These results certainly do not
results certainly not support
support the contention
contention
that
that retailers,
retailers, in
in general,
general, have
have increased
increased their power relative
their power relative to manufacturers.
manufacturers.
Of
Of course,
course, such
such an an aggregate
aggregate viewview maymay hide
hide differences
differences across
across industries
industries andand retail
retail
classes.
classes. WeWe nownow examine
examine individual
individual industries
industries andand retail
retail classes.
classes. Our
Our findings,
findings, discussed
discussed
below, provide
below, provide interesting
interesting insights
insights that
that are
are not
not available
available from analysis of
from an analysis of only
only a single
single
industry
industry (Farris
(Farris and
and Ailawadi,
Ailawadi, 1992;
1992; Messinger
Messinger and Narasimhan, 1995).
and Narasimhan, 199Q6 6
 25
20
15
~
10
E 5
~
<C 0
>
w -5
-10
-15
-20
82 83 84 85 86 87 88 89 90 91 92
Year

1-Manufacturer EVA ...-

- . ­ Retailer EVA I

Figure 1. EVA for Entire Sample

 1400
7-7
bNOoO(DTfN
0000000
00000000

1200
:: 1000
(Il!uJ$)WAW

'E 800

800
o
-

-<C 600

>
:E 400
. ..............­

20~t::
200 .L.._.....--~
: :_ I I
0+----1---+--~1_-_+--+_-_+--+_-__1~-_+_-__I

82 83 84 85 86
I
87
I
88
I
89
I
90
I
91
I
92
Year

I-ManUfacturer
I-Manufacturer MVA ....... Petailer MVA I

I
Figure 2. MVA for Entire Sample
TABLE
TABLE 44
T rend Regression
Trend Regression Coefficients
Coefficients for
for Entire
Entire Sample (1982-l 992)
Sample (1982-1992)
Measure
Measure All Manufacturers
A// Manufacturers All Retailers
A// Retailers
Gross Margin/Sales
Gross (GM/S %)
Margin/Sales (GM/S 0.60'
0.60’ -0.06"
-0.06**
(0.09)
(0.09) (0.04)
(0.04)
Return on Sales
Return (ROS %)
Sales (ROS -0.08'
-0.08* -0.13'
-0.13*
(0.04)
(0.04) (0.02)
(0.02)
Return on Assets
Return (ROA %)
Assets (ROA -0.30'
-0.30’ -0.28'
-0.28*
(0.04)
(0.04) (0.04)
(0.04)
Return on Investment
Return (ROI %)
Investment (ROI -0.34'
-0.34’ -0047'
-0.47*
(0.07)
(0.07) (0.08)
(0.08)
Economic Value
Economic Value Added
Added (EVA $mill)
$mill) 2.14'
2.14* -0.06
-0.06
(0.61)
(0.61) (0042)
(0.42)
E\NSales (EVA/S %)
E\A/Sales (EVNS 0.13'
0.13* 0.00
0.00
(0.04)
(0.04) (0.03)
(0.03)
Market Value
Market Value Added
Added (MVA
(MVA $milll
Bmill) 94.34'
94.34* 38.14'
38.14*
(8.44)
(8044) (5.89)
(5.89)
Inventory/Sales (l/S %)
Inventory/Sales (1/5 -0.32'
-0.32’ 0.03
0.03
(0.06)
(0.06) (0.06)
(0.06)
SG&NSales (SGAIS %)
SG&A/Sales (SGNS 0.46*
0046' -0.02
-0.02
(0.08)
(0.08) (0.03)

(0.03)
Advtg &
Advtg & Promotion/Sales (A&P/S %)
Promotion/Sales (A&P/S -0.10"
-0.1 o** -0.04'
-0.04*

(0.05)
(0.05) (0.01)
(0.01)
Notes:
Notes: +dard
Standard are in parefitheses
errors are parentheses
Significant at p =
• Significantatp Significant at p =
= 0.05; .. Significantatp = 0.10

TABLE
TABLE 55
Trend
Trend Regression
Regression Coefficients
Coefficients for
for Food
Food Industry (1982-l 992)
Industry (1982-1992)
Measure
Measure Manufacturers
Manufacturers Retailers
Retailers
Gross Margin/Sales
Gross (GM/S %)
Margin/Sales (GM/S 1.03'
1.03* 0.24'
0.24*
(0.22)
(0.22) (0.03)
(0.03)
(ROS %)
Return on Sales (ROS
Return 0.15'
0.15% -0.12'
-0.12*
(0.02)
(0.02) (0.03)
(0.03)
Return on Assets
Return (ROA %)
Assets (ROA -0.01
-0.01 -0.57'
-0.57*
(0.04)
(0.04) (0.12)
(0.12)
Return on Investment
Return (ROI %)
Investment (ROI 0.05
0.05 -0.92'
-0.92*
(0.07)
(0.07) (0.19)
(0.19)
Economic Value
Economic Value Added
Added (EVA
(EVA $milll
$mill) 9.11'
9.11* -0.12
-0.12
(I .47)
(1047) (0.83)
(0.83)
EVA/Sales (EVNS
EVNSales (EVA/S %) 0.27'
0.27* -0.00
-0.00
(0.06)
(0.06) (0.02)
(0.02)
Market Value
Market Value Added
Added (MVA
(MVA $mill)
$mill) 252.73'
252.73* 60.04'
60.04*
(20.69)
(20.69) (12.34)
(12.34)
Inventory/Sales (I/S %)
inventory/Sales (1/5 -0.40*
-0040' 0.01
0.01
(0.04)
(0.04) (0.03)
(0.03)
SG&NSales (SGNS %)
SC&A/Sales (SGNS 0.71'
0.71* 0.10'
0.10*
(0.21)
(0.21) (0.35)
(0.35)
& Promotion/Sales
Advtg & (A&P/S %)
Promotion/Sales (A&P/S -0.03
-0.03 -0.02'
-0.02*
(0.02)
(0.02) (0.01)
(0.01)
Notes:
Notes: Standard errors
Standard ermrs are
are in
in parentheses
parentheses
Significant at p == 0.05;
•* Significantatp 0.05; .. Significant at p == 0.10
** Significantatp
Analysis
Analysis of
of the
the Food
Food Industry
Industry

First,
First, we present
present results
results for the food food industry,
industry, which
which has been been analyzed
analyzed by both both Farris
Farris
and
and Ailawadi
Ailawadi (1992) (1992) and and Messinger
Messinger and and Narasimhan
Narasimhan (1995).(1995). Table
Table 5 summarizes
summarizes trends trends
for food
food manufacturers
manufacturers and and grocery
grocery retailers.
retailers.
Our
Our analysis
analysis validates
validates the results
results reported
reported by the earlierearlier studies
studies for Gross
Gross Margin,
Margin, ROS,ROS,
ROA
ROA and and ROI.ROI. These
These traditional
traditional ratesrates of of return
return have
have either
either increased
increased significantly
significantly or
remained
remained stable stable for manufacturers,
manufacturers, whereas whereas they they have
have either
either increased
increased at a much much slower
slower
rate
rate (e.g.
(e.g. Gross
Gross Margin/Sales),
Margin/Sales), or declined declined significantly
significantly for retailers.
retailers.
As shown
shown in FiguresFigures 3 and and 4, accounting
accounting for for the
the cost
cost of of capital
capital does
does notnot reverse
reverse thethe
trends
trends reported
reported by the previousprevious two two studies,
studies, and
and nor
nor does
does an examination
examination of of their
their potential
potential
for future
future earnings.
earnings. Food
Food manufacturers
manufacturers have have been
been able
able to improve
improve theirtheir EVA at the the rate
rate of
of
approximately
approximately $9 million million perper year,
year, while
while EVAEVA for grocery
grocery retailers
retailers has shown
shown no change.
change.
Similarly,
Similarly, food food manufacturers
manufacturers have have increased
increased theirtheir goodwill
goodwill at the the rate
rate of
of $253
$253 million
million perper
year
year while
while the the corresponding
corresponding rate rate for
for grocery
grocery retailers
retailers is only
only $60$60 million
million perper year.
year. We findfind
no
no evidence
evidence for an increase increase in in the
the power
power exercised
exercised or accumulated
accumulated for for the
the future,
future, byby gro­
gro­
cery
cery retailers.
retailers.
The
The data
data alsoalso show
show that
that although
although foodfood retailers
retailers have
have held
held their
their inventory/sales
inventory/sales ratio ratio fairly
fairly
steady
steady or increased
increased it slightly,
slightly, food
food manufacturers
manufacturers have have done
done better-their
better-their inventory/sales
inventory/sales
ratios
ratios have
have significantly
significantly decreased.
decreased. One One of of the
the strategies
strategies employed
employed by manufacturers
manufacturers to
increase
increase theirtheir EVAEVA has has been
been thethe reduction
reduction of of working
working capital
capital tied
tied up in inventories,
inventories,
whereas,
whereas, contrary
contrary to widespread
widespread beliefs,
beliefs, foodfood retailers
retailers appear
appear not not to have
have accomplished
accomplished
this
this reduction.
reduction. Finally,
Finally, manufacturer
manufacturer spending
spending on on SG&A
SG&A as a percentage
percentage of of Sales
Sales has
has
increased
increased much much faster
faster than
than retailer
retailer spending,
spending, but but the
the former's
former’s grossgross margins
margins havehave clearly
clearly
increased faster
increased than SG&AlS,
faster than SG&AlS, in in the
the food industry.
food industry.
If performance, both
If performance, both present
present and and potential,
potential, of of food
food retailers
retailers hashas been
been declining
declining relative
relative
food manufacturers
to food manufacturers and and this
this decline
decline is not not sensitive
sensitive to the the measure
measure of of performance
performance used, used,
why is the
why the press,
press, both
both business
business and and academic,
academic, so adamantadamant aboutabout increasing
increasing retail
retail power?
power?
Has this
Has this shift occurred in
shift occurred in non-food
non-food industries?
industries?

Analysis of
Analysis of Remaining
Remaining Industries
Industries

We analyzed
We analyzed trends
trends inin each
each measure
measure for for thirteen
thirteen other
other consumer
consumer good
good industries.
industries. Table
Table
summarizes the
6 summarizes the key
key findings
findings from
from this
this analysis.
analysis. Details
Details of
of the
the trend
trend regression
regression coeffi-
coeffi­
cients for
cients for manufacturers
manufacturers and and retailers
retailers in
in each
each industry
industry are
are provided
provided inin Table
Table A-2
A-2 ofof the
the
Appendix.
Appendix.

Accounting of Return
Accounting Rates of Return and
and Economic
Economic Value Added
Value Added

Manufacturer gross
Manufacturer gross margins
margins have
have been
been improving
improving at at a rate
rate that
that is
is significantly
significantly faster
faster than
than
that for
that for retailers
retailers in
in all
all 13 industries.
industries. Retailer
Retailer ROS
ROS hashas improved
improved relative
relative to
to manufacturer
manufacturer
ROS only
ROS only inin the
the computer
computer industry,
industry, where
where a few
few large
large manufacturers
manufacturers likelike IBM
IBM and
and DEC
DEC
 120
100
=­
g 80
gE
-
0
<2
>
<CC
60
40
ZJ 20
LIJ 20
0
-20
-20
82 83 84 85 86 87 88 89 90 91
91 92
Year
Year

I-Manufacturers --Ir-A3tailers I
Figure
Figure 3. for Food
3. EVA for Food Industry
Industry
 3000
2500
-"e
::
:: 2000

-
~
0
E
<<CC
>~
:::!E
1500
1000
500
0
0

82 83 84 85 86 87 88 89 90 91 92

92
Year

-'-~tailers
I-Manufacturers -.-~tailers I
Figure 4. MVA for Food Industry
TABLE 6
TABLE

MANUFACTURERS VERSUS
MANUFACTURERS VERSUS RETAILERS:
RETAILERS: SUMMARY
SUMMARY OF
OF RESULTS*
RESULTS*
industries with
Industries with Retailers Better off
Retailers Better off Relative
Relative to
to Manufacturers
Manufacturers Industries
industries
with
with Specialty
Specialty Retailers Better off
Retailers Better Relative to
off Relative to Manufacturers
Manufacturers
rota/ = 13)
(Total 13)

13) (Total
(Total = 8)8)

Measure
Measure Number
Number Industries
industries Number
Number Industries
Industries

Industries
CM/S
CMIS
o
0 o
0

ROS 1 Computers
Computers o0

ROA
ROA o0 2 Appliances,
Appliances, AudioNideo

Audion/ideo

ROI
ROI o0 o0

EVA 1 Computers
Computers 1 Computers

Computers
EVNS
EVNS

EVAiS 1 Computers
Computers 1
Computers

Computers
MVA
MVA
g@

g@
9” All
All except
except Appliances;
Appliances; Drugs;
Drugs; Toiletries;
Toiletries; and
and Tobacco
Tobacco 3 Apparel,
Apparel, Computers, Toy

Computers, Toy
Toy
1/5
I/S o
0 1 Appliances
Appliances
SC&NS
SC&AiS 8a All
All except
except Appliances;
Appliances; Furniture;
Furniture; Jewelry;
Jewelry; Office
Office 5 All
All except
except Appliances;
Appliances; Footwear;
Footwear; and
and Furniture
Furniture
Machines; Wood
and Wood
Machines; and Wood
A&P/S
A&P/S
A&P/S 7 All except
except Appliances;
Appliances; AudioNideo;
Audio/Video; Drugs;
Drugs; Office
Office 4
All
All except
except AudioNideo;
Audio/Video; Computers;
Computers; Furniture;
Furniture; and
and
Machines;
Machines; Tobacco;
Tobacco; and
and Toys
Toys Toys
Toys

Toys

Notes:
Notes: •* General
General Merchandisers
Merchandisers included in
are included in the retailer
retailer sample
sample for
for 9 industries.
industries.
@ Eliminating Wal-Mart
@ Eliminating W&Mart from the sample
from sample reduces
reduces this
this number
number to 3.
3.
have
have suffered.
suffered. The
The same
same is true
true of both EVA
of both EVA and
and the
the ratio
ratio of
of EVA/Sales.
EVA/Sales. The
The evidence
evidence is
clearly
clearly not
not consistent
consistent with
with a general
general increase
increase in power exercised
in power exercised by
by retailers.
retailers.

Market Value
Market Added
Value Added

Interestingly,
Interestingly, retailers perform much
retailers perform better on
much better on the
the market based measure
market based used in
measure used in our
our
analysis.
analysis. Their
Their MVA
MVA has has increased
increased at a significantly
significantly faster
faster rate
rate than
than manufacturers
manufacturers in 9 of of
the
the 13 industries.
industries. It would
would seem seem that
that the potential power
the potential power of of retailers,
retailers, as perceived
perceived by by the
the
market,
market, hashas increased
increased in in several
several industries.
industries.
A closer
closer look
look reveals
reveals that,
that, except
except forfor Appliances,
Appliances, the the remaining
remaining three
three industries
industries where
where
retailer MVA
retailer MVA has has not
not improved
improved relative
relative to manufacturers
manufacturers are
are served
served mainly
mainly by by grocery
grocery
retailers---drugs, toiletries
retailersdrugs, toiletries andand tobacco products. On
tobacco products. On the
the other
other hand,
hand, 8 of of the
the 9 industries
industries
where
where retailer
retailer MVA
MVA has has improved
improved faster
faster than
than manufacturer
manufacturer MVA,MVA, are are served,
served, apart
apart from
from
specialty
specialty retailers,
retailers, byby three
three groups
groups of of retail
retail stores,
stores, who
who we we refer
refer to as General
General Merchandis­
Merchandis-
ers
ers in
in the remainder of
the remainder of this paper: Variety
this paper: Variety (5331),
(5331), General
General Merchandise
Merchandise (5399)
(5399) and and
Department
Department (5311) (53 11) Stores.
Stores.

Separating
Separating Out
Out The
The Effect
Effect of
of General
General Merchandisers
Merchandisers

There
There areare eight
eight industries
industries in ourour sample
sample whose products are
whose products are sold both by
sold both by "specialty"
“specialty”
retailers
retailers and
and these
these general
general merchandisers.
merchandisers. In In order
order to determine
determine thethe extent
extent to which
which the per­
the per-
formance
formance of of retailers
retailers is influenced
influenced by by the
the latter,
latter, we
we also
also conducted
conducted thethe analyses
analyses forfor only
only the
the
specialty
specialty retailers
retailers (excluding
(excluding SICsSICs 5311,
53 11, 5331,
533 1, and
and 5399).
5399). The
The last
last two
two columns
columns of of Table
Table
6 summarize
summarize this this analysis,
analysis, while
while Table
Table A-2 provides the
A-2 provides the detailed
detailed results
results for
for each
each ofof the
the
eight
eight industries.
industries. Overall,
Overall, our
our earlier
earlier conclusions
conclusions aboutabout exercised power remain
exercised power remain unchanged.
unchanged.
There
There areare minor
minor differences
differences inin some
some performance
performance measures
measures like
like SG&A/S
SG&A/S and and ROA.
ROA. How­
How-
ever,
ever, the
the most
most notable
notable difference
difference is in in MVA
MVA trends.
trends. As we we suspected,
suspected, conclusions
conclusions about
about
potential power,
potential power, based
based on on MVA,
MVA, do do depend
depend substantially
substantially on on whether
whether or or not
not general
general mer­
mer­
chandisers
chandisers are included. We find
are included. find that,
that, once
once general
general merchandisers
merchandisers are are excluded,
excluded, retailers
retailers
are better off
are better off relative
relative to manufacturers
manufacturers in only only three
three industries.
industries. Clearly,
Clearly, general
general merchan­
merchan­
disers
disers dodo have
have a bigbig impact
impact onon MVA
MVA trends
trends for retailers.
retailers. Clearly,
Clearly, the
the market perceives an
market perceives
increase
increase in the power of
the power of certain
certain classes
classes of of retailers but not
retailers but not others.
others.

A
A Comparison
Comparison of Retailer Classes
Various Retailer
of Various Classes

In
In order
order to get
get a better
better understanding
understanding of
of such
such differences,
differences, we
we now
now examine
examine various
various
classes
classes of
of retailers.
retailers.

Grocery
Grocery Retailers versus
Retailers versus General Merchandisers
General Merchandisers

The
The first
first comparison
comparison that
that is called
called for
for is between
between grocery
grocery retailers
retailers and
and general
general merchan­
merchan-
disers,
disers, since
since it is clear
clear that
that grocery
grocery retailers
retailers have
have not
not improved
improved their position vis
their position vis a vis
vis
manufacturers
manufacturers while while general
general merchandisers
merchandisers have. have. TheThe first
first two
two rows
rows of of Table
Table 7 compares
compares
trends
trends inin all
all measures
measures for for these
these two classes of
two classes of retailers.
retailers.
Some
Some interesting
interesting differences
differences are are apparent between the
apparent between the two
two retail
retail classes.
classes. Grocery
Grocery retail­
retail-
ers
ers are better off
are better relative to general
off relative general merchandisers
merchandisers on on Gross
Gross Margin
Margin but but both
both classes have
classes have
held their
held their EVA
EVA fairly
fairly steady.
steady. This
This is because
because general
general merchandisers
merchandisers have have also
also reduced
reduced their
their
Inventory/Sales,
Inventory/Sales, SG&NSales
SG&A/Sales and and Advertising
Advertising & Promotion/Sales
Promotion/Sales at a significantly
significantly higher
higher
rate. Further,
rate. Further, general
general merchandisers
merchandisers have have increased their MVA
increased their MVA at an an average
average rate
rate of
of $151
$151
million
million perper year, while MVA
year, while MVA forfor grocery
grocery retailers
retailers has
has increased
increased only
only at a third
third of
of that
that rate,
rate,
at $60
$60 million
million perper year.
year. These
These findings
findings suggest
suggest that:
that: (1) general
general merchandisers
merchandisers have have low­
low-
ered
ered their
their gross
gross margins
margins but but have been able
have been able to survive
survive byby lowering
lowering their
their operating
operating costs
costs and
and
costs
costs ofof capital;
capital; and
and (2)(2) the
the market perceives a higher
market perceives potential for
higher potential power in
for power in general
general mer­
mer-
chandisers
chandisers compared
compared with with the
the traditional
traditional supermarket
supermarket channel.
channel. These
These findings
findings are are also
also
consistent
consistent withwith the
the impact
impact of of general
general merchandisers
merchandisers on on the
the MVA
MVA trends
trends wewe observed
observed for for 9
industries
industries in in the previous section.
the previous section.

SpeCialty Retailers versus

Specialty Retailers General Merchandisers
versus General Merchandisers

In
In recent
recent years,
years, some
some of of the
the discussion
discussion aboutabout retailing phenomena has
retailing phenomena has centered
centered around
around
the
the re-emergence
re-emergence of of specialty
specialty retailers
retailers (Bates,
(Bates, 1989;
1989; Wilson,
Wilson, 1993).
1993). ForFor instance,
instance, BatesBates
predicted that
predicted that the “strategic pendulum
the "strategic pendulum will move move backback into the specialty
specialty store arena”, and
store arena", and
“the next
"the next two decades
decades could
could well
well bebe dominated
dominated by new new forms
forms of specialty stores”
of specialty stores" (p. 383).383).
We therefore
therefore examine
examine the the data
data to seesee how
how specialty
specialty retailers,
retailers, on on the
the whole,
whole, havehave fared
fared rel­
rel-
ative
ative to general
general merchandisers.
merchandisers. The
The third
third rowrow of of Table
Table 7 showsshows that,that, as inin the previous
the previous
comparison,
comparison, Gross Gross Margin
Margin has has decreased
decreased faster
faster for
for general
general merchandisers,
merchandisers, but but there
there is no
significant
significant difference
difference in ROS ROS or or EVA
EVA trends between the
trends between the two
two groups.
groups. MVA MVA for for the
the general
general
class,
class, on
on the
the other
other hand,
hand, hashas increased
increased muchmuch faster
faster than
than for
for the
the specialty
specialty retailers.
retailers. Finally,
Finally,
although
although there
there is no
no significant
significant difference
difference in in the
the rate
rate at which
which bothboth classes
classes have
have been
been reduc­
reduc­
ing
ing their
their SG&NSales
SG&A/Sales and and Advertising
Advertising & Promotion/Sales,
Promotion/Sales, specialty
specialty retailers
retailers have,
have, unlike
unlike
general
general merchandisers,
merchandisers, not been able
not been able to decrease
decrease their their Inventory/Sales
Inventory/Sales ratios.
ratios. NorNor have
have
their
their SG&NSales
SG&A/Sales ratios declined at as a high
ratios declined high a rate.
rate. This
This is notnot surprising
surprising considering
considering that that
product line
product line assortment
assortment and and service
service are
are some
some of of the
the advantages
advantages that that specialty
specialty stores
stores areare
expected
expected to provide.
provide.
Thus,
Thus, there
there are
are significant
significant differences between various
differences between various retailer
retailer classes
classes in terms of
in terms of the
the
market's perception of
market’s perception of their potential power,
their potential power, even even though
though exercised power, as evidenced
exercised power, evidenced by by
EVA
EVA is not not very
very different.
different. Before
Before concluding
concluding that that general
general merchandisers
merchandisers have have increased
increased
their power relative
their power relative to specialty
specialty andand grocery
grocery retailers,
retailers, we we take
take a closer
closer look
look at thethe group
group of of
general
general merchandisers,
merchandisers, specifically
specifically thethe impact
impact of of one
one firm
firm which
which is known
known to have have gained
gained
power in
power in recent
recent years-Wal-Mart.
years-Wal-Mart.

General Merchandisers
General Merchandisers Excluding
Excluding Wal-Mart
Wal-Mart

The
The fourth
fourth row
row of
of Table
Table 7 depicts
depicts trends
trends in
in the
the general
general merchandiser
merchandiser group
group after
after exclud­
exclud­
ing
ing Wal-Mart
Wal-Mart from
from the
the sample.
sample. Although
Although the
the exclusion
exclusion of
of Wal-Mart
Wal-Mart does
does not
not have
have a
TABLE 7
A
A Comparison
Comparison of
of Trends
Trends for
for Different
Different Retail
Retail Classes
Classes
Retailer Class
Retailer CM/S
GMIS ROS
ROS ROA
ROA ROI
ROI EVA EVAIS
EVA!S MVA
MVA l/S
115 So\/5
SGA/S A&P/S
A&PIS
Food
Food 0.24*
0.24' -0.12’
-0.12' -0.57*
-0.57' -0.92*
-0.92' -0.12
-0.12 -0.00
-0.00 60.05*
60.05' 0.01
0.01 0.10’
0.10' -0.03
-0.03
(0.03)
(0.03) (0.02)
(0.02) (0.12)
(0.12) (0.19)
(0.19) (0.83)
(0.83) (0.03)
(0.03) (12.34)
(12.34) (0.03)
(0.03) (0.03)
(0.03) (0.01) )
(0.01
General Merchandisers
General Merchandisers -0.38*
-0.38' -0.15*
-0.15' -0.22*
-0.22' -0.36*
-0.36' -1.93
-1.93 -0.01
-0.01 151.50*
151.50' -0.15
-0.15 -0.19*
-0.19' -0.08’
-0.08'
(0.06)
(0.06) (0.04)
(0.04) (0.04)
(0.04) (0.10)
(0.10) (1.68)
(1.68) (0.05)
(0.05) (19.96)
(19.96) (0.10)
(0.10) (0.06)
(0.06) (0.02)
(0.02)
Specialty
Specialty -0.01
-0.Q1 -0.18*
-0.18' -0.37*
-0.37' -0.49*
-0.49' 0.07
0.07 0.04
0.04 15.29*
15.29' -0.01
-0.01 0.11
0.11 -0.03*
-0.03'
(0.09)
(0.09) (0.04)
(0.04) (0.07)
(0.07) (0.10)
(0.10) (0.15)
(0.15) (0.03)
(0.03) (4.26)
(4.26) (0.07)
(0.07) (0.07)
(0.07) (0.01)
(0.01)
General Merchandisers
General Merchandisers -0.38*
-0.38' -0.17*
-0.17' -0.24*
-0.24' -0.43’
-0.43' -3.38*
-3.38' -0.06*’
-0.06" 44.30*
44.30' -0.22**
-0.22" -0.21* '
-0.21 -0.04’
-0.04'
except Wal-Mart
except Wal-Mart (0.07)
(0.07) (0.04)
(0.04) (0.04)
(0.04) (0.09)
(0.09) (1.28)
(1.28) (0.04)
(0.04) (11.34)
(11.34) (0.12)
(0.12) (0.06)
(0.06) (0.02)
(0.02)
Wal-Mart
Wal-Mart -0.68*
-0.68' -0.02
-0.02 -0.05
-0.05 0.01
0.01 83.69*
83.69' o.o5”*
0.05" 5724.70’
5724.70' 0.07
0.07 -0.46*
-0.46'
NA
NA
(0.04)
(0.04) (0.02)
(0.02) (0.12)
(0.12) (0.20)
(0.20) (13.00)
(13.00) (0.03)
(0.03) (959.36)
(959.36) (0.05)
(0.05) (0.05)
(0.05)
Toys R
Toys R Us -0.30’
-0.30' -0.06
-0.06 -0.30*
-0.30' -0.47*
-0.47' 5.99*
5.99' 0.05
0.05 706.14*
706.14' 0.31
0.31 -0.16*
-0.16' -0.11” '
-0.11
(0.05)
(0.05) (0.04)
(0.04) (0.07)
(0.07) (0.13)
(0.13) (2.50)
(2.50) (0.06)
(0.06) (65.29)
(65.29) (0.19)
(0.19) (0.06)
(0.06) (0.02)
(0.02)
Home Depot
Home Depot 0.12
0.12 0.15
0.15 -0.00
-0.00 -0.41
-0.41 5.02
5.02 0.18
0.18 1416.49*
1416.49' -0.77*
-0.77' -0.06
-0.06 -0.27*
-0.27'
(0.07)
(0.07) (0.10)
(0.10) (0.36)
(0.36) (0.63)
(0.63) (2.95)
(2.95) (0.11)
(0.11) (398.93)
(398.93) (0.25)
(0.25) (0.09)
(0.09) (0.04)
(0.04)
Notes:
Notes: pal;$ntheses
Standard errors are in parentheses
p=O.OS; .. Significant at p=O.10
• Significant at p=O.05; p=O.lO
 2250

2000

1750

1500
eS'
"eE 1250
-
{jOt

~
c ( 1000
>
:::E
:::E
750

500

250

0
82 83 84 85 86 87 88 89 90 91 92
Year

-··-~ecialty
• ~ecialty - ....
·-General
'" General - •
••­ Except WalMart - -
­ Grocery

5.
Figure 5, MVA for Different Retail Classes
significant
significant effect
effect on on any
any ofof the
the internal,
internal, historical
historical measures,
measures, the the effect
effect onon MVA
MVA trendtrend is dra­
dra­
matic.
matic. MVAMVA for for this
this group
group hashas only
only increased
increased by by anan average
average of of $44
$44 million,
million, which,
which, if if
anything,
anything, is lessless than
than either
either the
the specialty
specialty or or the
the grocery
grocery retailers.
retailers. Figure
Figure 5 depicts
depicts the the trend
trend
in
in MVA
MVA for for each
each of of the
the four
four groups
groups of of retailers
retailers examined
examined in this this section.
section. We must must conclude
conclude
that with the exception
that with the exception of Wal-Mart, general merchandisers are no better off than the
of Wal-Mart,
Wal- Mart, general merchandisers are no better off than the other
other
classes
classes ofof retailers.
retailers. Wal-Mart
Wal-Mart may may have become more
have become powerful, but
more powerful, but the power is far from
the power from
widespread
widespread amongst
amongst other other retailers.
retailers.
The
The huge
huge impact
impact thatthat Wal-Mart
Wal-Mart has has on
on trends
trends forfor general
general merchandisers
merchandisers leads
leads us to
revisit
revisit the
the industry
industry level
level analysis,
analysis, where
where wewe had
had initially
initially found
found that
that retailers
retailers were better off
were better off
than
than manufacturers
manufacturers in terms of
in terms of MVA
MVA for for as many
many as nine nine industries.
industries. Wal-Mart
Wal-Mart was was
included
included in in the
the retailer
retailer group
group in eight
eight ofof these
these nine
nine industries.
industries. We redid redid the
the analysis
analysis after
after
excluding
excluding Wal-Mart
Wal-Mart and and found
found that
that only
only three
three industries
industries remained
remained where where retailers
retailers werewere
better off
better off in terms of
in terms of MVA-apparel,
MVA-apparel, computers
computers and jewelry. There
and jewelry. There were
were no no significant
significant
changes
changes in in the
the trends
trends observed
observed for for the
the other
other variables.
variables. It would
would seemseem that
that the
the evidence
evidence in
support
support of of an
an increase
increase in the the potential power of
potential power of a single
single class
class ofof retailers
retailers is largely
largely the the con­
con­
sequence of
sequence just one
of just one firm's
firm’s increasing power. Let
increasing power. Let us take
take a look
look at this
this firm.
firm.

How
How is
is Waf-Mart
Wal-Mart doing?
doing?

Figure
Figure 6 shows
shows that
that Wal-Mart's
Wal-Mart’s GrossGross Margin/Sales
Margin/Sales and and ROS
ROS over
over the past ten
the past ten years
years
have
have been declining, or
been declining, or at best
best remained
remained steady.
steady. But,
But, as wewe have
have argued
argued earlier
earlier inin this
this
paper, these
paper, these traditional profit measures
traditional profit measures do not not provide
provide a complete picture. Wal-Mart
complete picture. Wal-Mart is a
growth
growth oriented
oriented firm
firm that
that is intent
intent on
on establishing
establishing a superior
superior long-term
long-term cost position versus
cost position versus
its
its competitors
competitors andand has
has invested
invested heavily
heavily towards
towards that
that objective.
objective. That
That this
this investment
investment has has
been wisely
been wisely made
made is clear
clear from
from the
the steep
steep incline
incline in the
the company's
company’s EVA EVA andand MVA
MVA over over the
the
same
same period,
period, as depicted
depicted in in Figures
Figures 7 and
and 8. InIn contrast,
contrast, close
close competitors
competitors like
like Kmart
Kmart havehave
barely managed
barely managed to keepkeep their
their EVA
EVA stable,
stable, while
while others
others like
like Sears
Sears have
have taken
taken severe
severe hits.
hits.

Other
Other Category
Category Killers

Toys
Toys R Us and and Home
Home DepotDepot are are two
two other
other giant
giant retailers
retailers that
that have
have attracted
attracted a lotlot of
of atten­
atten-
tion
tion over
over the past few
the past few years,
years, although
although not not quite
quite as much Wal-Mart. We examined
much as Wal-Mart. examined thesethese
two
two companies
companies as well. well. The
The last
last two
two columns
columns of of Table
Table 6 summarize
summarize the the results,
results, none
none of of
which
which are are surprising.
surprising. The The trends
trends in in each
each measure
measure for for these
these two
two companies
companies followfollow Wal­
Wal­
Mart's pattern, although
Mart’s pattern, although they they have
have notnot performed
performed nearly
nearly as well
well as the
the latter.
latter. Toys
Toys R Us Us has
has
been increasing
been increasing its EVAEVA at the the rate
rate ofof $6 million per year,
million per year, in contrast
contrast with
with Wal-Mart's
Wal-Mart’s $84 $84
million,
million, while
while Home
Home DepotDepot has been holding
has been holding it steady.
steady. Although both companies
Although both companies are are
improving
improving theirtheir MVA
MVA at higherhigher yearly
yearly rates
rates ($706
($706 million
million andand $1416
$1416 million
million respectively)
respectively)
than
than the
the average
average retailer,
retailer, they
they are
are far behind Wal-Mart's
far behind Wal-Mart’s annual increase of
annual increase of $5725
$5725 million.
million.
Thus,
Thus, these
these category
category killers
killers are
are significantly
significantly better
better than
than average,
average, but
but they
they do notnot match
match thethe
stellar
stellar performance,
performance, both both present
present and potential, of
and potential, of Wal-Mart.
Wal-Mart.
 30 ..
30·1"

25 ~
25+
-

.
--.

I
20 +
.~

. 15L
r­
0~ 15 . ~

10
-

:1

0
~

. ­ -
•
-
• • •
-­.
82 83 84 85 86 87 88 89 90 91 92
Year

Figure 6. Wal-Mart's Rates of Return

 1000

1000
500

500
500
0

0
::
6
F -500

-500
E -1000
-500

-
~
0
c(
>
>
-1000
-1500
-1500
w
-2000
-2000
-2500
-2500
-3000
-3000
82
62 83
63 84
84 a5
85 86
86 87
a7 88
88 89
89 90
90 91
91 92
92
Year
Year

~KMart
+KMafI -'-Sears -Wal-Mart
Sears +WaI-Mart

Figure 7.
Figure 7. EVA for
EVA for Wal-Mart,
Wal-Mart, Kmart
Kmart and
and Sears
Sears

- --..
 66000
66000

56000
56000
56000

E
z: 46000
:

-~
£
5
~
36000
36000
>" 26000
~
1~a:;)~:::!=::lE=:t=~;;;;~;~:~::;;=1==::t;::::~
! "f" i i:;; ; : ; V ~

26000
= 16000
6000
!E:E 16000
-4000
-4000
82
82 83
83 84 85 86 87 88 89 90 91
91 92
Year
Year

~KMart
~KMart --'-~ars
+KMart --'-~ars -Wal-Mart
Sears +WaI-Mart

Figure 8.
Figure 8. MVA for
MVA for Wal-Mart,
Wal-Mart, Kmart
Kmart and
and Sears
Sears
 CONCLUSION
CONCLUSION

This paper has

This paper has examined
examined the purported shift
the purported shift in power from
in power from manufacturers
manufacturers to retailers using
retailers using
more
more complete measures of
complete measures of market power and
market power and a broader
broader sample
sample of of industries
industries andand retail
retail
classes than used in the two recent empirical investigations
classes than used in the two recent empirical investigations of the issue. It may also be use­
of the issue. It may also be use­
ful
ful to investigate
investigate the role of
the role of wholesalers
wholesalers in the
the vertical
vertical channel
channel system.
system. There
There is little
little ref­
ref-
erence
erence in
in the business or
the business or academic press to the
academic press power of
the power of wholesalers, perhaps because
wholesalers, perhaps because theythey
have
have neither
neither the
the "store
“store equity"
equity” nor
nor the
the "brand
“brand equity"
equity” to differentiate
differentiate themselves.
themselves. Still,
Still, an
an
empirical
empirical analysis
analysis of
of their performance vis
their performance vis a vis
vis manufacturers
manufacturers and and retailers
retailers should
should be be use-
use­
ful.
ful.

Power
Power Shift:
Shift: Dyadic
Dyadic Versus
Versus Aggregate
Aggregate View
View

Our
Our analysis
analysis suggests
suggests that,
that, over
over the past decade,
the past decade, retailers
retailers have been faring
have been faring worse
worse than
than
manufacturers,
manufacturers, with with only
only a few few exceptions.
exceptions. Our Our data
data do support,
support, quite
quite clearly,
clearly, anan increase
increase
in
in the power of
the power of the
the growing
growing Wal-Mart.
Wal-Mart. Just Just as clearly,
clearly, however,
however, they they show
show that
that not
not all
all
retailers
retailers have
have become
become more powerful, and
more powerful, and many
many havehave lost power. We are
lost power. are witnessing
witnessing an an era
era
of
of inter-retailer
inter-retailer competition
competition in in which
which somesome retailers
retailers like
like Wal-Mart
Wal-Mart compete
compete with with others
others byby
lowering
lowering theirtheir Gross
Gross Margins.
Margins. To keep keep this
this strategy
strategy viable,
viable, they
they focus
focus onon lowering
lowering operat­
operat­
ing
ing costs
costs and
and the
the cost
cost of
of invested
invested capital.
capital. TheThe success
success of of this
this handful
handful of of retailers
retailers is simply
simply
evidence
evidence of of one
one (or(or some)
some) retailers
retailers gaining power over
gaining power over other
other retailers, not of
retailers, not of manufactur­
manufactur­
ers,
ers, inin general,
general, losing power with
losing power with respect
respect to retailers.
retailers. Clearly,
Clearly, neither
neither academics
academics and and
practitioners have
practitioners have beenbeen making
making this this important
important distinction
distinction (see (see Dickinson
Dickinson and and Hollander,
Hollander,
1995
1995 forfor a discussion
discussion of of this
this issue).
issue). In In specific
specific given
given dyadic
dyadic relationships,
relationships, Wal-Mart
Wal-Mart and and
other low-cost discounters like Toys-R-Us may have become
other low-cost discounters like Toys-R-Us may have become more powerful, but that cer­ more powerful, but that cer­
tainly
tainly does
does not justify the
not justify the sweeping
sweeping statements
statements that that are being
being mademade so frequently,
frequently, about
about a
general
general increase
increase in in the market
market powerpower of of retailers.
retailers. Having
Having laid laid the
the issue
issue of
of a general
general increase
increase
in
in retail power to rest,
retail power rest, a fruitful
fruitful direction
direction for for future
future research
research wouldwould be be to study
study the
the dynam­
dynam­
ics
ics of
of dyadic
dyadic relationships
relationships of of specific
specific manufacturers
manufacturers and and these
these few powerful retailers,
few powerful retailers, and
and
compare
compare them them with with corresponding
corresponding dyads
dyads thatthat they
they formform withwith thethe large
large majority
majority of of
retailers.7 7
retailers.

Power
Power Shifts
Shifts Without
Without Profit
Profit Shifts
Shifts

Is it possible
possible for
for changes
changes in relative power to not
relative power not necessarily
necessarily result
result in changes
changes in in relative
relative
profit? Increases
profit? Increases in power need
in power need not
not lead
lead to immediate
immediate gains
gains in profit either
in profit because busi­
either because busi­
nesses
nesses may may notnot know
know howhow toto use
use their power (in
their power (in which
which casecase the power shift
the power shift is
meaningless),
meaningless), or because (as we
or because we have
have discussed
discussed inin this paper) they
this paper) they may
may use
use it in
in ways
ways that
that
preserve future
preserve future independence
independence rather
rather than
than increase
increase short
short term profit. That
term profit. That is why
why wewe exam­
exam-
ine
ine not
not only
only current profit but
current profit but potential
potential for
for future profit as well.
future profit well.
 ItIt may
may be be argued
argued thatthat manufacturers
manufacturers have have driven
driven down
down theirtheir costs
costs ofof operation
operation to to become
become
more efficient
more efficient than than retailers
retailers and,and, consequently,
consequently, their their profit
profit hashas increased
increased despite
despite aa lossloss ofof
market power.
market power. We We believe
believe suchsuch an an argument
argument misses misses aa major
major point.
point. Over
Over thethe long
long term,
term, andand
ten years
ten years isis certainly
certainly long long enough,
enough, any any efficiencies
efficiencies that that oneone channel
channel member
member might might gain
gain
will be
will be bargained
bargained away away by by the
the other partner ifif the
other partner the latter
latter isis more
more powerful.
powerful. As As noted
noted by by Por­
Por­
(1990), “‘powerful
ter (1990),
ter "powerful buyers buyers or or suppliers
suppliers bargain
bargain away the profits profits forfor themselves”(p.
themselves"(p. ).
When General
When General Motors Motors was was suffering
suffering large
large losses
losses andand itsits suppliers
suppliers werewere not,
not, thethe situation
situation
was not
was not tolerated.
tolerated. LargeLarge discounts
discounts were were demanded
demanded by by GMGM and and obtained.
obtained. In In exactly
exactly the the
same way
same way as as GM’s
GM's powerpower was was wielded
wielded by by the
the company’s
company's ex ex vice-president
vice-president of of worldwide
worldwide
purchasing, in
purchasing, in bringing
bringing down down pricesprices ofof efficient
efficient automotive
automotive suppliers,
suppliers, retailers
retailers should
should be be
able to
able to extract
extract away away profits
profits from
from manufacturers,
manufacturers, irrespective
irrespective of of the
the source
source of of those
those profits.
profits.
is not
It is
It not reasonable
reasonable to to say
say that
that thethe trade
trade hashas become
become more more powerful
powerful relative
relative to to manufactur­
manufactur­
ers if,
ers if, over
over the the long
long term,
term, we we continue
continue to to observe
observe the the opposite
opposite trendtrend inin their
their relative
relative profit,
profit,
both present
both present and and potential.
potential. Without
Without either
either profit
profit oror market
market value,
value, power
power is is only
only aa chimera,
chimera,
comprised of
comprised of the
the trappings
trappings but but notnot the
the substance.
substance.
It may also
It may also bebe argued
argued thatthat factors
factors other
other than
than relative
relative power
power affect
affect profitability
profitability and, and, were
were
it not
it not for for the
the power
power shift,
shift, those
those factors
factors maymay well
well have
have made
made retailers
retailers even
even worse
worse off off than
than
they are
they are today.
today. Unfortunately,
Unfortunately, this this argument
argument too too is indefensible.
indefensible. The The most
most common
common factorsfactors
to be
to be considered,
considered, according
according to to Industrial
Industrial Organization
Organization theory, theory, areare Concentration
Concentration and and Prod-
Prod­
uct Differentiation (measured, in this context,
uct Differentiation (measured, in this context, by variables such by variables such as Advertising expenditure
Advertising expenditure
and
and Private
Private labeling).
labeling). We have have seen,
seen, in
in this paper, that
this paper, that there
there areare few
few significant
significant differences
differences
in
in Advertising trends for the two groups. Messinger and Narasimhan (1995)
Advertising trends for the two groups. Messinger and Narasimhan (1995) have have docu­
docu­
mented
mented increases
increases in in private
private labels
labels in in the
the grocery
grocery industry
industry during
during the the seventies
seventies and and eighties.
eighties.
These
These authors
authors also also document
document some some increases
increases in in grocery
grocery retailer
retailer concentration,
concentration, especially
especially at
the regionallevel. 8 Yet, retailer profitability has suffered. We are skeptical that the publi­
the regional level.’ retailer profitability has suffered. are skeptical that the publi-
cized
cized growth
growth in private private labels
labels is a signal
signal ofof growing
growing retail
retail power.
power. While
While somesome firms,
firms, like
like
Wal-Mart,
Wal-Mart, have have increased
increased private
private labeling,
labeling, others,
others, likelike Sears,
Sears, have
have hadhad to reduce
reduce emphasis
emphasis
on
on their
their ownown labels,
labels, and and the
the net
net is not
not at all
all clear.
clear. And,
And, retailer
retailer concentration,
concentration, even even if does
does
increase,
increase, can can lead
lead to increased
increased marketmarket power
power only only if if there
there is a concomitant
concomitant decrease decrease in
competition.
competition.

The
The Role
Role of
of Inter-Retailer
Inter-Retailer Competition
Competition

Inter-retailer
Inter-retailer competition
competition has has only
only intensified
intensified over
over the
the past
past decade
decade and
and this
this pressure
pressure
forces
forces them to compete away their profits. There is no doubt about that. What are the
them to compete away their profits. There is no doubt about that. What are the impli­
impli­
cations
cations about
about thethe market
market power
power of of retailers,
retailers, though?
though? We We would
would point
point to
to the
the premise
premise of of the
the
Structure-Conduct-Performance
Structure-Conduct-Performance (SCP) paradigm-an
(SCP) paradigm-an industry can enjoy market
industry can enjoy market power power
and
and abnormal
abnormal profits
profits (the
(the "performance"
“performance” in in SCP)
SCP) as as it
it gets
gets more
more concentrated
concentrated (the(the "struc­
“struc­
ture"
ture” link) only if firms in the industry are able to collude (the “conduct” link) and
link) only if firms in the industry are able to collude (the "conduct" link) and reduce
reduce
competition
competition (hence
(hence thethe well-known
well-known term term "monopoly
“monopoly power").
power”). In In other
other words,
words, reduced
reduced hor­hor­
izontal
izontal competition
competition is
is aa necessary
necessary pre-condition
pre-condition for
for increased
increased market
market power
power and and
profitability.
profitability. That
That critical
critical link
link in
in the
the SCP
SCP paradigm
paradigm has has not
not been
been made
made by retailers.
retailers. IfIf it
it had,
had,
the
the result
result would
would be intense inter-manufacturer
be intense inter-manufacturer competition,
competition, whichwhich would
would force
force manufac­
manufac-
turers
turers to compete
compete their profits away
their profits away to retailers.
retailers. To summarize,
summarize, increased
increased retailer power
retailer power
should
should have
have ledled to: (1) high
high manufacturer
manufacturer competition
competition andand low
low manufacturer profits; and
manufacturer profits; and
(2) low
low retailer
retailer competition
competition and and high
high retailer profits. What
retailer profits. What we observe
observe in
in most
most industries
industries is
quite
quite the
the opposite.
opposite.
We conclude
conclude with
with the
the following
following quotes
quotes from
from the business press:
the business press:

Private
Private labels
labels are
are like
like a creeping paralysis. Unless
creeping paralysis. Unless manufacturers,
manufacturers, individually
individually as well
well
as in concert,
concert, take
take a militant
militant attitude
attitude and
and attempt
attempt to stem
stem this
this encroachment,
encroachment, the paral­
the paral-
ysis
ysis will
will proceed
proceed from
from the
the extremities
extremities and
and eventually
eventually strike
strike at the
the heart,
heart, rendering
rendering the
the
brand
brand manufacturer
manufacturer immobile
immobile (p. )

Manufacturers
Manufacturers are
are going
going to have
have to accept
accept the
the rather
rather unpleasant
unpleasant truth
truth that
that with
with the
the tre­
tre-
mendous
mendous power
power the
the chain
chain wields,
wields, whether
whether it be national,
national, regional
regional or
or local,
local, it is the
the retailer
retailer
who
who now
now has
has the
the supreme power to make
supreme power make oror break product in his
break a product his own
own stores
stores (p. ).

Amazing
Amazing as it may
may seem,
seem, these proclamations were
these proclamations were made
made more
more than
than three
three decades
decades ago
ago
by Zimmerman
by Zimmerman (1959)!
(1959)! Clearly,
Clearly, the
the current
current furor
furor is not
not the
the first
first time
time that private labels
that private labels and
and
retailers
retailers have
have been
been seen
seen as a threat
threat to national brands and
national brands and the power of
the power of the
the manufacturers.
manufacturers.

APPENDIX
APPENDIX

A-l
TABLEA-l
TABLE

Sampled Industries
Sampled Industries with
with SIC
SIC Codes
Codes
Manufactures
Manufactures Retailers
Retailers
1. Apparel
1. Apparel
2300
2300 Apparel
Apparel and
and other
other finished products
finished products 5600
5600 Apparel
Apparel and
and accessory
accessory stores

stores
2320
2320 Men, boys fins, wrk
Men, boys wrk c1thg.
clthg. 5621
5621 Women's
Women’s
clothing

clothing
2330
2330 Womens,
Womens, misses, jrs.jrs. outerwear
outerwear 5651
5651 Family
Family clothing

clothing
2340 Womens, miss,
2340 Womens, miss, chid,
chid, inft. undgrmt
undgrmt 5311
5311 Department
Department Stores

Stores
2390
2390 Mise.
Misc. fabricated
fabricated textile products
textile products 5331
5331 Variety
Variety stores
5399
5399 Mise.
Misc. Ceneral
General Mdse.
Mdse. stores
2.
2. Appliances
Appliances
3600
3600 Electric,
Electric, other
other elee.
elec. eq.
eq. ex cmp.

cmp. 5731
5731 Radio, tv, cons. elect.
Radio, tv, elect. stores
3630
3630 Household
Household appliances
appliances +
+

3634
3634 Electric
Electric Housewares
Housewares andand fans 5311
5311 5331
5331 5399#

5399#
3. Audio
Audio And
And Video
Video Equipment
Equipment
3651
3651 Household
Household audio
audio and
and video
video eq.
eq. 5731
5731 Radio, tv. consumer
Radio, tv. consumer elect.

elect.
3652
3652 Phonog.
Phonog. records,
records, audio
audio tape,
tape, disk 5735
5735 Record
Record and
and tape

tape
+
+
5311
5311 5331
5331 5399#
5399#
4.
4. Computers
Computers
3570
3570 Computer
Computer and
and office
office equipment
equipment 5734
5734 Computer
Computer and
and Computer
Computer Software

Software
3571
3571 Electronic
Electronic computers
computers +
+

3572
3572 Computer
Computer Storage
Storage devices
devices 5311
5311 5331
5331 5399#

5399#
3575
3575 Computer
Computer Terminals

Terminals
3576
3576 Computer
Computer communication
communication equip.

equip.
3577
3577 Computer peripheral ego
Computer peripheral eq. nec
net
(continued)
TABLE
TABLE A-l
A-l
Continued
Continued
Manufactures
Manufactures Retailers
Retailers
5.
5. Drugs
Drugs
2834 Pharmaceutical
2834 Pharmaceutical preparations
preparations
preparations
5912 Drug
5912 Drug and
and Proprietary
Proprietary

Proprietary
5400 Food
5400 Food stores
stores

S411 Grocery
5411 Grocery Stores
Stores
5412 Convenience
5412 Convenience stores
stores
6. Food
6.
6. Food and
and Beverages
Beverages
2000 Food
2000 Food and
and Kindred
Kindred Products
Products
Products 5400 Food
5400 Food Stores
Stores
Stores

2011, 2013,2015
2011, 2013,2015 -----
----- 2099
2099
2099 5411 Grocery
5411 Grocery Stores
Stores

5412 Convenience
5412 Convenience Stores
Stores

7.
7. Footwear
Footwear
3021 Rubber
3021 Rubber and
and plastics
plastics footwear
footwear 5661 Shoe
5661 Shoe stores
stores

stores
3140 Footwear,
3140 Footwear, except
except rubber
rubber +
+

5311
5311 5331
5331 5399#
5399#

5399#
8.
8. Furniture
Furniture
2510 Household
2510 Household furniture
furniture 5700 Home
5700 Home furniture
furniture and
and equip.
equip.
2511 Wood
2511 Wood hshld
hshld furn.,
furn., except.
except. upholstered
upholstered 5712 Furniture
5712 Furniture

Furniture
2520 Office
2520 Office furniture
furniture
furniture +

2522 Office
2522 Office furniture
furniture ex.
ex. wood
wood
wood 5311 5331
5311 5331 5399#

5399#
5399#
2531 Public
2531 Public bldg.
bldg. & reI. furniture
& rel. furniture
2540
2540 Partitions,
Partitions, shelvi ng, lockers
shelving, lockers
2590
2590 Mise.
Misc. furniture
furniture and
and fixtures
fixtures
9.
9. Jewelry
Jewelry and
and Watches
Watches
3873
3873 Watches,
Watches, clocks
clocks and parts
and parts 5944
5944 Jewelry
Jewelry

Jewelry
3910
3910 Jewelry,
Jewelry, silverware, plated ware
silverware, plated ware +
+

3911
3911 Jewelry
Jewelry and
and Precious
Precious Metals
Metals
Metals 5311
5311 5331
5331 5399#
5399#

5399#
10.
10. Office
Offke Machines
Machines
3578
3578 Calculate,
Calculate, acct.
acct. mach
math exe.
ext. computer
computer 5311
5311 5331
5331 5399#
5399#
3579
3579 Office
Office machines
machines
11.
11. Tobacco
Tobacco Products
Products
2100
2100 Tobacco
Tobacco products
products

products 5912
5912 Drug
Drug and
and Proprietary
Proprietary Stores
2111
2111 Cigarettes
Cigarettes +
+

5400
5400 5411
5411 5412@
5412@

5412@
12.
12. Toiletries
Toiletries and
and Cleaning
Cleaning AidsAids
2840
2840 Soap,
Soap, detergent,
detergent, toilet
toilet preps
preps 5411
5411 Grocery
Grocery stores
stores

2842 Special
2842 Special clean,
clean, polish
polish preps
preps
preps 5412
5412 Conven ience stores

Convenience
stores
2844
2844 Perfume,
Perfume, cosmetic,
cosmetic, toilet
toilet prep.
prep.
prep. 5912
5912 Drug
Drug & proprietary
proprietary stores

stores
+
+
5311
5311 5331
5331 5399#
5399#
13.
13. Toys
Toys and
and Games
Games
3942
3942 Dolls,
Dolls, stuffed
stuffed toys
toys

toys 5945
5945 Hobby,
Hobby, toy and game shops

shops
shops
3944
3944 Games,
Games, toys,
toys, child
child veh,
veh, except
except dolls
dolls ++

5311
5311 5331
5331 5399#
5399#
14.
14.
14. Wood
Wood and
and lumber
Lumber Products
Products
2400
2400 Lumber
Lumber and
and wood
wood products,
products, except
except furn.

furn.
furn 5200
5200 Building
Building material
material hardware,
hardware, garden
garden
2421
2421 Sawmills,
Sawmills, planing
planing mills,
mills, gen.
gen. 5211
5211 Lumber
Lumber and
and other
other build.
build. material

material
material
2430
2430 Millwork,
Millwork, veneer,
veneer, plywood

plywood
plywood
Notes: ## These
Notes: Thesethree
three SICs
KS areare defined
defined under
under Apparel
Apparel Retailers
Retailers
@ These
@ TheseSICs
SIG are
are defined
defined under
under Drug
Drug Retailers
Retailers
TABLE A-2
TABLE

Trend Regression Coefficients

Trend Coefficients for all Industries
for all Industries
Performance Measure
Performance Measure
Channel Member
Channel Member GMIS
CMIS ROS
ROS ROA
ROA ROJ
ROI EVA
EVA EVA/S
EVAIS MVA
MVA 115
II5 SG&AIS
SC&A/S A&PtS
A&PIS
Apparel Manufacturers
Apparel Manufacturers 0.45* 0.24* 0.34* 0.58* 1.51* *
1.51 0.44* 11.03* -0.02 0.14* 0.08*
(2.80) (0.14)
Apparel
Apparel Specialty
Specialty Retailers
Retailers
(0.09)
‘FE?
0.14
(0.10)
(0.10)
-0.05
(0.14)
(0.14)
-0.27*
(0.21)
(0.21)
-0.38*
(0.34)
(0.34)
-0.13
(0.10)
(0.10)
0.02
(2.80)
43.34*
(0.14)
-0.18* *
(0.04)
YE’
0.18*
(0.03)
(0.03)
-0.02
(0.10)
(0.10) (0.03)
(0.03) (0.06)
(0.06) (0.09)
(0.09) (0.22)
(0.22) (0.04)
(0.04) (11.27)
(11.27) (0.05)
(0.05) (0.07)
(0.07) (0.02)
(0.02)
Apparel Retailers
Apparel Retailers -0.29* -0.14* -0.20* -0.34* -0.97 0.00 103.10* -0.15 -0.11* -0.07*
(0.05)
(0.05) (0.03)
(0.03) (0.04)
(0.04) (0.09)
(0.09) (1.03)
(1.03) (0.04)
(0.04) (14.73)
(14.73) (0.09)
(0.09) (0.05)
(0.05) (0.01)
(0.01)
Appliance Manufacturers
Manufacturers 0.12
0.12 -0.15* -0.49* -O&6*
-0.66* 2.62 0.04 153.85** -0.16 -0.23** -0.06**
(0.15)
(0.15) (0.06)
(0.06) (0.06)
(0.06) (0.12)
(0.12) (6.11)
(6.11) (0.06)
(0.06) (68.77)
(68.77) (0.09)
(0.09) (0.10)
(0.10) (0.03)
(0.03)
Appliance Specialty
Appliance Specialty Retailers
Retailers -2.79* -0.77* -1.28* -1.39* -2.56* -0.35* -79.61* -0.96* -1.46* -0.42*
(0.37)
(0.37) (0.10)
(0.10) (0.19)
(0.19) (0.23)
(0.23) (0.40)
(0.40) (0.05)
(0.05) (24.51)
(24.51) (0.17)
(0.17) (0.27)
(0.27) (0.05)
(0.05)
Appliance Retailers
Appliance Retailers -0.41*
-0.41 * -0.16* -0.23* -0.38* -1.60 -0.01
-0.01 113.11* -0.14 -0.19* -0.08*
(0.05)
(0.05) (0.04)
(0.04) (0.04)
(0.04) (0.10)
(0.10) (1.51)
(1.51 ) (0.05)
(0.05) (18.15)
(18.15) (0.10)
(0.10) (0.05)
(0.05) (0.02)
(0.02)
AudioNideoManufacturers
AudioNideo Manufacturer s 0.36 -0.03 -0.11
-0.11 -0.21
-0.21 -0.05 0.25* 45.31**
45.31 ** -0.76* 0.22** -0.16
(0.26)
(0.26) (0.09)
(0.09) (0.10)
(0.10) (0.19)
(0.19) (1.10)
(1.10) (0.07)
(0.07) (24.29)
(24.29) (0.15)
(0.15) (0.12)
(0.12) (0.13)
(0.13)
Specialty
Audio-Video Specialty Retailers
Retailers -2.51**
-2.51 -0.75* -1.29* -1.46* -1.54* -0.33* -60.32* -0.89* -1.30* -0.43*
(0.35)
(0.35) (0.09)
(0.09) (0.17)
(0.17) (0.20)
(0.20) (0.27)
(0.27) (0.05)
(0.05) (17.96)
(17.96) (0.17)
(0.17) (0.25)
(0.25) (0.05)
(0.05)
AudioNideo Retailers
AudioNideo Retailers -0.39* -0.16* -0.23* -0.3a*
-0.38* -1.43 -0.01
-0.01 105.41* -0.13 -0.18* -0.08*
(0.05)
(0.05) (0.04)
(0.04) (0.04)
(0.04) (0.10)
(0.10) (1.40)
(1.40) (0.05)
(0.05) (17.59)
(17.59) (0.10)
(0.10) (0.05)
(0.05) (0.02)
(0.02)
Computer
Computer Manufacturers
Manufacturers -0.34 -0.95* -0.95* -1.61*
-1.61 * -8.06* -0.57* -86.48* -0.19 0.55*
0.55* -0.01
-0.01
(0.20)
(0.20) (0.18)
(0.18) (0.17)
(0.17) (0.32)
(0.32) (1.45)
(1.45) (0.15)
(0.15) (12.21)
(12.21 ) (0.14)
(0.14) (0.09)
(0.09) (0.02)
(0.02)
Computer Specialty
Computer Specialty Retailers
Retailers -5.83* -0.44 -0.39 0.23
0.23 0.46 0.62** 33.68** -1.24 -4.88* 0.32*
(1.67)
(1.67) (0.34)
(0.34) (0.80)
(0.80) (1.23)
(1.23) (0.35)
(0.35) (0.28)
(0.28) (13.08)
(13.08) (0.74)
(0.74) (1.34)
(1.34) (0.00)
(0.00)
Computer Retailers
Computer Retailers -0.39* -0.15'
-0.15* -0.22* -0.36* -1.65 -0.01
-0.01 144.49* -0.15 -0.19* -0.08*
(0.06)
(0.06) (0.04)
(0.04) (0.04)
(0.04) (0.10)
(0.10) (1.66)
(1.66) (0.05)
(0.05) (19.25)
(19.25) (0.10)
(0.10) (0.05)
(0.05) (0.02)
(0.02)
Drug
DrugManufacturers
Manufacturer s 1.51*
1.51 * 0.58* 0.39*
0.39* 0.93*
0.93* 12.09* 0.82*
0.82* 359.30* -0.52* 0.76*
0.76* -0.13*
(0.07)
(0.07) (0.04)
(0.04) (0.06)
(0.06) (0.10)
(0.10) (1.18)
(1.18) (0.07)
(0.07) (48.81)
(48.81) (0.04)
(0.04) (0.06)
(0.06) (0.04)
(0.04)
Retailers
Drug Retai lers 0.24* -0.13* -0.59* -0.95* -0.10 -0.00 46.75* 0.02 0.14*
0.14* -0.03*
(0.03)
(0.03) (0.03)
(0.03) (0.11
(0.11)) (0.18)
(0.18) (0.61)
(0.61) (0.02)
(0.02) (10.04)
(10.04) (0.03)
(0.03) (0.04)
(0.04) (0.01)
(0.01)
Footwear Manufacturers
Manufacturers 0.40'
0.40* 0.18 0.32
0.32 0.36 1.07*
1.07* 0.30* 22.14* -0.43* 0.19** 0.15*
0.15*
(0.11)
(0.11) (0.14)
(0.14) (0.25) (0.33)
(0.33) (0.38)
(0.38) (0.12)
(0.12) (5.16)
(5.16) (0.10)
(0.10) (0.10)
(0.10) (0.05)
(0.05)
Footwear Specialty
Footwear Specialty Retailers
Retailers 0.49*
0.49* 0.39
0.39 'K'
0.67 1.01
1.01 0.86 0.10
0.10 0.63
0.63 1.24*
1.24* 0.25**
0.25** -0.01
-0.01
(0.13)
(0.13) (0.25)
(0.25) (0.48)
(0.48) (0.69)
(0.69) (1.18)
(1.18) (0.23)
(0.23) (4.32)
(4.32) (0.19)
(0.19) (0.14)
(0.14) (0.02)
(0.02)
Footwear Retailers
Footwear Retailers -0.38* -0.15* -0.21* -0.36* -1.76 -0.01
-0.01 143.61*
143.61 * -0.14 -0.19* -0.08*
(0.06)
(0.06) (0.04)
(0.04) (0.05)
(0.05) (0.10)
(0.10) (1.64)
(1.64) (0.05)
(0.05) (19.23)
(19.23) (0.10)
(0.10) (0.06)
(0.06) (0.02)
(0.02)
(continued)
(continued)
TABLE
TABLE A-2
A-2

Trend Coefficients for all Industries

Trend Regression Coefficients Industries
Performance Measure
Performance Measure
- - - - _ _-_._._-
.. _---,
._"----­
­_._ .. ..
_ -
_ -
~
~
_
_ .
.
_
-
- -

Channel Member
Channel Member GM/S
CM!S ROS
ROS ROA
ROA ROJ
ROI EVA
EVA EVA/S
EVA!S MVA
MVA l/S
I!S SC&A/S
SC&A!S A&P/S
A&P!S
Manufacturers
Furniture Manufacturers -0.35*
-0.35* -0.27**
-0.27** -0.48*
-0.48* -0.53*
-0.53* 0.03
0.03 0.11
0.11 12.89*
12.89* -0.73*
-0.73* -0.23*
-0.23* 0.04*
0.04*
(0.14)
(0.14) (0.14)
(0.14) (0.17)
(0.17) (0.22)
(0.22) (0.45)
(0.45) (0.14)
(0.14) (0.01)
(0.01) (0.11) )
(0.11 (0.11)
(0.11) (0.02)
(0.02)
Furniture Specialty
Furniture Specialty Retailers
Retailers -0.52*
-0.52* -0.36
-0.36 -0.50
-0.50 -0.72
-0.72 -0.12
-0.12 0.05
0.05 5.62
5.62 -0.01
-0.01 -0.21
-0.21 -0.10
-0.10
(0.21)
(0.21) (0.21)
(0.21) (0.29)
(0.29) (0.45)
(0.45) (0.42)
(0.42) (0.21)
(0.21) (3.15)
(3.15) (0.05)
(0.05) (0.14)
(0.14) (0.08)
(0.08)
Furniture Retailers
Furniture Retailers -0.38*
-0.38* -0.16*
-0.16* -0.22*
-0.22* -0.37*
-0.37* -1.45
-1.45 -0.01
-0.01 120.06*
120.06* -0.14
-0.14 -0.18*
-0.18* -0.07*
-0.07*
(0.06)
(0.06) (0.04)
(0.04) (0.05)
(0.05) (0.10)
(0.10) (1.40)
(1.40) (0.05)
(0.05) (16.91)
(16.91) (0.10)
(0.10) (0.05)
(0.05) (0.02)
(0.02)
Manufacturers
Jewelry Manufacturers -0.31* *
-0.31 -0.14
-0.14 -0.25
-0.25 -0.36
-0.36 -0.20
-0.20 0.04
0.04 7.96*
7.96* 0.26
0.26 -0.33**
-0.33** 0.02
0.02
(0.09)
(0.09) (0.14)
(0.14) (0.19)
(0.19) (0.30)
(0.30) (0.22)
(0.22) (0.15)
(0.15) (1.50)
(1.50) (0.19)
(0.19) (0.15)
(0.15) (0.02)
(0.02)
Jewelry Specialty
Jewelry Specialty Retailers
Retailers -2.01* *
-2.01 -0.26
-0.26 -0.31
-0.31 -0.88
-0.88 3.75
3.75 0.22
0.22 20.11* *
20.11 0.81*
0.81* -2.17*
-2.17* -0.30*
-0.30*
(0.45)
(0.45) (0.39)
(0.39) (0.41)
(0.41) (0.85)
(0.85) (2.27)
(2.27) (0.40)
(0.40) (7.43)
(7.43) (0.27)
(0.27) (0.37)
(0.37) (0.09)
(0.09)
Jewelry Retailers
Jewelry Retailers 4).39*
-0.39* -0.15*
-0.15* -0.22*
-0.22* -0.37*
-0.37* -1.48
-1.48 -0.00
-0.00 130.52*
130.52* -0.13
-0.13 -0.20*
-0.20* -0.08’
-0.08*
(0.06)
(0.06) (0.04)
(0.04) (0.05)
(0.05) (0.10)
(0.10) (1.61) )
(1.61 (0.05)
(0.05) (17.23)
(17.23) (0.10)
(0.10) (0.06)
(0.06) (0.02)
(0.02)
Off. Mach
Off. Manufacturers s
Mach Manufacturer 0.76*
0.76* -0.05
-0.05 -0.45*
-0.45* -0.61*
-0.61* -0.03
-0.03 -0.02
-0.02 18.91* *
18.91 -0.33*
-0.33* -0.10
-0.10 -0.07*
-0.07*
(0.10)
(0.10) (0.08)
(0.08) (0.11)
(0.11) (0.20)
(0.20) (0.38)
(0.38) (0.13)
(0.13) (5.08)
(5.08) (0.12)
(0.12) (0.06)
(0.06) (0.03)
(0.03)
Off. Mach
Off. Mach Retailers
Retailers -0.38*
-0.38* -0.15*
-0.15* -0.22*
-0.22* +3).37*
-0.37* -1.93
-1.93 -0.01
-0.01 151.50*
151.50* -0.15
-0.15 -0.19*
-0.19* -0.08*
-0.08*
(0.06)
(0.06) (0.04)
(0.04) (0.04)
(0.04) (0.10)
(0.10) (1.68)
(1.68) (0.05)
(0.05) (19.96)
(19.96) (0.10)
(0.10) (0.06)
(0.06) (0.02)
(0.02)
Manufacturers
Tobacco Manufacturers 2.11* *
2.11 0.13
0.13 -0.36**
-0.36** -0.35
-0.35 34.1 o*
34.10* 0.44*
0.44* 360.50*
360.50* -0.92*
-0.92* o.vo*
0.90* -0.10*
-0.10*
(0.22)
(0.22) (0.16)
(0.16) (0.18)
(0.18) (0.34)
(0.34) (10.01)
(10.01) (0.17)
(0.17) (125.37)
(125.37) (0.14)
(0.14) (0.07)
(0.07) (0.05)
(0.05)
Tobacco Retailers
Tobacco Retailers 0.24*
0.24* -0.13*
-0.13* -0.59*
-0.59* -0.95*
-0.95* -0.10
-0.10 -0.00
-0.00 46.75*
46.75* 0.02
0.02 0.14*
0.14* -0.03*
-0.03*
(0.03)
(0.03) (0.03)
(0.03) (0.11)
(0.11) (0.18)
(0.18) (0.61)
(0.61) (0.02)
(0.02) (10.04
(10.04 (0.03)
(0.03) (0.04)
(0.04) (0.01)
(0.01)
Toiletries Manufacturers
Toiletries Manufacturers 0.73*
0.73* 0.02
0.02 -0.12
-0.12 -0.00
-0.00 3.98*
3.98* 0.32*
0.32* 81.10*
81.10* -0.15*
-0.15* 0.61* *
0.61 0.22*
0.22*
(0.13)
(0.13) (0.07)
(0.07) (0.13)
(0.13) (0.21)
(0.21) (0.72)
(0.72) (0.06)
(0.06) (9.39)
(9.39) (0.06)
(0.06) (0.13)
(0.13) (0.03)
(0.03)
Toiletries Retailers
Toiletries Retailers 4).12*
-0.12* -0.14*
-0.14* -0.29*
-0.29* -0.51*
-0.51* -0.92
-0.92 -0.01
-0.01 99.91*
99.91* -0.05
-0.05 -0.06**
-0.06** -0.05*
-0.05*
(0.04)
(0.04) (0.03)
(0.03) (0.05)
(0.05) (0.09)
(0.09) (0.98)
(0.98) (0.03)
(0.03) (11.00)
(11.00) (0.06)
(0.06) (0.04)
(0.04) (0.01)
(0.01)
Manufacturers
Toy Manufacturers 0.24
0.24 -0.11
-0.11 -0.34
-0.34 -0.63
-0.63 -0.39
-0.39 -0.19
-0.19 26.33*
26.33* -0.40**
-0.40** 0.40*
0.40* 0.01
0.01
(0.20)
(0.20) (0.27) (0.37)
(0.37) (0.56) (0.89)
(0.89) (0.27)
(0.27) (8.00)
(8.00) (0.20)
(0.20) (0.16)
(0.16) (0.24)
(0.24)
Toy Specialty
Toy Specialty Retailers
Retailers -0.21*
-0.21* ‘k%Y
0.20 0.21
0.21 ‘KY
0.12 2.83*
2.83* 0.25**
0.25** 153.32*
153.32* 0.27
0.27 -0.25*
-0.25* -0.1 v*
-0.19*
(0.05)
(0.05) (0.12)
(0.12) (0.19)
(0.19) (0.33)
(0.33) (0.70)
(0.70) (0.12)
(0.12) (15.68)
(15.68) (0.19)
(0.19) (0.04)
(0.04) (0.03)
(0.03)
Toy Retailers
Toy Retailers -0.37*
-0.37* -0.14*
-0.14* -0.20*
-0.20* -0.34*
-0.34* -1.67
-1.67 -0.00
-0.00 151.81*
151.81* -0.13
-0.13 -0.18*
-0.18* -o.ov*
-0.09*
(0.06)
(0.06) (0.04)
(0.04) (0.05)
(0.05) (0.10)
(0.10) (1.61) )
(1.61 (0.05)
(0.05) (19.06)
(19.06) (0.10)
(0.10) (0.05)
(0.05) (0.02)
(0.02)
Wood Manufacturers
Wood Manufacturers 0.56*
0.56* 0.02
0.02 0.00
0.00 0.01
0.01 2.14
2.14 0.36
0.36 16.35
16.35 -0.14**
-0.14** 0.18**
0.18** 0.01*
0.01*
(0.20)
(0.20) (0.24)
(0.24) (0.29)
(0.29) (0.39)
(0.39) (2.23)
(2.23) (0.26)
(0.26) (9.61)
(9.61) (0.06)
(0.06) (0.08)
(0.08) (0.00)
(0.00)
Wood Retailers
Wood Retailers -0.11* *
-0.11 -0.25*
-0.25* -0.51* *
-0.51 -0.65*
-0.65* -0.57**
-0.57** 0.06
0.06 86.84*
86.84* -0.24*
-0.24* 0.10
0.10 -0.16*
-0.16*
(0.04)
(0.04) (0.05)
(0.05) (0.10)
(0.10) (0.13)
(0.13) (0.31)
(0.31) (0.05)
(0.05) (27.47)
(27.47) (0.04)
(0.04) (0.08)
(0.08) (0.02)
(0.02)
Notes:
Notes: Standard Errors are in parentheses
Standard parentheses
•* Significant
Significant at p
p = 0.05;
0.05; ••
** Significant
Significant at p
p = 0.10
0.10
Acknowledgment:
Acknowledgment: Thanks Thanks are are due
due to
to Eric
Eric Olsen
Olsen of
of the
the University
University of
of Virginia
Virginia and
and Sonali
Sonali Krishna
Krishna
of Dartmouth
of Dartmouth College
College for
for their
their assistance
assistance with
with data
data preparation.
preparation. The
The first
first author
author gratefully
gratefully acknowl­
acknowl­
edges the
edges the support
support of
of the
the Tuck
Thck Associates
Associates Program,
Program, and
and thanks
thanks Clyde
Clyde Stickney
Stickney and
and Virginia
Virginia Soybel
Soybel
for their
for their helpful
helpful comments.
comments.

NOTES
NOTES

1. TheThe CSRCSR simply

simply means
means thatthat book
book value
value atat the
the end
end of of a period
period is equal
equal to
to the
the book
book value
value at the
the
beginning of
beginning of the
the period
period plus
plus earnings
earnings minus
minus dividends.
dividends. Capital
Capital additions
additions are
are incorporated
incorporated as nega- nega­
tive dividends
tive dividends (Fairfield
(Fairfield 1994).
1994).
2. Future
Future EVAEVA needneed only
only bebe summed
summed over over a finite
finite time
time horizon,
horizon, because,
because, ultimately,
ultimately, competi-
competi­
tive pressures
tive pressures will
will bring
bring the
the residual
residual earnings
earnings of of a firm
firm down
down so so that
that it no
no longer
longer earns
earns more
more than
than the
the
cost of its
cost of its capital
capital (Fairfield
(Fairfield 1994;
1994; Stickney
Stickney 1995).
1995).
3. Of Of course,
course, manufacturers,
manufacturers, in turn, tum, may
may be able to transfer
be able transfer some
some of of their
their inventory
inventory costs
costs to
their own
their own suppliers.
suppliers. LackLack of of data
data prevented
prevented us from from separately analyzing raw
separately analyzing raw material,
material, work-in­
work-in­
progress and
progress and finished
finished goods
goods inventory
inventory costs
costs to disentangle
disentangle these these mechanisms.
mechanisms.
4. Some currently used
Some currently used measures
measures of of EVA
EVA only
only take
take into
into account
account thethe cost
cost of
of long
long term
term debt.
debt. We
believe that
believe that short term debt
short term debt is very
very important,
important, especially
especially for for retailers,
retailers, and
and its cost
cost should also be
should also be
taken into
taken into consideration.
consideration.
5. See Rappaport (1986)
See Rappaport (1986) for for a simple explanation of
simple explanation of the
the Capital
Capital Asset
Asset Pricing
Pricing Model
Model and and
Grabowski and
Grabowski and Vernon
Vernon (1990)
(1990) for
for a recent
recent illustration
illustration of of the
the cost
cost ofof capital
capital calculation.
calculation.
recognize that
6. We recognize that all manufacturer
manufacturer firm-retailer
firm-retailer firm firm dyads
dyads within
within an industry
industry group
group may
may notnot
have experienced
have experienced the the same,
same, if if any, power
power shift towards the
shift towards the retailer.
retailer. However,
However, as discussed
discussed earlier,
earlier,
our focus
our focus is on determining
determining whether,
whether, on the the whole,
whole, retailers
retailers in different
different industries
industries are are becoming
becoming
more
more powerful
powerful thanthan manufacturers.
manufacturers.
7. On On the
the subject
subject of of future
future research,
research, it maymay also
also be useful
useful to investigate
investigate thethe role
role of
of wholesalers
wholesalers
in the
the vertical
vertical channel
channel system.
system. There
There is little
little reference
reference in the the business
business or or academic
academic presspress to thethe
power
power of of wholesalers,
wholesalers, perhaps
perhaps because
because they they have
have neither
neither thethe "store
“store equity"
equity” nor
nor the
the "brand
“brand equity"
equity” to
differentiate
differentiate themselves.
themselves. Still,Still, an empirical
empirical analysis
analysis of of their
their performance
performance vis vis a vis manufacturers
manufacturers and and
retailers
retailers will
will be
be worthwhile.
worthwhile.
8. OurOur ownown preliminary
preliminary analysis,
analysis, using
using Census
Census datadata fromfrom thethe U.S.
U.S. Department
Department of of Commerce
Commerce
and
and COMPUSTAT,
COMPUSTAT, shows shows thatthat over
over the period
period that
that we analyze,
analyze, the the percentage
percentage of of total
total retail
retail sales
sales
accounted
accounted for for by the
the five
five largest
largest retailers
retailers has increased
increased slightly,
slightly, from
from 8.3%
8.3% to 10.110.1%.%.

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