Sears Apparel Brands

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Evaluating the Competition in RetailingEvaluating the Competition in Retailing

Chapter 4

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

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Learning ObjectivesLearning Objectives

• Explain the various models of retail competition

• Distinguish between various types of retail competition

• Describe the four theories used to explain the evolution of retail competition

• Describe the changes that could affect retail competition

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Models of Retail CompetitionModels of Retail Competition

• The Competitive Marketplace

• Market Structure

• The Demand Side of Retailing

• The Supply Side of Retailing

• The Profit-Maximizing Price

• Nonprice Decisions

• Competitive Actions

LO 1

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The Competitive MarketplaceThe Competitive Marketplace

While retailers typically compete for customers on a local level, catalog and electronic retailers compete at national and international levels.

LO 1

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Market StructureMarket Structure

Pure Competition Pure Monopoly Monopolistic Competition Oligopolistic Competition

LO 1

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Pure Competition

Occurs when a market has homogenous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers.

LO 1

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Pure Monopoly

Occurs when there is only one seller for a product or service.

LO 1

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Monopolistic Competition

Occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products.

LO 1

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Oligopolistic Competition

Occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers.

LO 1

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Outshopping

Occurs when individuals in one community travel usually to a larger community to shop.

LO 1

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The Demand Side of RetailingThe Demand Side of Retailing

LO 1: Exhibit 4.1P

rice

Quantity Demanded

Demand as a Function of Price

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The Supply Side of RetailingThe Supply Side of Retailing

LO 1D

oll

ars

Unit Sales Quantity or Sales Volume

Fixed Costs

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LO 1D

oll

ars


Variable Costs

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LO 1D

oll

ars


Total Costs

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The Profit-Maximizing PriceThe Profit-Maximizing Price

• A profit-maximizing price seeks to get as much profit as possible from the sale of each unit.

LO 1

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Nonprice DecisionsNonprice Decisions

• Nonprice competition strategies

• Position itself as different from the competition by altering its merchandise mix to offer higher quality goods, great personal service, etc.

• Offering private label merchandise.

• Provide free services or products, such as free gas to out of town customers.

• Strive to always have basic merchandise in stock.

LO 1

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Nonprice DecisionsNonprice Decisions

• Store Positioning

Is when a retailer identifies a well-defined market segment using demographic or lifestyle variables and appeals to this segment with a clearly differentiated approach.

LO 1

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Nonprice Decisions: Private Labels ofNonprice Decisions: Private Labels of

• Kmart: Joe Boxer, Martha Stewart Everyday, Disney

• Sears apparel brands: Apostrophe, TKS, Land’s End• JCPenny: St. John’s Bay, Arizona, Stafford• Wal-Mart: Equate, Simply Basic, Great Value• Target: Cherokee, Honors, Furio• Saks Fifth Avenue: 5/48, Real Clothes, SFA Collections• Federated Department Stores: I.N.C., Alfani, Green Dog• Nordstrom: BP, Halogen, Studio 121• Lord and Taylor: Katie Hill, Context, Identity

LO 1: Exhibit 4.2Major Retailers

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Competitive ActionsCompetitive Actions

Competitive activity can be examined by the number of retail establishments of a given type per thousand households.

LO 1

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Competitive ActionsCompetitive Actions

• Overstored

Is a condition in a community where the number of stores in relation to households is so large that to engage in retailing is usually unprofitable or marginally profitable.

• Understored

Is a condition in a community where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.

LO 1

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Types of CompetitionTypes of Competition

• Intratype and Intertype Competition

• Divertive Competition

LO 2

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• Intratype Competition

Occurs when two or more retailers of the same type as defined by NAICS codes in the Census of Retail Trade, compete directly with each other for the same households.

• Intertype Competition

Occurs when two or more retailers of a different type, as defined by NAICS codes in the Census of Retail Trade, compete directly by attempting to sell the same merchandise lines to the same households.

LO 2

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Intratype and Intertype CompetitionIntratype and Intertype Competition

• Intratype competition for books.

LO 2

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Intertype competition for video rentals.

LO 2

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LO 2

Intratype Competition

Intertype Competition

AlbertsonsSupermarket

Food GiantSupermarket

McDonald’s

Supermarkets offeringHome Meal

Replacements (HMR)compete with fast-food

restaurants

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Divertive Competition

Occurs when retailers intercept or divert customers from competing retailers.

LO 2

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Break-even Point

Is where total revenues equal total expenses and the retailer is making neither a profit nor a loss.

LO 2

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Evolution of Retail CompetitionEvolution of Retail Competition

• The Wheel of Retailing

• The Retail Accordion

• Retail Life Cycle

LO 3

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• The Wheel of Retailing Theory

Describes how new types of retailers enter the market as low-status, low-margin, low-price operators; however, as they meet with success, these new retailers gradually acquire more sophisticated and elaborate facilities, and thus become vulnerable to new types of low-margin retail competitors who progress through the same patter.

LO 3

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The Wheel of Retailing TheoryThe Wheel of Retailing Theory

LO 3: Exhibit 4.3

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Wheel of RetailingWheel of Retailing

Some would argue that McDonald’s has become a victim of the wheel of retailing. When McDonald’s started out, it served a select menu. Over the years, the McDonald’s product offering has expanded to the inclusion of playgrounds, thus opening the way for new, low-cost fast-food providers, such as Checkers.

LO 3

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Retail Accordion

Describes how retail institutions evolve from outlets that offer wide assortments to specialized stores and continue repeatedly through the pattern.

LO 3

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The Retail AccordionThe Retail Accordion

LO 3

Wide Assortment

Wide Assortment

NarrowAssortment

Time

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Retail Life Cycle

Describes four distinct stages that a retail institution progresses through:

Introduction

Growth

Maturity

Decline

LO 3

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Evolution of Retail Competition:Evolution of Retail Competition:

Introduction

Begins with an aggressive, bold entrepreneur who is willing and able to develop a different approach to retailing of certain products. During this stage profits are low, despite increasing sales levels.

LO 3The Retail Life Cycle

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Growth

Sales and profits explode, validating the entrepreneur’s good idea. New retailers enter the market and begin to copy the retailers idea. Late in this stage both market share and profitability approach their maximum levels.


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Maturity

Market share stabilizes and profits decline because:

• managers use to managing simple small

retail outlets must now manage large complex firms,

• industry has overexpanded, and

• competitive assaults by new retail

formats.


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Decline

The once promising idea is no longer needed in the marketplace. As a result, market share and profits fall.


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Retail Institutions in the Four Stages ofRetail Institutions in the Four Stages of

LO 3: Exhibit 4.4

Introduction

E-tailing (1990’s)

Recyclers (2000’s)

Growth

Food Courts (1980’s)

Airport-based retailers (1980’s)

Supercenters (2000’s)

Maturity

Warehouse clubs(1970’s) Department stores (1860’s) Supermarkets (1930’s) Convenience stores (1960’s) Category killers (1970’s) Fast food (2000’s’)

Decline

Variety Stores (1890’s)

Factory outlet malls (1970’s)

Department stores (2000’s)

The Retail Life Cycle

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Resource-Advantage TheoryResource-Advantage Theory

Resource-advantage theory

Is based on the idea that all firms seek superior performance in an ever-changing environment.

• Illustrates two important lessons for retailers:

• Superior performance at any point in time is a result of achieving a competitive advantage in the market place as a result of some tangible or intangible entity (“resource”).

• All retailers cannot achieve superior results at the same time.

LO 3

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Future Changes in Retail CompetitionFuture Changes in Retail Competition

• Nonstore Retailing

• New Retail Formats

• Heightened Global Competition

• Integration of Technology

• Increased use of Private Labels

LO 4

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• Nonstore RetailingDirect sellingCatalog salesE-tailing

LO 4

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New Retail Formats Supercenters Recycled Merchandise Retailers Liquidators

LO 4

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Future Changes in Retail Competition:Future Changes in Retail Competition:

Off-price Retailers

Sell products at a discount but do not carry certain brands on a continuous basis. They carry those brands they can buy from manufacturers at closeout or deep one-time discount prices.

LO 4New Retail Formats

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Supercenters

Combine a discount store and grocery store to carry 80,000 to 100,000 products in order to offer one-stop shopping.


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Number of Supercenters by Retailer

1998 1999 2000Wal-Mart 564 721 894Meijer 117 127 144Kroger 105 126 135Kmart 102 105 115Target 14 16 31

LO 4Supercenters

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Recycled Merchandise Retailers

Are establishments that sell used and reconditioned products.


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Liquidators

Liquidates leftover merchandise when an established retailer shuts down or downsizes.


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Leading U.S. Retailers by SalesLeading U.S. Retailers by SalesLO 4

1900 ’20 ’30 ’40 ’50 ’60 ’70 ’80 ’90 2000

A&P

Sears

K-Mart

Wal-Mart

$200B

$30B

$10B

$5B

$800M

$500M

$200M

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The Relationship of Price VersusNonprice Actions and Demand CurveThe Relationship of Price VersusNonprice Actions and Demand Curve

LO 4Price

Quantity

PriceD2D1

Pricing Actions move the consumer up and down the current demand curve.

Pricing Actions move the consumer up and down the current demand curve.

Non-price Actions seek to shift the demand curve to right and make it more inelastic.

Non-price Actions seek to shift the demand curve to right and make it more inelastic.

Quantity

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Heightened Global Competition Increasing Rate of Change Greater Diversity Creation of New Retail Formats

LO 4

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Integration of Technology Supply Chain Management Customer Management Customer Satisfaction

LO 4

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Increasing Use of Private Labels Helps in protecting retailer niche Sets retailer apart from competition

LO 4

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Arizona Jeans Co.Arizona Jeans Co.

JCPenney has built significant store loyalty through the introduction and development of the private label brand Arizona Jeans Co.

LO 4

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Question to PonderQuestion to Ponder

• Should retailers advertise the fact that they are the owners of the private label brand(s) they sell?

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• Private Label Branding Strategies

• Developing a partnership with well-known celebrities, noted experts, and institutional authorities.

• Developing a partnership with traditionally higher-end suppliers to bring an exclusive variation on their highly regarded brand name to the market.

• Reintroducing products with strong name recognition that have fallen from the retail scene.

• Branding an entire department or business; not just a product line.

LO 4

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Additional SlidesAdditional Slides

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LO 1

Retail Competition

PureCompetition

OligopolisticCompetition

PureMonopoly

MonopolisticCompetition

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LO 4

NonstoreRetailing

New RetailFormats

Integration ofTechnology

HeightenedGlobal

Competition

Increased useof Private Labels

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LO 4

E-tailingCatalogSales

Direct Selling

Nonstore Retailing

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LO 4

LiquidatorsRecycled

MerchandiseRetailers

Supercenters

New Retail Formats

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LO 4

Creation ofNew Retail

Formats

GreaterDiversity

Increased Rate of Change

Heightened Global Competition

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LO 4

CustomerSatisfaction

CustomerManagement

Supply ChainManagement

Integration of Technology

Sears Apparel Brands

Business

market structure outshopping

market structure pure

retailing chapter

price quantity

different products

welldefined market segment

dollars unit sales quantity

census of retail trade