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Hey retailers, if you're so powerful, why aren't you more profitable?

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Much of the research into retail performance has focused on the changing balance of power between manufacturers and retailers. The conventional wisdom is that retailers will use their growing power to extract more resources from manufacturers and use them to fund investment to improve profitability. This paper explores the observation that retailers, while becoming more powerful, are not performing significantly better. Indeed it appears that the performance of the retail sector relative to manufacturers is, if anything, getting worse over time. To explain this finding the authors investigate a variety of structural and strategic factors and find that the intensity of price-based competition between retailers is a particularly important and often under-estimated factor. They use the prisoners' dilemma to show why retailers compete so aggressively on price and to explore whether their lower levels of margin performance and lacklustre returns for shareholders are temporary or more lasting phenomena. They conclude that retail will likely remain a low-margin, low-cost industry; a finding with obvious managerial implications for retailers pursuing strategies based on differentiation to support premium pricing. They also suggest two key avenues for future academic research into the retail sector: how to create a cost and execution focused culture, and how to develop and implement the smart differentiation and pricing strategies that have worked in other low-margin industries such as casino gambling and airlines.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2004/2004-67.pdf

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Copyright INSEAD. All rights reserved