Chapter 3 - Retail Institutions by Ownership and Store-Based Strategy Mix

Retail Institutions by  Ownership and Store-based

Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall

Chapter Objectives    

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Identify Identif y ways how how retail institut i nstitutions ions are classified. Describe retail institutions characterized by ownership. Describe definition of classification by strategy mix. Describe the wheel of retailing, scrambled merchandising and retail life cycle. Examine characteristics of institutions with store-based strategy mixes. Contrast the service-based retailing with goods-based retailing.

Classifications of Retailers

Figure 4-1: A Classification Method for Retail Institutions I Ownership II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix

Forms of Ownership 1. Independent 2. Chain  3. Franchise 4. Leased department 5.  Vertical marketing system 6. Consumer cooperative

1. Independent Retailers  2.2

million independent U.S. retailers  Account for one-third of total store sales  70% of independents operated by owners and their families  Why so many? Ease of entry

Competitive State of  Independents  Advantages Disadvantages  Flexibility in formats,  Lack of bargaining power locations, and strategy   with suppliers  Control over investment  Lack of economies of  costs, personnel scale functions, and strategies  Labor intensive operations – less  Personal image computerization  Consistency and  Over-dependence on independence owner  Strong entrepreneurial  Limited long-run leadership planning

2. Chain Retailers Operate

multiple outlets under common ownership Engage in some level of centralized or coordinated purchasing and decision making In the U.S., there are roughly 110,000 retail chains operating about 900,000 establishments Give examples

Competitive State of  Chain stores  Advantages  Bargaining

power  Cost efficiencies  Efficiency maintained by computerization,  warehouse sharing, and other functions  Defined management philosophy   Considerable efforts in long-run planning

Disadvantages  Limited

flexibility   Higher investment costs  Complex managerial control  Limited independence among personnel

3. Franchising Franchise

is a contractual agreement between a franchisor and a retail franchisee that allows the franchisee to conduct business under an established name and according to a given pattern of business Franchisee pays an initial fee and a monthly  percentage of gross sales in exchange for the exclusive rights to sell goods and services in an area

Franchise Formats Product/ Trademark Business Format  franchisee acquires  franchisee receives the identity of a assistance: location, franchisor by agreeing quality control, to sell products accounting systems, and/or operate under startup practices, the franchisor name management training  franchisee operates  common for autonomously  restaurants, real 2/3 of retail estate franchising sales

Franchise licensed in Malaysia STATUS LOCAL FRANCHISE FOREIGN FRANCHISE TOTAL

TOTAL 426 240 666

% 64 36 100

List of approved Registrations by sector N0. 1. 2. 3. 4. 5. 6.

SECTOR

FOOD CLOTHING & ACCESSORIES SERVICE & MAINTENANCE LEARNING CENTRE& NURSERY HEALTH & BEAUTY CARE CONVENIENCE SHOP & SUPERMARKET 7. ICT & ELECTRONICS 8. OTHER BUSINESSES TOTAL

TOTAL PERCENTAGE 212 34 73 12 69 11 71 11 65 10 16 3 26 87 619

4 14 100

Figure 4-5: Business Qualifications Sought by McDonald’s for Potential Franchisees Experience

Financial resources

Growth capability Planning ability

Strong credit Ideal Franchisee

Ability to manage finances

Customer and employee focus Willingness to complete training

Full-time commitment

Figure 4-6: Structural Arrangements in Retail Franchising

Wholesaler-Retailer Structural Franchising Arrangements A wholesaler sets up a franchise system and grants franchises to individual retailers Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a  wholesaling organization Voluntary:

Competitive state of franchising  Advantages  low capital required  acquisition of wellknown names  operating/ management skills taught  cooperative marketing possible  exclusive rights  less costly per unit

Disadvantages  over-saturation could occur  franchisors may  overstate potential  contractual confinement  agreements may be cancelled or voided  royalties are based on sales, not profits

From the Franchisor’s Perspective Benefits  national or global presence possible  qualifications for franchisee/operations are set and enforced  money obtained at delivery   royalties represent revenue stream

Potential Problems  potential for harm to reputation  lack of uniformity may  affect customer loyalty   ineffective franchised units may damage resale  value, profitability   potential limits to franchisor rules

4. Leased Departments  A leased department is a department in a retail store that is rented to an outside party  The proprietor is responsible for all aspects of its business and pays a percentage of sales as rent The department store sets operating restrictions to ensure consistency and coordination Examples ? 

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Competitive State of Leased Departments – for the store Benefits  provides one-stop shopping to customers  lessees handle management, Display  and reordering  Regular store personnel don’t have to be

involved  reduces store costs  provides a stream of  revenue

Potential Pitfalls  lessees may negate store image  procedures may conflict  with department store  problems may be blamed on department store rather than lessee

Competitive State of Leased Departments – Departments  – for  for the lessee Benefits  Stores have steady  customers-generate immediate sales  Some costs are reduced through shared facilities  Image is enhanced by  popular stores

Potential Pitfalls Inf lexibility in the time  Inflexibility they open and close the store  Goods and service lines are usually restricted successful , stores may   If successful, raise rent or not renew leases  In store location may  not generate the sales expected

5. Vertical marketing system  A vertical marketing marketing system (VMS) is one in  which the main members of a distribution channel, producer, wholesaler, and retailer work together as a unified unif ied group in order to to meet consumer needs.

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5. Vertical marketing system In conventional conventional marketing systems, producers,  wholesalers, and retailers retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits profits comes comes at the expense of other other members, conflicts can arise that reduce profits for the entire channel. channel. To To address this problem, more and more companies are forming vertical marketing systems.

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6. Consumer Cooperatives Retail firm owned by customer members EXAMPLES: Koperasi polis How/why started?  Advantages/Disadvantages

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 www.skm.gov.my 

Malaysian Cooperatives  

up to 31 December 2010. The total number of registered co-operatives has increased from 7,215 in 2009 to 8,146 in 2010, an increase of 14.3 per cent with membership of 6.6 million.

Figure 4-1: A Classification Method for Retail Institutions I Ownership II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix

Retailer Strategy Mix 

 A strategy mix is the firm’s particular combination of: store location operating procedures goods/services offered pricing tactics store atmosphere customer services promotional methods

Destination Retailer  A destination store is a retail operation that consumers find attractive for particular reasons and are therefore willing to make a special trip solely for the purpose of shopping at that location. Typically, destination stores are unique in certain respects in order to entice shoppers to come to them, even if the distance or location is not convenient.

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Earning Destination Retailer Status Must

be price-oriented and cost efficient Must be upscale Must be convenient Should offer a dominant assortment Should offer superior customer service Must be innovative or exclusive

3 key concepts in planning retail strategy mixes 1.  Wheel of retailing 2. Scrambled merchandising 3. Retail life cycle

 Video  Wheel of retailing 

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Wheel of retailing 

 A better known theory of retailing “ wheel of  retailing” proposed by Maclcomb McNair says,

1. New retailers often enter the market place with low prices, margins, and status . The low prices are usually the result of some innovative costcutting procedures and soon attract competitors. 2. With the passage of time, these businesses strive to broaden their customer base and increase sales. Their operations and facilities increase and become more expensive.

Wheel of retailing-contd.. They may move to better up market locations, start carrying higher quality products or add services and ultimately emerge as a high cost price service retailer. 4. By this time newer competitors as low price, low margin, low status emerge and these competitors too follow the same evolutionary process. 5. The wheel keeps on turning and department stories, supermarkets, and mass merchandise  went through this cycles. 3.

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Figure 5-1: The Wheel of Retailing

Lessons of the Wheel of Retailing • Do not lose sight of your prime customer’s price •

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consciousness Beware of the dangers in upgrading target markets – Old segment gets “sticker shock” and new segment does not accept retailer’s revised positioning Do not create opening for new cost-conscious retailer to emerge Employ customer benefit costing to weigh the cost and benefits of specific service upgrades Use unbundled pricing to separately charge for  select services such as delivery, installation etc.

Figure 5-2: Retail Strategy Alternatives

Scrambled Merchandising 

Scrambled merchandising occurs when a retailer adds goods and services that may  be unrelated to each other and to the firms original business

Scrambled Merchandising increases the intertype competition which is competition between the retailers who sell similar particular merchandise  while using different formats, such as discount and department stores.

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Figure 5-3: Scrambled Merchandising by a Shoe Store

Retail Life Cycle 

Retail institutions pass through identifiable life stages  introduction  growth  maturity   decline

Figure 5-4: The Retail Life Cycle

How Retail Institutions Are Evolving 

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Mergers, diversification, and downsizing Cost-containment and valuedriven retailing

Mergers, Diversification, and Downsizing   Mergers: combinations

of separately owned firms (e.g., Bank of America and Commerce Bank)  Diversification: retailers become active in businesses outside their normal operations (e.g., Yum! Brands)  Downsizing: unprofitable stores are closed or divisions are sold off (e.g., Kmart)

Methods for Cost Containment  Standardizing

procedures, store layouts, store size, and product offerings  Using secondary locations  Placing stores in smaller communities  Using inexpensive construction materials  Using plainer fixtures and displays  Buying refurbished equipment  Joining cooperative buying and advertising  Creatively financing inventories

Table 5-1: Store-Based Retail Strategy Mixes Food-Oriented

General Merchandise

 Convenience

 Specialty

store  Conventional supermarket  Food-based superstore  Combination store  Box (limited-line) store  Warehouse store

store  Traditional department  Full-line discount store  Variety store  Off-price chain  Factory outlet  Membership club  Flea market

Retailer Strategy Mix 

 A strategy mix is the firm’s particular combination of: store location operating procedures goods/services offered pricing tactics store atmosphere customer services promotional methods

Convenience Store Strategy Mix Location: Neighborhood

Merchandise: Medium width and low depth of assortment; average quality

Prices: Average to Above average Atmosphere and Services: Average Promotion: Moderate

Conventional Supermarket Strategy Mix Location: Neighborhood

Prices: Competitive

Merchandise: Extensive width and depth of assortment; average quality; manufacturer, private, & generic brands

Atmosphere and Services: Average Promotion: Heavy use of  newspapers, flyers, and coupons

Food-Based Superstore Strategy Mix Location: Community shopping center or isolated site

Merchandise: Full assortment plus health and beauty aids and general merchandise

Prices: Competitive Atmosphere and Services: Average Promotion: Heavy use of  newspapers, flyers

Figure 5-7: Supermarkets Have Come a Long Way

Combination Store Strategy Mix Location: Community shopping center or isolated site

Merchandise: Full assortment plus health and beauty aids and general merchandise

Prices: Competitive Atmosphere and Services: Average Promotion: Heavy use of  newspapers, flyers

Box store Is a retail store that sells a limited assortment of basic grocery items, often, as at a warehouse, displayed in their original cartons in order to lower costs and prices.

Box Store Strategy Mix

Location: Neighborhood

Merchandise: Low width and depth of  assortment; few perishables; few national brands

Prices: Very low Atmosphere and Services: Low Promotion: Little or none

Warehouse Store Strategy Mix Location: Secondary site, often in industrial area Merchandise: Moderate width and low depth of  assortment; emphasis on manufacturer brands bought at discount

Prices: Very low Atmosphere and Services: Low Promotion: Little or none

Specialty store  A store that concentrates on selling one good or service line such as young women's apparel It usually carries a narrow but deep assortment of the chosen category and tailors the strategy  to the given market segment  Apparel, personal care , auto supply, home furnishings, electronic books etc

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Specialty Store Strategy Mix Location: Business district or shopping center

Merchandise: Very narrow width and extensive depth of  assortment; average to good quality

Prices: Competitive to Above average Atmosphere and Services: Average to excellent Promotion: Heavy use of displays Extensive sales force

Category killer  A large retail chain store that is dominant in its product category. This type of store generally offers an extensive selection of  merchandise at prices so low that smaller stores cannot compete.  Also known as Big Box store

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Traditional Department Store Strategy Mix Location: Business district, shopping center or isolated store

Merchandise: Extensive width and depth of  assortment; average to good quality

Prices: Average to Above average Atmosphere and Services: Good to excellent Promotion: Heavy ad and catalog use; direct mail; personal selling

Full-Line Discount Store Strategy Mix Location: Business district, shopping center or isolated store

Merchandise: Extensive width and depth of  assortment; average to good quality

Prices: Competitive Atmosphere/Services: Slightly below average to average Promotion: Heavy on newspapers; price-oriented; selling

Variety Store Strategy Mix Location: Business district, shopping center or isolated store Merchandise: Good width and some depth of  assortment; below-average to average quality

Prices: Average

Atmosphere/Services: Below average

Promotion: Use of newspapers

Off price stores 

Retail stores offering merchandise at prices less than other retail stores. They acquire out-of-season products and distressed merchandise from other retailers, including bankruptcies, and from manufacturers having production overruns. Off-price stores can threaten retailers carrying name-brand merchandise at full retail prices.

Off-Price Chain Strategy Mix Location: Business district, shopping center or isolated store Merchandise: Moderate width and poor depth of  assortment; average to good quality; low continuity

Prices: Low

Atmosphere/Services: Below average Promotion: Use of newspapers; brands not advertised; limited selling

Factory Outlet Strategy Mix Location: Out of the way site or discount mall

Merchandise: Moderate width and poor depth of  assortment; low continuity

Prices: Very Low

Atmosphere/Services: Very low

Promotion: Little

Membership Club Strategy Mix Location: Isolated store or secondary site

Merchandise: Moderate width and poor depth of  assortment; low continuity

Prices: Very Low

Atmosphere/Services: Very low Promotion: Little; some direct mail

Flea Market Strategy Mix Location: Isolated store

Prices: Very Low

Merchandise: Extensive width and poor depth of  assortment; low continuity; variable quality

Atmosphere/Services: Very low

Promotion: Limited