What Is the Future for "Stores-Within-Stores"?

Knowledge@Wharton reported recently on a study of when and why retailers turn over portions of their stores to manufacturers, creating "stores-within-stores." We see the concept most often in the U.S. in the department store channel, where the cosmetic department’s space is generally parcelled out among the leading manufacturers, with each sector staffed by personnel employed by the manufacturer rather than the store. Many department stores often have a few boutiques in the apparel departments that are similarly devoted to a single manufacturer.

But that’s pretty much as far as it has gone. In some other countries stores-within-stores go much further, sometimes taking over all or almost all of the store (the researchers became interested in the subject when an executive from LG Electronics, on a visit to Best Buy, wondered aloud why electronics manufacturers had not set up such stores in Best Buy).

The study notes that the concept should result in lower prices to consumers, since retailer markup is eliminated (although the retailer will charge rent on the space).

[The arrangement] works for department stores because if the manufacturers are doing well, the retailers can charge higher rental fees. "There's a sweet spot where they can make more profit even at a lower price because more cosmetics are being sold," notes Jerath.

Stores-within-stores won’t work well in categories where there’s little brand loyalty. They do work where customer service and consultative selling is valued by the consumer. If the consumer perceives that all the products are essentially interchangeable, then they will shop on price and there’s little point in the manufacturer investing in providing the level of service this arrangement requires. But where the consumer values brand names, service and advice, the investment is justified. Which might lead one to join the LG executive in wondering whether consumer electronics is an area where stores-within-stores would prosper.

The study also points out, though, that retailer power is also a factor:

Zhang and Jerath's research emphasizes the importance of factoring in overall retailer power in weighing whether to create a store-within-a-store. The paper notes that in the last two decades, retail power has grown increasingly concentrated in the United States.

Retailers are surrendering power when they allow manufacturers to set up stores-within-stores. That would seem to argue that the concept is not likely to expand, since retailer power does not look likely to recede.

The area for expansion, however, might be literal stores-within-stores; areas within a retailer that are branded under the name of another retailer. For example, the Sephora stores within JC Penney, or FAO Schwartz within Saks Fifth Avenue. These allow the retailer to offer a wider product range and to appeal to a wider potential audience without the investment and risk in gaining expertise in another category.