Tuesday, October 13, 2009

Disney Stores Plan Makeover

According to the New York Times, Disney plans a major makeover of its stores in the year ahead. I found this story fascinating both because of Disney's retail struggles in recent years, as well as because the news comes just one day after we learn that Oliver Williamson won the Nobel Prize. Williamson's work actually informs us a great deal as we analyze Disney's retail strategy.

Williamson's theories help us understand the merits of vertical integration. In the Disney store situation, we have a case of forward integration, with a company choosing to operate its own retail locations. Williamson basically details how we can think about why companies might wish to be forward integrated in some situations and why they might not choose to do so. He argues we should always compare the costs of performing activities inside the firm vs. cooperating with other firms through contracts and markets.

Why should Disney be in the retail business? Forward integration makes sense to the extent that Disney is doing things at the retail level that are complex, costly, and difficult to do through contracts with outside parties. If contracts work efficiently, then we would allow others to retail Disney products and not be in the retail business at all. To the extent that Disney stores simply sell products like any other retailer, it's hard to justify forward integration. That's why many questioned Disney's store strategy in recent years. In fact, Disney itself tried to outsource the stores to Children's Place, but it didn't work out.

However, to the extent that the stores are true interactive experiences, then Disney may wish to control those retail outlets themselves and can secure key benefits from that ownership of the stores. The direct control enables them to use the stores to further differentiate the brand in the marketplace, raise willingness-to-pay for Disney products, communicate with and learn directly from customers, and drive synergistic benefits across the Disney portfolio (think Apple). Contracting with outside parties to create this type of experience for consumers would be costly and risky perhaps; thus, Disney wants to own this entire interaction with its customers. We'll see if the new strategy works out. The investment will be substantial. However, if Disney wishes to stay in the store business, moving toward a more "experience-oriented" retail strategy provides more sound justification for forward integration than Disney had in the past.


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Christopher said...

Your suggestion reminds me of the Mars strategy with M&M World in Manhattan. Everything from the visuals to the scent of chocolate pumped through the vents is an experience. Disney could have their movies playing, characters inside and outside the stores, much like M&M World has the M&M characters roaming the store, and offer visitor incentives such as every ten-thousandth visitor gets a free two-day pass to DisneyWorld, etc. Just a thought...