Guaranteed profit margins : A demonstration of retailer power

Abstract In this paper, the authors examine a phenomenon, which has been observed in the grocery channel recently, called “guarantee of margins”. Guarantee of margins is a clause inserted in the contract between the manufacturer and the retailer that ensures a certain profit margin for the retailer irrespective of the retail price he/she is charging. In the wake of increasing retail level concentration and competition, the retailers' ability of extracting these guarantees from the manufacturers is a clear demonstration of retailer power. Our analysis provides new insights into the growing debate about the power shift to the retailers in the grocery channel. It shows how the retailers can and have utilized this power to maintain their margins by extracting these guarantees from the manufacturers. We specifically model the ability of the retailers to play one manufacturer against another and to use the private label brands as a lever to extract more profits.