Decision SupportThe impacts of e-tailer's private label on the sales mode selection: From the perspectives of economic and environmental sustainability
Introduction
In the last decade, firms have increasingly developed their online channels and turned to online retailing through e-commerce platforms (also called e-tailers). One indicator of this trend is the growth of global retail e-commerce sales, which have already reached $3.5 trillion in 2019 and even under the pandemic, it was estimated to be $3.914 trillion in 2020 (eMarketer, 2020). Amazon, the leading e-tailer in the United States, has achieved close to $280.5 billion net sales in 2019. The Chinese corporation Alibaba Group recorded an e-commerce revenue of $47 billion in 2020 (statista, 2020a). These prominent e-tailers, giving manufacturers tremendous opportunities to increase their sales, have recently developed their private labels. For example, in 2009, Amazon introduced its first private label AmazonBasics which offers household goods and electronics and becomes the most popular private label now (MarketplacePulse, 2020). Kogan.com, an e-commerce platform in Australia, owned 20 private labels and sales under these labels accounted for 49.7% of overall gross profit in 2019 (Kogan.com, 2020). Besides, JD.com and Alibaba Group also started to establish their private labels in 2019.
In practice, manufacturers can sell their products via e-tailers under two sales modes: agency selling and reselling. Under agency selling, the manufacturer sells products directly to consumers and shares profits with the e-tailer based on a percentage fee. While under reselling, the e-tailer purchases products from the manufacturer and then resells to consumers. Actually, most e-tailers offer both agency selling and reselling to manufacturers. For example, on Amazon, 53% of paid units were sold under agency selling in the second quarter of 2020 (statista, 2020c). On JD.com, revenue from reselling accounted for about 88.5% of the total revenue in 2019 (statista, 2020d).
Though the sales mode selection problem has already attracted attention from both firms and scholars, the e-tailers’ private labels may influence manufacturers’ decisions. First, under reselling, the e-tailer may reduce orders from the manufacturer to increase its own private label products’ sales. Second, the private label's and the manufacturer's products will compete in end markets. In practice, many manufacturers have complained that Amazon favored its private labels at the expense of sellers on the platform, especially the agency-selling sellers (YahooFinance, 2021). Further, Amazon's sales data reveals that the percentage of product sales from agency selling and reselling are related to private labels (Amazon, 2021). As shown in Table 1, in the category of softlines, the platform's private labels were relatively popular and agency selling represented 72% of total sales. However, in the category of consumables, private labels had poor performance and agency selling only represented 59% of total sales. The difference in the percentage of sales illustrates that manufacturers’ preferences for sales modes may depend on the competitive private labels.
Thus, in this paper, we investigate the manufacturer's sales mode selection problem when the e-tailer introduces the private label products. Our research questions are as follows: (1) Facing the e-tailer's private label, when should a manufacturer adopt agency selling versus reselling? (2) Given the sale mode, how should the manufacturer decide the wholesale price or sales quantities? Also, how should the e-tailer decide the sales/order quantities? (3) Do there exist incentive alignment opportunities for both the manufacturer and the e-tailer to prefer one specific sales mode? (4) Considering the supply chain sustainability, which sales mode is more environmentally friendly? Can one sales mode achieve both economic sustainability and environmental sustainability? (5) How would the results change if the manufacturer and the e-tailer have asymmetric production or sales costs for online retailing?
To answer these questions, we develop a stylized model comprising a manufacturer and an e-tailer. The manufacturer sells his products via the e-tailer under either agency selling or reselling. Also, the e-tailer sells private label products which compete with the manufacturer's in the downstream market. We first analyze the manufacturer's and the e-tailer's optimal decisions on sales quantities. Then we discuss whether two firms’ preferences over the sales modes can be reconciled from the economic sustainability perspective and compare the environmental performance of two sales modes from the environmental sustainability perspective. Our findings are mainly as follows.
First, the manufacturer's preference over sales modes depends on the percentage fee and his brand advantage. When the percentage fee is low, he prefers agency selling because he can reserve the right to decide sales quantities and keep most of his profits. When the percentage fee is moderate and the brand advantage is low, he also chooses agency selling, where he can obtain relatively high income from unit product. Second, the e-tailer prefers agency selling when the percentage fee is moderate and the brand advantage is high or when the percentage fee is high. With a high percentage fee, the e-tailer can gain a lot from the manufacturer's profits. And with a high brand advantage, the right to decide sales quantities is less valuable, thus the e-tailer is more profitable under agency selling. Third, though the preferences of the manufacturer and the e-tailer seem opposite, we find that they can achieve incentive alignment under agency selling if the percentage fee and the brand advantage are moderate. Fourth, when considering the sales modes’ environmental impacts, two influence factors, total sales quantities and manufacturer's market share, play important roles. In addition, the manufacturer, the e-tailer and the environment can reach the “win-win-win” situation under agency selling. More interestingly, if the manufacturer's production technology is enough green, the optimal sales mode with economic sustainability is certainly the one with environmental sustainability. Fifth, if the sales costs are relatively high, the manufacturer is reluctant to be in charge of sales under agency selling, thus the above three parts can also reach the “win-win-win” under reselling.
This study makes several contributions. First, the introduction of e-tailer's private labels makes the interactions between the manufacturer and the e-tailer more complicated. Thus, it is significant to take the private labels into consideration when analyzing the sales mode selection problem, which to the best of our knowledge, has not been studied before. Second, we consider both the manufacturer's and the e-tailer's preferences over the sales modes and identify the “win-win” situation. Our findings can not only explain why different sales modes are adopted in practice but also guide e-tailers and manufacturers to develop online retailing in the future. Third, e-commerce helps manufacturers increase product sales but simultaneously enhances the environmental burden due to production expansion. However, few studies analyze e-commerce from the environmental sustainability perspective. In this paper, we compare the environmental performance of two sales modes and the results are insightful for governments that focus on reducing pollution.
The remainder of the study is organized as follows. We review the related literature in Section 2. Then we present our main model in Section 3. In Section 4, we analyze the model and derive the results. Section 5 shows the environmental performance of two sales modes. Section 6 contains model extensions to confirm the robustness of our main results and derive new findings. Finally, we conclude the study and provide management insights in Section 7.
Section snippets
Literature review
Our study is related to three streams of research: online sales modes, private labels and supply chain's environmental sustainability.
As online retailing booms, there is a vast literature on two prevalent sales modes, i.e., agency selling and reselling. Some papers studied whether the agency selling mode should be introduced in addition to the reselling mode. Yan, Zhao, and Xing (2019) found that even the manufacturer has the disadvantages of sales efficiency and demand information, he may
Model
We consider a stylized model comprising a manufacturer and an e-tailer where the manufacturer sells products M through the e-tailer and the e-tailer has its own private label products E which will compete with M in the downstream market. For the remainder of the study, we use the pronoun “he” to represent the manufacturer and “she” to represent the e-tailer. The manufacturer can choose one of two sales modes (the superscripts A and R represent these two modes, respectively):
Agency selling (A).
Analysis and results
In this section, we solve the equilibrium outcomes and compare the results under agency selling and reselling. Then we analyze the manufacturer's and the e-tailer's preferences over the sales modes.
Lemma 1 Under agency selling, the equilibrium outcomes are , , , and
Lemma 2 Under reselling, the equilibrium outcomes are
Environmental impact of two sales modes
In addition to the traditional offline sales, e-commerce has already become a main channel for many manufacturers. In 2019, online retail sales surpassed $3.5 trillion, accounting for 14.1% of all retail sales worldwide and this figure is expected to reach 22% in 2023 (statista, 2020b). Online retailing surely provides manufacturers with more opportunities to increase sales, however, it aggravates the environmental burden due to the expansion of production. In Section 4, we compare the two
Positive production costs
In this subsection, we take production costs into consideration. We use and to represent the manufacturer's and the e-tailer's production costs for unit sales and their profit functions under two sales modes are as follows.
Compared to the e-tailer, the manufacturer owns more professional production technology and thus he can produce products with fewer costs. However, the e-tailer with less experience in production
Conclusion
This paper studies two common sales modes, agency selling and reselling. Under agency selling, the manufacturer sells his products to consumers and shares profits with the e-tailer; while under reselling, the e-tailer, as a traditional retailer, orders products from the manufacturer and resells to consumers. We investigate the manufacturer's and the e-tailer's preferences over these two sales modes when the e-tailer owns her private label products. We find that when the percentage fee is high,
Declaration of Competing Interest
None.
Acknowledgments
We thank the editors and anonymous reviewers for their insightful and constructive comments. This work was supported by the National Social Science Fund of China under Grant 15BGL074 and 16BGL079.
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