Retail Institutions by Ownership

Chapter 4 Retail Institutions by Ownership

RETAIL MANAGEMENT: A STRATEGIC APPROACH,

Chapter Objectives To show the ways in which retail institutions can be classified To study retailers on the basis of ownership type and examine the characteristics of each To explore the methods used by manufacturers, wholesalers, and retailers to exert influence in the distribution channel 4-2

Figure 4.1 A Classification Method for Retail Institutions I Ownership II Store-based Retail Strategy Mix III Nonstore-based Retail Strategy Mix

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Ownership Forms  Independent  Chain  Franchise  Leased department  Vertical marketing system  Consumer cooperative

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Independent Retailers  2.1 million independent U.S. retailers  50% of these are run by owners and their families  Account for 40% of total stores and 3% of U.S. store sales  Why so many? Ease of entry

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Competitive State of Independents Advantages Disadvantages  Flexibility in formats,  Lack of bargaining locations, and strategy power  Control over investment  Lack of economies of costs and personnel scale functions, strategies  Labor intensive  Personal image operations  Consistency and  Over-dependence on independence owner  Strong entrepreneurial  Limited long-run leadership planning 4-6

Figure 4.2 Useful Online Publications for Small Retailers

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Store-based Retail Strategy Mix  Convenience store  Conventional supermarket  Food-based superstore  Combination store  Box store  Warehouse store  Specialty store 4-8

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

Chain Retailers  Operates multiple outlets under common ownership  Engages in some level of centralized or coordinated purchasing and decision making  In the U.S., there are roughly 100,000 retail chains operating about 750,000 establishments 4-9

Competitive State of Chains Advantages  Bargaining power  Cost efficiencies  Efficiency from computerization, sharing warehouse and other functions  Defined management philosophy  Considerable efforts in long-run planning 4-10

Disadvantages  Limited flexibility  Higher investment costs  Complex managerial control  Limited independence among personnel

Figure 4.3 Carrefour: The Largest Foreign-Based Retailer in the World

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Nonstore-based Retail Strategy Mix and Nontraditional Retailing  Direct marketing  Direct selling  Vending machine  World Wide Web  Other emerging retail formats

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Figure 4.4 MasterCuts: A Well-Defined Management Philosophy

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Franchising  A contractual agreement between a franchisor and a retail franchisee, which 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 4-14

Franchise Formats Product/ Trademark  franchisee acquires the identity of a franchisor by agreeing to sell products and/or operate under the franchisor name  franchisee operates autonomously  2/3 of retail franchising sales 4-15

Business Format  franchisee receives assistance: location, quality control, accounting systems, start-up practices, management training  common for restaurants, real estate

Figure 4.5 Business Qualifications Sought by McDonald’s for Potential Franchisees

Personal Integrity Entrepreneurial Spirit Ability to motivate and train

Ideal Franchisee

Ability to manage finances 4-16

Financial resources Willingness to complete training Willingness to devote time

Figure 4.6 Structural Arrangements in Retail Franchising

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Wholesaler-Retailer Structural Arrangements  Voluntary: 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

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Figure 4.7 Franchises and Business Opportunities

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Competitive State of Franchising Advantages  small capital required  acquire well-known names  operating/manageme nt skills taught  cooperative marketing possible  exclusive selling rights  less costly per unit 4-20

Disadvantages  oversaturation could occur  franchisors may overstate potential  locked into contracts  agreements may be cancelled or voided  royalties are based on sales, not profits

From the Franchisor’s Perspective

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Benefits

Potential Problems

 national or global presence possible  qualifications for franchisee/ operations are set and enforced  money obtained at delivery  royalties represent revenue stream

 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

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 4-22

Competitive State of Leased Departments Benefits

Potential Pitfalls

 provides one-stop  lessees may negate shopping to store image customers  procedures may  lessees handle conflict with management department store  reduces store costs  problems may be blamed on  provides a stream of department store revenue rather than lessee 4-23

Figure 4.8 Vertical Marketing Systems Independent Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Independent Manufacturer Independent Wholesaler Independent Retailer

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Figure 4.8 Vertical Marketing Systems Partially Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Two channel members own all facilities and perform all functions

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Figure 4.8 Vertical Marketing Systems Fully Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: All production and distribution functions are performed by one channel member

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Figure 4.9 Sherwin-Williams’ Dual Vertical Marketing System

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Web-Based Exercise  Subway is one of the largest retail franchisors in the world  Based on the information found under Franchise Opportunities on the Subway website, would you be interested in becoming a Subway franchisee?

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