If alcohol is on your annual holiday shopping list, you could soon have more choice. A University of Toronto researcher suggested a retail reform that would put a greater selection of products on LCBO shelves while increasing the Crown corporation’s profits by 16%.
Francis Guiton, a PhD Candidate with the Department of Economics, examined data from the Liquor Control Board of Ontario’s (LCBO) retail outlets. The data, obtained through a Freedom of Information request, details the inventories, product prices, and sales figures for each of the LCBO’s locations.
In Misaligned Objectives and Within-Firm Competition in Retail Chains, Guiton examined how performance-based bonuses paid to store managers effect the company’s profits and consumers’ interests.
“Individual store managers have the ability to choose which products to carry at their store, but pricing decisions are centralized and uniform across all the LCBO stores and managers take retail prices as given when making their inventory decisions,” Guiton explained in the paper. “Ultimately, the extent to which store managers behave in their own self-interest is correlated with the size of their store and the number of same-district stores in their neighbourhood.”
Across the retail industry, annual performance bonuses are a common incentive for retail managers. In the context of the LCBO, Guiton found that those bonuses work for the managers, but they do not necessarily work for the company because store managers compete with other LCBO outlets in their district.
“Within the LCBO, store managers, driven by annual bonuses tied to their stores’ profits, engage in competition for customers and higher bonus payments,” said Professor of Economics Victor Aguirregabiria, who sits on Guiton’s supervision committee. “While this competition enhances effort and sound decision-making, it introduces a misalignment between individual managers’ objectives and the company’s goals.”
Results of the analysis show a significant loss of potential revenue due to the misalignment. To improve the situation, Guiton proposes empowering district managers to bring store managers in line with company goals and reduce store managers’ cannibalization of each other’s customer base.
“The LCBO’s mandate is to maximize revenue for the Ontario government,” Guiton said. “Using a structural model of store-level inventory decision-making, my paper finds that in the context of the LCBO, competitive interactions between store managers generates a loss in profit for the organization of approximately 16%. Given this evidence, retail chains should consider enhancing the role of district managers within their organization to encourage store managers to consider the impact of their decisions on neighbouring stores.”
The job market paper is a valuable contribution.
“Francis Guiton’s investigation into how performance-based incentives in retail stores can create a disconnect between the goals store managers reach, and the goals the company wants to reach, is a useful example of the on-the-ground benefits of applied economics research to business,” said Professor Avi Goldfarb, one of Guiton’s dissertation supervisors.
Return to the Department of Economics website.
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