Module 6
Merchandise Management
a. Merchandise Management Overview
This section provides an overview of the merchandise management process,
including the organization of a retailer’s merchandise management activities and the
objectives and measures used to evaluate merchandise management performance. In the
following section, we review the differences in the process for managing fashion and
seasonal merchandise versus basic merchandise, as well as each of the steps in the
merchandise management process.
Every retailer has its own system for grouping categories of merchandise, but the
basic structure of the buying organization is similar for most retailers. This basic structure
by depicting the organization of the merchandise division for a department store chain
such as Macy’s, Belk, or Dillard’s. The organization of buyers in the merchandise
division. A similar structure for planners parallels the structure for buyers.
The highest classification level is the merchandise group. The organization chart
has four merchandise groups: (1) women’s apparel; (2) men’s, children’s, and intimate
apparel; (3) cosmetics, shoes, jewelry, and accessories; and (4) home and kitchen. Each
of the four merchandise groups is managed by a general merchandise manager (GMM),
who is often a senior vice president in the firm. Each of the GMMs is responsible for
several departments. For example, the GMM for men’s, children’s, and intimate apparel
makes decisions about how the merchandise inventory is managed in five departments:
men’s dress apparel, men’s sportswear, young men’s apparel, children’s apparel, and
intimate apparel.
The merchandise category is the basic unit of analysis for making merchandising
management decisions. A merchandise category is an assortment of items that customers
see as substitutes for one another. For example, a department store might offer a wide
variety of girls’ dresses sizes 4 to 6 in different colors, styles, and brand names. A mother
buying a dress for her daughter might consider the entire set of dresses when making her
purchase decision. Lowering the price on one dress may increase the sales of that dress
but also decrease the sales of other dresses. Thus, the buyer’s decisions about pricing and
promoting specific SKUs in the category will affect the sales of other SKUs in the same
category. Typically, a buyer manages several categories of merchandise.
A category management approach to managing merchandise assigns one buyer or
category manager to oversee all merchandising activities for the entire category.
Managing by category can help ensure that the store’s assortment includes the “best”
combination of sizes and vendors—the one that will get the most profit from the allocated
space.
Some retailers instead define categories in terms of brands. For example, Tommy
Hilfiger and Polo/Ralph Lauren each might be categories if the retailer believes these
brands are not substitutes for each other (i.e., a “Tommy” customer buys Tommy, not
Ralph). Also, it is easier for one buyer to purchase merchandise and coordinate
distribution and promotions for the merchandise offered by a national-brand vendor. This
brand-based approach to category management is particularly common among grocery
retailers. A supermarket chain thus might have three different buyers for breakfast cereals
—one for Kellogg’s, one for General Mills, and one for General Foods.
Managing merchandise within a brand category can lead to inefficiencies, though,
because it fails to consider the interdependencies among SKUs in the category. For
example, the three breakfast cereal buyers for a supermarket chain, one for each major
brand, might each decide to stock a new product line of gluten-free breakfast cereals.
However, if the brand-organized buyers had taken a category-level perspective, they
would have realized that the market for gluten-free cereals was limited and that their
company (i.e., the supermarket) could have generated more sales by stocking just one
brand of gluten-free cereals. Then it could have used some of the space set devoted to all
those gluten-free cereal brands to stock a locally produced cereal that has a strong
following among other customers.
Some retailers select a vendor, such as General Mills or Kellogg’s, to help them
manage a particular category. The vendor, known as the category captain, works with the
retailer to develop a better understanding of consumer shopping behaviors, create
assortments that satisfy consumer needs, and improve the profitability of the merchandise
category. Selecting vendors as category captains has several advantages for retailers. It
makes merchandise management tasks easier and can increase profits. Vendors are often
in a better position to manage a category than are retailers because they have superior
information about the specific category. The vendor’s entire focus is on that category;
buyers instead are typically responsible for several categories. In addition, the insights
that vendors acquire from managing the category for other retailers can be applied to a
current problem.
A potential problem with establishing a vendor as a category captain is that the
vendor could take advantage of its position. It is somewhat like “letting the fox into the
henhouse.” Suppose, for example, that Frito-Lay chose to maximize its own sales, rather
than the retailer’s sales, in managing the salty snack category. It could suggest an
assortment plan that included most of its SKUs and exclude SKUs that are more
profitable to the retailer, such as high-margin, private-label SKUs. Thus, retailers are
becoming increasingly reluctant to turn over these important decisions to their vendors.
Working closely with vendors and carefully evaluating their suggestions offers a much
more prudent approach.
ROA is composed of two components, asset turnover and net profit margin
percentage. But ROA is not a good measure for evaluating the performance of
merchandise managers because they do not have control over all the retailer’s assets or all
the expenses that the retailer incurs. Merchandise managers have control only over what
merchandise they buy (i.e., their merchandise inventory, but not the cost of other assets
such as cash, accounts receivable, or fixtures). They also control the cost of the
merchandise and the price at which it is sold, which results in the gross margin. They do
not, however, have control over operating expenses, such as store operations, human
resources, real estate, and logistics and information systems.
Retailers normally express inventory turnover (sales-to-stock) ratios on an annual
basis rather than for part of a year. If the sales-tostock ratio for a three-month season
equals 2.3, the annual sales-to-stock ratio will be four times that number (9.2). Thus, to
convert a sales-to-stock ratio based on part of a year to an annual figure, multiply it by
the number of such time periods in the year. The most accurate way to measure average
inventory is to measure the inventory level at the end of each day and divide the sum by
365. Most retailers can use their information systems to get accurate average inventory
estimates by collecting and averaging the inventory in stores and distribution centers at
the end of each day. Another method is to take the end-of-month (EOM) inventories for
several months and divide by the number of months.
To improve the inventory turnover (sales-to-stock ratio), buyers can either reduce
the level of inventory or increase sales. One approach that buyers take to increase
inventory turnover is to reduce the number of SKUs within a category. Buyers need to
provide backup stock for each SKU so that the products will be available in the sizes and
colors that customers are seeking. Fewer SKUs means that less backup stock is needed.
However, reducing the number of SKUs could reduce sales, because customers will be
less likely to find what they want. Even worse, if they continually can’t find the brand or
product line at all, customers might start shopping at a competitor and also urge their
friends to do the same.
A second approach for reducing the level of inventory is to keep the same number
of SKUs but reduce the backup stock for each SKU. This approach has the same problem
as reducing the number of SKUs. Less backup stock increases the chances that customers
will not find the size and color they want when visiting a store or website.
Three approaches to increasing the gross margins are increasing prices, reducing
the cost of goods sold, or reducing customer discounts. Increasing prices increases gross
margin, but it can also decrease sales and inventory turnover because price-sensitive
customers buy less. Buyers usually attempt to lower the cost of goods sold by negotiating
for better prices from vendors, though they also might increase the percentage of private-
label merchandise in a category’s assortment, because private-label merchandise is
generally less costly than similar merchandise made by national-brand vendors. Finally,
buyers can increase gross margins by reducing the customer discounts needed to sell
unwanted merchandise or merchandise left over at the end of the season. To minimize
these discounts, buyers need to do a better job of buying products that customers want
and accurately forecasting sales.
b. Merchandise Planning Process
Retailers use different types of merchandise planning systems for managing (1)
staple and (2) fashion merchandise categories. Staple merchandise categories, also called
basic merchandise categories, are those categories that are in continuous demand over an
extended time period. While consumer packaged-goods companies introduce many “new
products” each year, the number of “new-to-the-world” product introductions each year
in staple categories is limited. Some examples of staple merchandise categories include
most categories sold in supermarkets, white paint, copy paper, and basic casual apparel
such as T-shirts and men’s underwear.
Because sales of staple merchandise are fairly steady from week to week, it is
relatively easy to forecast demand, and the consequences of making mistakes in
forecasting are not great. For example, if a buyer overestimates the demand for canned
soup and buys too much, the retailer will have excess inventory for a short period of time.
Eventually the canned soup will be sold without having to resort to discounts or special
marketing efforts.
Because the demand for staple merchandise is very predictable, merchandise
planning systems for staple categories often involve continuous replenishment. These
systems involve continuously monitoring merchandise sales and generating replacement
orders, often automatically, when inventory levels drop below predetermined levels.
Fashion merchandise categories are in demand only for a relatively short period of
time. New products are continually introduced into these categories, making the existing
products obsolete. In some cases, the basic product does not change but the colors and
styles change to reflect what is “hot” that season. Some examples of fashion merchandise
categories are athletic shoes, tablets, smartphones, and women’s apparel.
Forecasting the sales for fashion merchandise categories is much more
challenging than doing so for staple categories. Buyers for fashion merchandise
categories have much less flexibility in correcting forecasting errors. For example, if the
tablet buyer for Best Buy purchases too many units of a particular model, the excess
inventory cannot be easily sold when a new upgraded model is introduced. Due to the
short selling season for most fashion merchandise, buyers often do not have a chance to
reorder additional merchandise after an initial order is placed. So if buyers initially order
too little fashion merchandise, the retailer may not be able to satisfy the demand for the
merchandise and will develop a reputation for not having the most popular merchandise
in stock. If buyers order too much fashion merchandise, they will have to put it on sale at
a discount or dispose of it in some other way at the end of the season. Thus, an important
objective of merchandise planning systems for fashion merchandise categories is to be as
close to out of stock as possible at the same time that the SKUs move out of fashion.
Seasonal merchandise categories consist of items whose sales fluctuate
dramatically depending on the time of year. Some examples of seasonal merchandise are
Halloween candy, Christmas ornaments, swimwear, and snow shovels. Both fashion and
more basic merchandise can be seasonal categories. For example, swimwear is
fashionable, and snow shovels are more basic.
However, from a merchandise planning perspective, retailers buy seasonal
merchandise in much the same way that they buy fashion merchandise. Retailers could
store unsold snow shovels at the end of the winter season and sell them the next winter,
but it is typically more profitable to sell the shovels at a steep discount near the end of the
season rather than incur the cost of carrying this excess inventory until the beginning of
the next season. Thus, plans for seasonal merchandise, like fashion merchandise, hope to
zero out inventory at the end of the season.
These two different merchandise planning systems, staple and fashion, affect the
nature of the approaches used to forecast sales and manage inventory. The following
section describes each of the steps in the merchandise management process for staple and
fashion merchandise.
c. Forecasting Category Sales
The sales of staple merchandise are relatively constant from year to year. Thus,
forecasts are typically based on extrapolating historical sales. Because there are
substantial sales data available, sophisticated statistical techniques can be used to forecast
future sales for each SKU. However, these statistical forecasts are based on the
assumption that the factors affecting item sales in the past will be the same and have the
same effect in the future. Thus, even though sales for staple merchandise categories are
relatively predictable, controllable and uncontrollable factors can have a significant
impact on sales.
Controllable factors include the opening and closing of stores, the price set for the
merchandise in the category, special promotions for the category, the pricing and
promotion of complementary categories, and the placement of the merchandise categories
in the stores. Some factors beyond the retailer’s control are the weather; general
economic conditions; a pandemic such as COVID-19; special promotions or new product
introductions by vendors; and new product, pricing, and promotional activities by
competitors.13 Thus, buyers need to adjust the forecast on the basis of statistical
projections to reflect the effects of these controllable and uncontrollable factors.
Forecasting sales for fashion merchandise is challenging because buyers typically
need to place orders and commit to buying specific quantities between three to six
months before the merchandise will be delivered and made available for sale.14 In
addition, for fashion items there often is no opportunity to increase or decrease the
quantity ordered before the selling season has ended. Suppliers of popular merchandise
usually have orders for more merchandise than they can produce and excess inventory of
unpopular items. Finally, forecasting fashion merchandise sales is particularly difficult
because some or all of the items in the category are new and different from units offered
in previous seasons or years. Some sources of information that retailers use to develop
forecasts for fashion merchandise categories are (1) previous sales data, (2) marketing
research, (3) AI and data analytics, (4) fashion trend services, and (5) vendors.
Although items in fashion merchandise categories might be new each season,
many items in a fashion category are often similar to items sold in previous years. Thus,
accurate forecasts might be generated by simply projecting past sales data. For example,
certain beverages and snacks might change from season to season and reflect new
editions. But even if the SKUs differ each season, the amount of a seasonal offering that
gets consumed probably is relatively constant and predictable each year. Such
predictability enables retailers to maintain appropriate levels of inventory, even for trendy
products, and keep customers informed about where and when they can find their
favorites.
Buyers for fashion merchandise categories undertake a variety of marketing
research activities to help them forecast sales. These activities range from informal,
qualitative research about trends affecting the category to more formal experiments and
surveys.
To find out what customers are going to want in the future, buyers immerse
themselves in their customers’ world. For example, buyers look for information about
trends by going to Internet chat rooms and blogs, attending soccer games and rock
concerts, and visiting hot spots around town like restaurants and nightclubs to see what
people are talking about and wearing. Buyers are information junkies and read
voraciously. What movies are hits at the box office, and what are the stars wearing? Who
is going to see them? What books and albums are on the top 10 lists? What magazines are
consumers purchasing? Are there themes that keep popping up across these sources of
information?
Social media sites are important sources of information for buyers. Buyers learn a
lot about their customers’ likes, dislikes, and preferences by monitoring their past
purchases and by monitoring their interactions with social network sites such as
Facebook, Pinterest, and Twitter. Customers appear keen to submit their opinions about
their friends’ purchases, interests, and blogs. Retailers also use traditional forms of
marketing research such as in-depth interviews and focus groups. The in-depth interview
is an unstructured personal interview in which the interviewer uses extensive probing to
get individual respondents to talk in detail about a subject. Buyers can gather customer
data from the retailer’s database, then call specific shoppers to find out what they like, or
don’t like, about the merchandise in the store.
A more informal method of interviewing customers involves buyers spending
some time (e.g., one day per week) on the selling floor waiting on customers. Although
not a retailer itself, Showfields leases retail space to a rotating selection of online brands
and takes the initiative to observe and interact with thousands of customers who visit its
showrooms. It shares metrics like dwell time with these temporary tenants, giving them
insights about how customers react to their offerings in person and thus how they can
best persist with showcasing those offerings on their own websites.
In a focus group, a small group of respondents submits to be interviewed by a
moderator who uses a loosely structured format. Participants are encouraged to express
their views and comment on the views of others in the group. To keep abreast of the
youth market, for example, some stores have teen boards consisting of opinion leaders
who meet to discuss merchandising and other store issues. When Under Armour noted a
significant drop in its net income, it turned to focus groups to learn why. It quickly
discovered that part of the issue was its strategic effort to push high-performance gear,
often with a strong focus on men. But women were making up a larger part of the athletic
apparel market, and many of them were seeking comfy athleisure gear, leggings, and less
restrictive sports bras they could wear every day. Even while the company retains its
primary, strategic focus on performance, it leveraged the insights from its focus groups to
redesign several product features to make them more appealing to women.
With all these sources of marketing research, the information might become
overwhelming. Therefore, many retailers are turning to artificial intelligence (AI) to
enhance their abilities to understand what customers are likely to want and better forecast
their demand. AI-based solutions can help identify patterns in data or reveal if certain
variables might be related. In addition, building on data analytics, predictive analytics
specifically derive assumptions from prior patterns of behavior. Then machine learning
goes a step further to make automatic adjustments to algorithms as the AI gets used.17
Such benefits are critical, prompting many leading companies like Nike and Nordstrom
to invest heavily in AI.
Other apparel retailers have embraced AI for its ability to personalize the
available products too. Uniqlo’s UMood kiosks measure people’s chemical reactions to
different colors and styles, then automatically suggest options that will make the
customer feel good at that moment or in that season. American Eagle’s interactive
dressing rooms make recommendations based on clothing the customer previously tried.
In addition, fashion merchandise categories beyond apparel benefit too. For example,
West Elm’s Pinterest Style Finder reviews personal design boards to recommend
complimentary décor during different seasons. At Kroger, smart shelves help customers
gather new insights on trending products, such as gluten-free options, as well as alert
them when products that they have added to their retailer-provided mobile shopping list
go on sale.
Vendors have proprietary information about their marketing plans, such as new
product launches and special promotions that can have a significant impact on retail sales
for their products and the entire merchandise category. In addition, vendors tend to be
very knowledgeable about market trends for particular merchandise categories, because
they typically specialize in fewer merchandise categories than do retailers. Thus,
information from vendors about their plans and marketing end of the season. If there are
empty seats when a plane takes off or a rock concert ends, the revenue that might have
been generated from these seats is lost forever. Likewise, if more people are interested in
dining at a restaurant than there are tables available, a revenue opportunity also is lost. So
service retailers have devised approaches for managing demand for their offering so that
it meets but does not exceed capacity.
However, advanced sales also carry some risk. What happens if the service is
canceled—as occurred on a global scale to the entertainment industry during the COVID-
19 pandemic? Some providers hoped that the pandemic would be short-lived and
promised rescheduled dates; others canceled the bookings right away. But regardless of
this choice, they had to do something with the billions of dollars in payments they had
received for a service they could no longer provide. Live music ticket sellers had about
50 million advance tickets on the books for summer shows. When consumers demanded
refunds, larger companies like Live Nation struggled, but the real threat was to smaller
promoters, staging companies, and vendors that could not do so and still stay in business.
Most sports leagues encouraged season ticket holders to roll their investments over to the
next season. Another option embraced mainly by nonprofit theaters was to request
donations of the value of the tickets, with varying success. The Los Angeles
Philharmonic was able to convince only 11 percent of ticket holders to make such
donations, but the nearby Antaeus Theatre Company recaptured 40 percent of its advance
tickets through donations.
d. Developing an Assortment Plan
The assortment plan reflects the breadth and depth of merchandise that the retailer
plans to offer in a merchandise category. In the context of merchandise planning, the
variety, or breadth, of a merchandise category is the number of different merchandising
subcategories offered, and the assortment, or depth, of merchandise is the number of
SKUs within a subcategory.
The process of determining the variety and assortment for a category is called
editing the assortment. An example of an assortment plan for girls’ jeans, includes 10
types or varieties (skinny or boot-cut, distressed denim or rinsed wash, and three price
points reflecting different brands). For each type there are 81 SKUs (3 colors × 9 sizes ×
3 lengths). Thus, this retailer plans to offer 810 SKUs in girls’ jeans. When editing the
assortment for a category like jeans, the buyer considers the following factors: (1) the
firm’s retail strategy, (2) the effect of assortments on GMROI, (3) the complementarities
among categories, (4) the effects of assortments on buying behavior, and (5) the physical
characteristics of the store.
The number of SKUs offered in a merchandise category is a strategic decision.
For example, Costco supermarkets focus on customers who are looking for low prices
and do not care much about brands, so they offer very few SKUs in a category. With
limited SKUs, Costco can increase its inventory turnover, lower costs, and charge lower
prices. In contrast, Best Buy’s target customers are interested in comparing many
alternatives, so the retailer must offer several SKUs in each consumer electronics
category. Even within one company, different brands might have different retail
strategies, necessitating different assortment decisions.
In developing the assortment plan, buyers need to be sensitive to the trade-off of
increasing sales by offering greater breadth and depth but at the same time potentially
reducing inventory turnover and GMROI because of the increased inventory investment.
Increasing assortment breadth and depth also can decrease gross margin. For example,
the more SKUs offered, the greater the chance of breaking sizes—that is, stocking out of
a specific size or color SKU. If a stockout occurs for a popular SKU in a fashion
merchandise category and the buyer cannot reorder during the season, the buyer will
typically discount the entire merchandise type, thus reducing gross margins. By removing
the merchandise type from the assortment altogether, the retailer reduces the risk that
customers might be disappointed when they don’t find the precise size and color they
want.
When buyers develop assortment plans, they need to consider the degree to which
categories in a department complement each other. For instance, a comprehensive smart
house technology system may have a low GMROI, so a retailer provider might plan to
commit to promoting only options by one brand, like Google. But customers who invest
in such a system likely have different needs for complementary products, including a
range of automated light bulbs in various wattages and colors, pet food dispensers
specific to their pets’ types and sizes, and varying numbers of outlet converters. These
complementary items may provide higher GMROI. Therefore, a buyer might stock
options from additional smart home developers, such as Sonos and Vivint, so that
customers have the ability to buy more profitable accessories that are capable of linking
up with their chosen system.
Offering large assortments provides a number of benefits to customers. First,
increasing the number of SKUs that customers can consider increases the chance they
will find the product that best satisfies their needs. Second, large assortments are valued
by customers because they provide a more informative and stimulating shopping
experience due to the complexity associated with numerous products and the novelty
associated with unique items. Third, large assortments are particularly appealing to
customers who seek variety—those who want to try new things. However, offering a
large assortment can make the purchase decision more complex and time-consuming and
potentially overwhelms the consumer, which could reduce sales.
Buyers need to consider how much space to devote to a category. More space is
needed to display categories with large assortments. In addition, a lot of space is needed
to display individual items in some categories, and this limits the number of SKUs that
can be offered in stores. For example, furniture takes up a lot of space, thus furniture
retailers typically display one model of a chair or sofa, and then provide photographs,
cloth swatches, or a virtual display on a computer to show how the furniture would look
with different upholstery. Multichannel retailers address space limitations in stores by
offering a greater assortment through their Internet and catalog channels than they do in
stores. For example, Staples offers more types of laptop computers and printers on its
Internet site than it stocks in its stores. If customers do not find the computer or printer
they want in the store, sales associates direct them to the company’s Internet site and can
even order the merchandise for them on the spot from a POS terminal.
e. Brand Alternatives
National brands, also known as manufacturer’s brands, are products designed,
produced, and marketed by a vendor and sold to many different retailers. The vendor is
responsible for developing the merchandise, producing it with consistent quality, and
undertaking a marketing program to establish an appealing brand image. Examples of
national brands are Tide detergent, Ralph Lauren polo shirts, and Hewlett-Packard
printers.
In some cases, vendors use an umbrella or family brand associated with their
company and a subbrand associated with the product, such as Kellogg’s (family brand)
Raisin Bran (subbrand) or Ford (family brand) F-Series trucks (subbrand). In other cases,
vendors use individual brand names for different product categories and do not associate
the brands with their companies. For example, most consumers probably don’t know that
Unilever makes Q-tips, Dove soap, Lipton Tea, Hellmann’s mayonnaise, Pond’s Cold
Cream, and many others.
Some retailers organize their buying activities around national-brand vendors that
cut across merchandise categories. Thus, buyers in department stores may be responsible
for all cosmetic brands offered by Estée Lauder (Estée Lauder, Origins, Clinique, and
Prescriptives) rather than for a product category (such as skin care or eye makeup).
However, there are inefficiencies associated with managing merchandise at the brand or
vendor level rather than the category level.
Store brands, also called private-label brands, house brands, or own brands, are
products developed by retailers. In many cases, retailers develop the design and
specifications for their store-brand products, then contract with manufacturers to produce
those products. In other cases, national-brand vendors work with a retailer to develop a
special version of its standard merchandise offering to be sold exclusively by the retailer.
In these cases, the national-brand vendor or manufacturer is responsible for the
production of the merchandise.
In the past, sales of store brands were limited. National brands had the resources
to develop customer loyalty toward their brands through aggressive marketing. It was
difficult for smaller local and regional retailers to gain the economies of scale in design,
production, and promotion that were needed to develop well-known brands. In recent
years, though, as the size of retail firms has increased, more retailers have obtained
sufficient scale economies to develop store brands and use this merchandise to establish a
distinctive identity. Now retailers offer a broad spectrum of store brands, ranging from
lower-price, lower-quality products to products that offer superior quality and
performance compared with national brands. Three examples of store brands are
premium store brands, exclusive brands, and copycat brands.
Premium store brands offer the consumer a product that is comparable to a
manufacturer’s brand in terms of quality, sometimes with modest price savings.
Examples of premium store brands include Kroger’s Private Selection, Tesco Finest
(UK), The Men’s Collection at Saks Fifth Avenue, and Bloomingdale’s Aqua—and
nearly everything Trader Joe’s sells. Although nearly every product in its stores comes
with a Joe-linked label, many of the items are virtually indistinguishable from national-
brand offerings. Consumers even suspect they are the same products, just put into
different bags, as in the case of Stacy’s Pita Chips. Other offerings, like Trader Joe’s
addictive peanut butter cups, even outscore their national-brand counterparts on taste and
quality surveys, where consumers note the darker, additional chocolate relative to a
Reese’s Peanut Butter Cup.
An exclusive brand is developed by a national-brand vendor, often in conjunction
with a retailer, and sold exclusively by the retailer. The simplest form of an exclusive
brand occurs when a national brand manufacturer assigns different model numbers and
has different exterior features for the same basic product sold by different retailers, but
the product is still marketed under the manufacturer’s brand. For example, a Canon
digital camera sold at Best Buy might have a different model number than a Canon
digital camera with similar features available at Walmart. These exclusive models make
it difficult for consumers to compare prices for virtually the same camera sold by
different retailers.
Copycat brands imitate the manufacturer’s brand in appearance and packaging,
generally are perceived as lower quality, and are offered at lower prices. Copycat brands
are plentiful in drugstores and grocery stores. Accordingly, CVS or Walgreens brands
placed next to the manufacturer’s brands often are packaged to look alike too.
In a sense, a generic brand isn’t actually a brand at all and, as such, is neither a
store nor a national brand. Generic brands are labeled with the name of the commodity
and consequently have no brand name distinguishing them. These products target a price-
sensitive segment by offering a no-frills product at a discount price. They are used
typically for prescription drugs and commodities like milk or eggs. Except for
prescription drugs, where the use of generics has increased significantly over the last few
decades, the sales of generics have declined significantly
Stocking national brands is a double-edged sword for retailers. On the one hand,
many customers have developed loyalty to specific national brands. They patronize only
retailers selling this national-brand merchandise. This loyalty toward the national brand
develops because customers know what to expect from the products and like them. They
trust the brand to deliver consistent quality. Every bottle of Chanel No. 5 will have the
same fragrance, and every pair of Levi’s 501 jeans will have the same fit. In addition, the
availability of national brands can affect customers’ image of the retailer. If a retailer
does not offer the national brands, customers might view its assortment as lower in
quality, with a resulting loss of profits. Even Amazon, which strongly pushes its own
offerings on everything from batteries to baby wipes, knows that it had better have
Duracell and Huggies among its listings too, to keep customers happy.
f. Buying National-Brand Merchandise
For many types of merchandise, particularly fashion apparel and accessories,
buyers regularly visit with vendors in established market centers. Wholesale market
centers have permanent vendor showrooms that retailers can visit. At specific times
during the year, these wholesale centers host market weeks, during which buyers make
appointments to visit the various vendor showrooms. Vendors that do not have permanent
showrooms at the market center lease temporary space to participate in market weeks.
Probably the world’s most well-known wholesale market center for many
merchandise categories is in New York City. The Fashion Center, also known as the
Garment District, is located from Fifth to Ninth Avenues and from 34th to 41st Streets.
Thousands of apparel buyers visit every year for five market weeks and numerous annual
trade shows. The Garment District hosts thousands of showrooms and factories. There are
also major wholesale market centers in London, Milan, Paris, and Tokyo. The United
States has various regional wholesale market centers—like the Dallas Market Center
(positioned as the world’s most complete wholesaler) or the Atlanta Merchandise Mart—
that smaller retailers rely on to view and purchase merchandise.
Trade shows provide another opportunity for buyers to see the latest products and
styles and interact with vendors. Vendors display their merchandise in designated areas
and have sales representatives, company executives, and sometimes even celebrities
available to talk with buyers as they walk through the exhibit area. For example,
consumer electronics buyers always make sure that they attend the annual Consumer
Electronics Show (CES) in Las Vegas, the world’s largest trade show for consumer
technology (www.cesweb.org). The most recent show was attended by 171,000 people
(representing more than 160 countries), such as vendors, developers, and suppliers of
consumer technology hardware, content, technology delivery systems, and related
products and services.16 Nearly 4,400 vendor exhibits take up 2.9 million square feet of
exhibit space, showcasing the very latest products and services.17 Vendors often use CES
to introduce new products, including the first camcorder (1981), high-definition
television (HDTV, 1998), Internet protocol television (IPTV, 2005), 3D printers (2014),
and virtual reality (2015).
In the COVID-19 era, the 2021 CES will be completely virtual, which planners
hope will allow retailers to interact with even more vendors, using digital search tools.18
Such necessary shifts undermine some of the benefits of conventional trade shows, such
as stumbling on an unexpected surprise that inspires the retailer just by walking the
aisles, but they might offer other benefits, if vendors can gain access to smaller retailers
that in the past might not have been able to attend the shows in person.
When attending market weeks or trade shows, buyers and their supervisors
typically make a series of appointments with key vendors. During these meetings, the
buyers discuss the performance of the vendors’ merchandise during the previous season,
review the vendors’ offerings for the coming season, and possibly place orders for the
coming season. These meetings take place in conference rooms in the vendors’
showrooms at wholesale market centers. During trade shows, the meetings typically are
less formal. Meetings during market weeks offer opportunities for an in-depth discussion,
whereas trade shows provide the opportunity for buyers to see a broader array of
merchandise in one location and gauge reactions to the merchandise by observing the
level of activity in the vendor’s display area.
Often, buyers do not negotiate with vendors or place orders during the market
week or trade show. They typically want to see what merchandise and prices are
available from all the potential vendors before deciding what items to buy. So, after
attending a market week or trade show, buyers return to their offices, review requested
samples of merchandise sent to them by vendors, meet with their supervisors to review
the available merchandise, make decisions about which items are most attractive, and
then negotiate with the vendors before placing an order.
g. Developing and Sourcing Store-Brand Merchandise
Larger retailers that offer a significant amount of store-brand merchandise, such
as Costco (discussed in Retailing View 13.1), Kroger, H&M, IKEA, and Walgreens, have
large divisions with people devoted to the development of their store-brand merchandise.
Employees in these divisions specialize in identifying trends, designing and specifying
products, selecting manufacturers to make the products, maintaining a worldwide staff to
monitor the conditions in which the products are made, and managing facilities to test the
quality of the manufactured products. Returning to the example of Costco, we mentioned
how it repackaged cashews. But in an even more elaborate effort, a buying team
encountered a toy available for $50 from the manufacturer, which other retailers were
selling for $100, and Costco initially planned to sell for $60. But rather than just stop
there, Costco devoted months of effort, advice, collaboration, and planning to work with
the manufacturer to bring its production costs down to $25, after which Costco sold the
toy for $30. Its profit margins were no greater, but because it had the resources to manage
the interaction, it was able to lower the price for customers and likely sell more of the
toy.
Smaller retail chains can offer store brands without making a significant
investment in the supporting infrastructure. Smaller retailers often ask national-brand or
storebrand suppliers to make minor changes to products they offer and then provide the
merchandise with the store’s brand name or a special label copyrighted by the national
brand. Alternatively, store-brand manufacturers can sell to them from a predetermined
stock selection. Hollander makes more than 30 million pillows for companies such as
Beautyrest, Ralph Lauren, and Simmons. It also makes store-brand versions for various
retailers (e.g., Walmart, Amazon).
Retailers use production facilities located in developing economies for much of
their private-label merchandise because of the very low labor costs in these countries.
However, counterbalancing the lower acquisition costs are other expenses that can
increase the costs of sourcing privatelabel merchandise from other countries. These costs
include the relative value of foreign currencies, tariffs, longer lead times, and increased
transportation costs.
Short-term foreign currency fluctuations are common and sometimes severe, such
as when global economies were buffeted by the effects of COVID-19. To protect against
them, retailers might seek to enter into buying contracts with set prices, regardless of how
the currency fluctuates. But in the longer term, the relative value of foreign currencies
can have a strong influence on the cost of imported merchandise. For example, if the
Indian rupee has a sustained and significant increase relative to the U.S. dollar, the cost of
store-brand merchandise produced in India and imported for sale into the United States
will increase.
Tariffs, also known as duties, are taxes collected by a government on imports.
Import tariffs historically have been used to shield domestic manufacturers from foreign
competition. However, the persistent trade wars between the United States and China,
seemingly sparked by political rather than competitive motives, have twisted the impact
of tariffs in unexpected ways. In response, some retailers such as Target require suppliers
to cover the higher costs, and with its market power, it likely will convince them to do so.
Other U.S. retailers are looking to move their manufacturing capabilities to other settings,
rather than China, to avoid the specific tariffs applied to those products.
Whereas the cost factors associated with global sourcing are easy to quantify,
some more subjective issues include quality control, time to market, and sociopolitical
risks. When sourcing globally, it is harder to maintain consistent quality standards than it
is when sourcing domestically. Quality control problems can cause delays in shipments
and adversely affect a retailer’s image.
Another issue related to global sourcing is the problem of policing potential
violations of human rights and child labor laws. Many retailers have had to publicly
defend themselves against allegations of human rights, child labor, or other abuses
involving the factories and countries in which their goods are made. This issue sadly
remains prevalent, especially in the fast-fashion industry.24 However, some retailers
have started being more proactive in enforcing the labor practices of their suppliers. L
Brands, for instance, was one of the first U.S. apparel manufacturers to develop and
implement policies requiring that vendors and their subcontractors and suppliers observe
core labor standards as a condition of doing business. Among other things, this
requirement ensures that each supplier pays minimum wages and benefits; limits
overtime to local industry standards; does not use prisoners, forced labor, or child labor;
and provides a healthy and safe environment.25 Other companies that rely on firms in
low-wage countries for their production also pursue self-policing to avoid unpleasant
surprises and reputational risks.
Many retailers purchasing private-label merchandise use resident buying offices,
which are organizations located in major market centers that provide services to help
retailers buy merchandise. As retailers have become larger and more sophisticated, these
third-party, independent resident buying offices have become less important. Now, many
large retailers have their own buying offices in other countries. To illustrate how buying
offices operate, consider how David Smith of Pockets Men’s Store in Dallas uses his
when he goes to market in Milan. Smith meets with market representative Alain Bordat
of the Doneger Group. Bordat, an English-speaking Italian, knows Smith’s store and his
upscale customers, so before Smith’s visit, he sets up appointments with Italian vendors
that he believes will fit Pockets’s image.
s Rather than negotiating with a specific manufacturer to produce the
merchandise, some retailers use reverse auctions to get quality private-label merchandise
at low prices. In traditional auctions like those conducted on eBay, there is one seller and
many buyers. Auctions conducted by retailer buyers of privatelabel merchandise are
called reverse auctions because there is one buyer (the retailer) and many potential sellers
(the manufacturing firms). In a reverse auction, the retail buyer provides a specification
for what it wants to a group of potential vendors.
h. Negotiating with Vendors
When buying national brands or sourcing private-label merchandise, buyers and
firm employees responsible for sourcing typically enter into negotiations with suppliers.
To understand how buyers negotiate with vendors, consider a hypothetical situation in
which Carolyn Swigler, women’s jeans buyer at Bloomingdale’s, is preparing to meet
with Dario Carvel, the salesperson from Citizens of Humanity, in his office in New York
City. Swigler, after reviewing the merchandise during the women’s wear market week in
New York, is ready to buy Citizens of Humanity’s spring line, but she has some
merchandising problems that have yet to be resolved from last season.
The more Carolyn Swigler knows about her situation and Citizens of Humanity’s,
as well as the trends in the marketplace, the more effective she will be during the
negotiations. Swigler assesses the relationship she has with the vendor. Although Swigler
and Carvel have met only a few times in the past, their companies have had a long,
profitable relationship. A sense of trust and mutual respect has been established, which
Swigler feels will lead to a productive meeting.
Although Citizens of Humanity jeans have been profitable for Bloomingdale’s in
the past, three styles sold poorly last season. Swigler plans to ask Carvel to let her return
some merchandise. Swigler knows from past experience that Citizens of Humanity
normally doesn’t allow merchandise to be returned but does provide markdown money—
funds vendors give retailers to cover lost gross margin dollars due to the markdowns
needed to sell unpopular merchandise.
Vendors and their representatives are excellent sources of market information.
They generally know what is and isn’t selling. Providing good, timely information about
the market is an indispensable and inexpensive marketing research tool. So Swigler plans
to spend at least part of the meeting talking to Carvel about market trends, such as the
threats and opportunities created by more fashionable consumers working from home
during the COVID-19 pandemic, which could be a boon for casual apparel brands like
Citizens of Humanity
Of course, Swigler wants to buy the merchandise at a low price so that she will
have a high gross margin. In contrast, Carvel wants to sell the jeans at a higher price
because he is concerned about Citizens of Humanity’s own margins. Two factors that
affect the price and gross margin are margin guarantees and slotting allowances.
At times in the past, Citizens of Humanity has offered Swigler discounted prices
to take excess merchandise. The excessive merchandise arises from order cancellations,
returned merchandise from other retailers, or simply an overly optimistic sales forecast.
Although Swigler can realize higher-thannormal gross margins on this merchandise or
put the merchandise on sale and pass the savings on to customers, Bloomingdale’s has to
preserve its image as a fashion leader, and therefore Swigler is not very interested in any
excess inventory that Citizens of Humanity has to offer.
Swigler would like to negotiate for a long period in which to pay for merchandise.
A long payment period improves Bloomingdale’s cash flow, lowers its liabilities
(accounts payable), and can reduce its interest expense if it is borrowing money from
financial institutions to pay for its inventory. But Citizens of Humanity also has its own
financial objectives it wants to accomplish and accordingly would like to be paid soon
after it delivers the merchandise.
Retailers often negotiate with vendors for an exclusive arrangement so that no
other retailer can sell the same item or brand. Through an exclusive arrangement, the
retailer can differentiate itself from competitors and realize higher margins due to
reduced price competition. In some cases, vendors also benefit by making sure that the
image of retailers selling their merchandise is consistent with their brand image. For
example, Prada might want to give exclusive rights for its apparel to only one store in a
major market, such as Neiman Marcus. In addition, an exclusive arrangement offers a
monopoly to the retailer and thus a strong incentive to promote the item.
Retailers often share the cost of advertising through a cooperative arrangement
with vendors known as cooperative (co-op) advertising—a program undertaken by a
vendor in which the vendor agrees to pay for all or part of a pricing promotion. As a
fashion leader, Bloomingdale’s advertises heavily. Swigler would like Citizens of
Humanity to support an advertising program with a generous advertising allowance.
Transportation costs can be substantial, though this concern is less prominent for
Citizens of Humanity jeans because its merchandise has a relatively high unit price and
low weight. Nonetheless, the question of who pays to ship merchandise from the vendor
to the retailer remains a significant negotiating point. Now that some of the issues
involved in the negotiation between Citizens of Humanity and Bloomingdale’s are on the
table, the next presents some tips for effective negotiations.
Swigler and Carvel will be meeting virtually over Zoom. In addition to allowing
for safe social distancing, this communication channel gives them a way to remain on
equal ground during their meeting. They both will have ready access to important
information, and they can call in virtual secretarial and supervisory assistance. From a
psychological perspective, people generally feel more comfortable and confident in
familiar surroundings. However, if they are working from home, they could suffer
unforeseen interruptions or distractions. Selecting the location for a negotiation, whether
virtual or in person, consequently is an important decision.
Suppose Swigler starts the meeting with, “Dario, you know we’ve been friends
for a long time. I have a personal favor to ask. Would you mind taking back $10,000 in
shirts?” This personal plea puts Carvel in an uncomfortable situation. Swigler’s personal
relationship with Carvel isn’t the issue here and shouldn’t become part of the negotiation.
An equally detrimental scenario would be for Swigler to say, “Dario, your line is terrible.
I can hardly give the stuff away. I want you to take back $10,000 in jeans. After all,
you’re dealing with Bloomingdale’s. If you don’t take this junk back, you can forget
about ever doing business with us again.” Threats usually don’t work in negotiations.
They put the other party on the defensive. Threats may actually cause negotiations to
break down, in which case no one wins.
The best way to separate the people from the business issues is to rely on
objective information. Swigler must know exactly how many jeans need to be returned to
Citizens of Humanity or how much markdown money is necessary to maintain her gross
margin. If Carvel argues from an emotional perspective, Swigler will stick to the
numbers. For instance, suppose that after Swigler presents her position, Carvel says that
he’ll get into trouble if he takes back the merchandise or provides markdown money.
With the knowledge that Citizens of Humanity has provided relief in similar situations in
the past, Swigler should ask what Citizens of Humanity’s policy is regarding customer
overstock problems. She should also show Carvel a summary of Bloomingdale’s buying
activity with Citizens of Humanity over the past few seasons and an analysis of recent
trends, demonstrating how shifting the assortment can benefit both of them. Using this
approach, Swigler forces Carvel to acknowledge that providing assistance in this
overstock situation—especially if it has been done in the past—is a small price to pay for
a long-term profitable relationship.
i. Strategic Relationships
Traditionally, relationships between retailers and vendors have focused on
haggling over how to split up a profit pie.30 The relationships were basically win–lose
encounters because when one party got a larger portion of the pie, the other party got a
smaller portion. Both parties were interested exclusively in their own profits and
unconcerned about the other party’s welfare. These relationships continue to be common,
especially when the products being bought are commodities and have limited impact on
the retailers’ performance. In these situations, there is no benefit to the retailer from
entering into a strategic relationship.
A strategic relationship, also called a partnering relationship, emerges when a
retailer and vendor are committed to maintaining the relationship over the long term and
investing in opportunities that are mutually beneficial to both parties. In this relationship,
it is important for the partners to take risks to expand the profit pie to give the
relationship a strategic advantage over other companies. In addition, the parties have a
longterm perspective: They are willing to make short-term sacrifices because they know
that they will get their fair share in the long run.
Strategic relationships are win–win relationships. Both parties benefit because the
size of the profit pie increases. Both the retailer and the vendor increase their sales and
profits, because the parties in strategic relationships work together to develop and exploit
joint opportunities. Innovative collaboration efforts, can lead to previously unforeseen
rewards too. Partners in these relationships depend on and trust each other heavily. They
share goals and agree on how to accomplish those goals, and as a result they reduce the
risks of investing in the relationship and sharing confidential information. Even as the
power in supply chains has shifted from large manufacturers to large retailers such as
Walmart and Target, the relationships are generally not adversarial. Instead, these supply
chain partners share point-of-sale data and collaborate and cooperate on issues such as
which items to buy, how much, and when. As a result of these collaborative efforts,
financial performance throughout the supply chain has been enhanced.
In the awareness stage, no transactions have taken place. This phase might begin
with the buyer seeing some interesting merchandise at a retail market or an ad in a trade
magazine. The reputation and image of the vendor can play an important role in
determining if the buyer moves to the next stage.
During the exploration phase, the buyer and vendor begin to explore the potential
benefits and costs of a partnership. At this point, the buyer may make a small purchase
and try to test the demand for the merchandise in several stores. In addition, the buyer
will get information about how easy it is to work with the vendor.
Eventually, the buyer has collected enough information about the vendor to
consider developing a longer-term relationship. The buyer and the vendor determine if
there is the potential for a win–win relationship. They begin to work on joint promotional
programs, and the amount of merchandise sold increases.
If both parties continue to find the relationship mutually beneficial, it moves to
the commitment stage and becomes a strategic relationship. The buyer and vendor then
make significant investments in the relationship and develop a long-term perspective
toward it. It is difficult for retailer–vendor relationships to be as committed as some
supplier– manufacturer relationships. Manufacturers can enter into monogamous (sole-
source) relationships with other manufacturers. However, an important function of
retailers is to provide an assortment of merchandise for their customers. Thus, they must
always deal with multiple, sometimes competing suppliers.
The glue in a strategic relationship is trust. Trust is a belief that a partner is honest
(reliable and stands by its word) and benevolent (concerned about the other party’s
welfare). When vendors and buyers trust each other, they are more willing to share
relevant ideas, clarify goals and problems, and communicate efficiently. Information
shared between the parties becomes increasingly comprehensive, accurate, and timely.
There is less need for the vendor and buyer to constantly monitor and check up on each
other’s actions, because each believes the other will not take advantage, even when given
the opportunity.
To share information, develop sales forecasts together, coordinate deliveries, and
achieve their sustainability common goals, Walmart and its vendors must have open and
honest communication. This requirement may sound easy in principle, but most
businesses don’t like to share information with their business partners. They believe their
business is none of the other firm’s business. But open, honest communication is a key to
developing successful and profitable relationships.40 Buyers and vendors in a
relationship need to understand what is driving each other’s business, their roles in the
relationship, each firm’s strategies, and any problems that arise over the course of the
relationship. The CPFR (collaborative planning, forecasting, and replenishment) systems,
in which retailers and their vendors share forecasts and collaborate on replenishment
issues, are an example of open communications.
j. Legal, Ethical, and Social Responsibility Issues for Buying Merchandise
Selling counterfeit offerings, whether tangible or intangible, can negatively affect
a retailer’s image and its relationship with the vendor of the legitimate brand. Counterfeit
merchandise includes goods made and sold without the permission of the owner of a
trademark or copyright. Trademarks and copyrights are intellectual property, which is
intangible and created by intellectual (mental) effort as opposed to physical effort. A
trademark is any mark, word, picture, device, or nonfunctional design associated with
certain merchandise (e.g., the crown on a Rolex watch, the red Levi’s tag on the back
pocket of a pair of jeans). A copyright protects the original work of authors, painters,
sculptors, musicians, and others who produce works of artistic or intellectual merit. This
book is copyrighted, so these sentences cannot be used by anyone without the consent of
the copyright owners.
When it comes to tangible products, estimates suggest the counterfeit trade is
worth close to $4.5 trillion.42 Counterfeiters of name-brand merchandise, such as
handbags and clothing, have improved their techniques, such that the quality of the fakes
is better, and it has become more difficult to distinguish fake from real merchandise. In
their efforts to deal with this expensive problem, some luxury brands take legal action
against online retailers that they allege are facilitating sales of counterfeit goods. Louis
Vuitton was awarded $23 million after challenging 200 Chinese retailers that were selling
knockoffs of its branded products;43 Amazon and Valentino recently joined forces to
hold 10 defendants accountable for violating Amazon’s counterfeiting policies and
Valentino’s intellectual property rights to Garavani Rockstud shoes.
Gray-market goods, also known as parallel imports, involve the flow of
merchandise through distribution channels, usually across international borders, other
than those authorized or intended by the manufacturer or producer.46 In the perfume
category, designer fragrance suppliers in the United States sell their brands such as
Davidoff, Dolce & Gabbana, or Calvin Klein perfumes directly to department stores and
other high-end retailers. They do not sell to Walmart, CVS, or Target. However, in
Europe and Asia, most suppliers sell their wares to distributors and wholesalers, which
can earn profits by selling some of these fragrances to mass retailers in the United States.
Thus, the perfumes go from U.S. suppliers to international distributors, then back to U.S.
mass merchandisers before reaching U.S. consumers.
Diverted merchandise is similar to gray-market merchandise except there need not
be distribution across international borders. Suppose, for instance, that the fragrance
manufacturer Givenchy grants an exclusive scent to Saks Fifth Avenue. The Saks buyer
has excess inventory and sells it at a low price to a discount retailer in the United States,
such as an off-price retailer. In this case, the merchandise has been diverted from its
legitimate channel of distribution, and Saks would be referred to as the diverter.
The Robinson-Patman Act, passed by the U.S. Congress in 1936, potentially
restricts the prices and terms that vendors can offer to retailers. The act makes it illegal
for vendors to offer different terms and conditions to different retailers for the same
merchandise and quantity. Sometimes called the Anti-Chain-Store Act, it was passed to
protect independent retailers from chain-store competition. Thus, if a vendor negotiates a
good deal on the issues discussed in the previous section (price, advertising allowance,
markdown money, transportation), the Robinson-Patman Act requires that the vendor
offer the same terms and conditions to other retailers.
Commercial bribery occurs when a vendor or its agent offers or a buyer asks for
“something of value” to influence purchase decisions. Say a salesperson for a ski
manufacturer takes a sporting goods retail buyer to lunch at a fancy private club and then
proposes a ski weekend in Vail. These gifts could be construed as bribes or kickbacks,
which are illegal unless the buyer’s manager is informed of them. To avoid such
problems, many retailers forbid employees to accept any gifts from vendors. Other
retailers have a policy that it is fine to accept limited entertainment or token gifts, such as
flowers or wine for the holidays. In any case, retailers want their buyers to decide on
purchases solely on the basis of what is best for the retailer.
A chargeback is a practice used by retailers in which they deduct money from the
amount they owe a vendor. Retailers might use a chargeback if a vendor has not met the
agreed-on terms, such as improperly applying labels to shipping containers or sending
incomplete shipments. Chargebacks are especially difficult for vendors because once the
money is deducted from an invoice and the invoice is marked “paid,” it is difficult to
dispute the claim and get the amount back. Vendors sometimes argue that the
chargebacks retailers take actually are not justifiable and are unethical.
Similar to slotting allowances, buybacks, also known as stocklifts or lift-outs, are
activities engaged in by vendors and retailers to get old products out of retail stores and
new products in their place. Specifically, in a buyback situation, either a retailer allows a
vendor to create space for its merchandise by “buying back” a competitor’s inventory and
removing it from the retailer’s system, or the retailer forces a vendor to buy back slow-
moving merchandise. A vendor with significant market power can violate federal
antitrust laws if it stocklifts from a competitor so often that it shuts the competitor out of
a market, but such cases are difficult to prove.
Exclusive dealing agreements occur when a vendor restricts a retailer to carrying
only its products and nothing from competing vendors. For example, Ford may require
that its dealers sell only Ford cars and no cars made by General Motors. The effect of
such arrangements on competition is determined by the market power of the vendor. For
example, it may be illegal for a market leader like Coca-Cola to sell its products to a
small supermarket chain only if the chain agrees not to sell a less popular cola product
like RC Cola.
A tying contract exists when a vendor requires that a retailer take a product it
doesn’t necessarily desire (the tied product) to ensure that it can buy a product it does
desire (the tying product). Tying contracts are illegal if they substantially lessen
competition or tend to create a monopoly. But the complaining party has the burden of
proof. Thus, it is typically legal for a vendor to require that a buyer buy all items in its
product line. For example, if a gift store sued a postcard manufacturer for requiring that it
purchase as many “local view” postcards (the tied product) as it did licensed Disney
character postcards (the tying product), the court would probably dismiss the case
because the retailer would be unable to prove a substantial lessening of competition.
