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

Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall5-1

Chapter 3

Retail Institutions by Ownership and Store-based

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Chapter ObjectivesIdentify ways how retail institutions 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. 5-2

Classifications of Retailers

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Retail Mgt. 11e (c) 2010 Pearson Education, Inc. publishing as Prentice Hall 4-4

Figure 4-1: A Classification Method for Retail Institutions

I Ownership

IIStore-Based

Retail Strategy Mix

IIINonstore-Based

Retail Strategy Mix

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Forms of Ownership 1. Independent2. Chain3. Franchise4. Leased department5. Vertical marketing system6. Consumer cooperative

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1. Independent Retailers2.2 million independent U.S.

retailersAccount for one-third of total store

sales70% of independents operated by

owners and their familiesWhy so many? Ease of entry

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Competitive State of Independents

AdvantagesFlexibility in

formats, locations, and strategy

Control over investment costs, personnel functions, and strategies

Personal imageConsistency and

independenceStrong

entrepreneurial leadership

DisadvantagesLack of bargaining

power with suppliersLack of economies of

scaleLabor intensive

operations – less computerization

Over-dependence on owner

Limited long-run planning

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2. Chain RetailersOperate multiple outlets under

common ownershipEngage 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 8

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Competitive State of Chain stores

AdvantagesBargaining powerCost efficienciesEfficiency

maintained by computerization, warehouse sharing, and other functions

Defined management philosophy

Considerable efforts in long-run planning

DisadvantagesLimited flexibilityHigher investment

costsComplex

managerial control

Limited independence among personnel

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3. FranchisingFranchise 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

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Franchise Formats

Product/ Trademarkfranchisee

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

Business Formatfranchisee

receives assistance: location, quality control, accounting systems, startup practices, management training

common for restaurants, real-estate

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Franchise licensed in Malaysia

STATUS TOTAL %LOCAL FRANCHISE 426 64FOREIGN FRANCHISE

240 36

TOTAL 666 100

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List of approved Registrations by sector N0. SECTOR TOTAL PERCENTA

GE1. FOOD 212 34

2. CLOTHING & ACCESSORIES 73 12

3. SERVICE & MAINTENANCE 69 11

4. LEARNING CENTRE& NURSERY 71 11

5. HEALTH & BEAUTY CARE 65 10

6. CONVENIENCE SHOP & SUPERMARKET

16 3

7. ICT & ELECTRONICS 26 4

8. OTHER BUSINESSES 87 14

TOTAL 619 100

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

Financial resources

Customer and employee focus

Strong credit

Willingness to complete training

Ability to manage finances

Planning ability

Growth capability

IdealFranchisee

Experience

Full-timecommitment

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Figure 4-6: Structural Arrangements in Retail Franchising

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Wholesaler-Retailer Structural Franchising 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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Competitive state of franchising

Advantageslow capital

requiredacquisition of

well-known namesoperating/

management skills taught

cooperative marketing possible

exclusive rightsless costly per

unit

Disadvantagesover-saturation

could occurfranchisors may

overstate potentialcontractual

confinementagreements may

be cancelled or voided

royalties are based on sales, not profits

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From the Franchisor’s Perspective

Benefitsnational or global

presence possiblequalifications for

franchisee/operations are set and enforced

money obtained at delivery

royalties represent revenue stream

Potential Problemspotential for harm to

reputationlack of uniformity

may affect customer loyalty

ineffective franchised units may damage resale value, profitability

potential limits to franchisor rules

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4. Leased DepartmentsA leased department is a department

in a retail store that is rented to an outside partyThe 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

Benefitsprovides one-stop

shopping to customers

lessees handle management, Display and reordering

Regular store personnel don’t have to be involved

reduces store costsprovides a stream of

revenue

Potential Pitfallslessees may negate

store image procedures may

conflict with department store

problems may be blamed on department store rather than lessee

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Competitive State of Leased Departments – for the lessee

BenefitsStores have steady

customers-generate immediate sales

Some costs are reduced through shared facilities

Image is enhanced by popular stores

Potential PitfallsInflexibility in the

time they open and close the store

Goods and service lines are usually restricted

If successful, stores may raise rent or not renew leases

In store location may not generate the sales expected

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5. Vertical marketing systemA vertical marketing

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

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5. Vertical marketing systemIn conventional marketing systems,

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

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6. Consumer CooperativesRetail firm owned by customer

membersEXAMPLES: Koperasi polis

How/why started?Advantages/Disadvantages

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www.skm.gov.my

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Malaysian Cooperativesup to 31 December 2010. The total

numberof 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.

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Figure 4-1: A Classification Method for Retail Institutions

I Ownership

IIStore-Based

Retail Strategy Mix

IIINonstore-Based

Retail Strategy Mix

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Retailer Strategy MixA strategy mix is the firm’s

particular combination of:store location operating procedures goods/services offered pricing tacticsstore atmosphere customer servicespromotional methods

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Destination RetailerA 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 convenientShould offer a dominant

assortment Should offer superior customer

serviceMust be innovative or exclusive 32

3 key concepts in planning retail strategy mixes

1. Wheel of retailing2. Scrambled merchandising3. Retail life cycle

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Video Wheel of retailing

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Wheel of retailingA 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 cost-cutting 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.

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Wheel of retailing-contd..3. 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.

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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

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 MerchandisingScrambled 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. 40

Figure 5-3: Scrambled Merchandising by a Shoe Store


Retail Life CycleRetail institutions pass through

identifiable life stages introduction growth maturity decline

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Figure 5-4: The Retail Life Cycle

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How Retail Institutions Are Evolving

Mergers, diversification, and downsizing

Cost-containment and value-driven retailing

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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)

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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

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Table 5-1: Store-Based Retail Strategy Mixes

Food-OrientedConvenience storeConventional

supermarketFood-based

superstoreCombination storeBox (limited-line)

storeWarehouse store

General Merchandise

Specialty storeTraditional

departmentFull-line discount

storeVariety storeOff-price chainFactory outletMembership clubFlea market

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Retailer Strategy MixA strategy mix is the firm’s

particular combination of:store location operating procedures goods/services offered pricing tacticsstore atmosphere customer servicespromotional methods

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Convenience Store Strategy Mix

Location:Neighborhood

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

Prices:Average to

Above average

Atmosphere andServices:Average

Promotion:Moderate

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Conventional Supermarket Strategy Mix


Merchandise:Extensive width

and depth of assortment;

average quality; manufacturer,

private, & generic brands

Prices:Competitive


Promotion:Heavy use of

newspapers, flyers, and coupons

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Food-Based Superstore Strategy Mix

Location:Community shopping center or isolated site

Merchandise:Full assortment plus

health and beauty aidsand generalmerchandise

Prices:Competitive



newspapers, flyers

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Figure 5-7: Supermarkets Have Come a Long Way

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Combination Store Strategy Mix

Location:Community shopping center

or isolated site

Merchandise:Full assortment plus

health and beauty aidsand general merchandise

Prices:Competitive



newspapers, flyers

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Box storeIs 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.

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Box Store Strategy Mix


Merchandise:Low width and depth of

assortment; fewperishables; few national

brands

Prices:Very low

Atmosphere andServices:

Low

Promotion:Little or none

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Warehouse Store Strategy Mix

Location:Secondary site, often in

industrial area

Merchandise:Moderate width and

low depth of assortment; emphasis on

manufacturer brandsbought at discount

Prices:Very low


Low

Promotion:Little or none

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Specialty storeA 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


Average to excellent

Promotion:Heavy use of displaysExtensive sales force

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Category killerA 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


Good to excellent

Promotion:Heavy ad and catalog

use; direct mail; personal selling

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Full-Line Discount Store Strategy Mix




depth of assortment; average to

good quality

Prices:Competitive

Atmosphere/Services:Slightly below

average to average

Promotion:Heavy on newspapers;price-oriented; selling

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Variety Store Strategy Mix



Merchandise:Good width and some depth of assortment;

below-average to average quality

Prices:Average

Atmosphere/Services:Below average

Promotion:Use of newspapers

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Off price storesRetail 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.

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Off-Price Chain Strategy Mix




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

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Factory Outlet Strategy Mix

Location:Out of the way site

or discount mall



low continuity

Prices:Very Low

Atmosphere/Services:Very low

Promotion:Little

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Membership Club Strategy Mix

Location:Isolated store or

secondary site



low continuity

Prices:Very Low


Promotion:Little;

some direct mail

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Flea Market Strategy Mix

Location:Isolated store



low continuity; variable quality

Prices:Very Low


Promotion:Limited

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

Thank You

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

Documents

vertical marketing

retail life

community

retailer strategy

retail institutionsi

isolated store

strategy mix

shopping center