Not All Retailers Are Sold on Group Buying
Production & Operations Management, 2011
To group, or not to group: That’s the question for retailers considering the strategy of cooperative buying. Despite lower wholesale prices, retailers may not always benefit from pooling their purchasing power, especially when they are competing with each other, according to Assistant Professor Rachel Chen.
Certainly, Chen says, competition may not be a concern for retailers with similar market bases and operational efficiencies. “Homogeneous retailers should always participate in cooperative buying, even if they are competitors,” she explains. “This is consistent with the observation that co-ops members are often of similar sizes and interests.”
In practice, retailers often face the opportunity of group purchase. WorldWide Retailer Exchange, the premier integrated worldwide exchange community, promotes the idea among its members, who are mostly large retailers (e.g., Kroger, Safeway, CVS, Walgreens, etc.). In Europe, purchasing consortia are well established for the retail sector. In the U.S. and Canada, for example, with the majority of furniture coming from overseas, independent retailers who do not get on board with a buying group often find themselves having a hard time surviving.
However, not all retailers are sold on group buying. While this can be explained by coordination efforts or purchase timing required to join in, Chen shows that competition between retailers could also deter cooperation. Her research, believed to be the first that studies group buying in a distribution channel, offers another possible explanation of why some retailers may not join group purchase.
“We found that if the asymmetry level between two retailers is high, cooperation in purchasing can be detrimental to the larger (or more efficient) one,” explains Chen, who recommends that retailers that are different from the competitors should look closely at the competition level and negotiate a relationship that will allow them to benefit from joint purchasing.
Chen teamed up with her visiting Ph.D. student Paolo Roma from University of Palermo, Italy, to research whether cooperative buying always produces benefit for retailers. Their work, “Group Buying of Competing Retailers,” is forthcoming in the journal Production & Operations Management.