rm chapter 3 final

CHAPTER 3Retail Institutions

Merchandise Offering

• Variety (breadth of merchandise)

- The number of merchandise categories

• Assortment (depth of merchandise)

-the number of items in a category (Stock Keeping Units SKUs)

The Retail Life Cycle

• 3

Retail Institutions in their VariousStages of the Retail Life Cycle

• Introduction • Growth • Maturity • Decline

Services vs. Merchandise Retailers

Intangibility -Problems in Evaluating Service Quality

-Performance of Service Provider

Simultaneous Production and Delivery -Importance of Service Provider

Perishability -No Inventory, Must Fill Capacity

Inconsistency of the Offering -Importance of HR Management

Type of Service Service Retail Firms

Airlines American, Delta, British Airways, Singapore Airways

Automobile maint/repair Jiffy Lube, Midas, AAMCO

Automobile rental Hertz, Avis, Budget, Alamo

Banks Citibank, NCNB, Bank of America

Child care centers Kindercare, Gymboree

Credit cards American Express, VISA, Mastercard

Education University of Florida, Babson College

Entertainment parks Disney, Universal Studios, Six Flags

Express package delivery Federal Express, UPS, US Postal Service

Financial services Merrill Lynch, Dean Witter

Fitness Jazzercise, Bally’s, Gold’s Gym

Health Care Humana, HCA

Home maintenance Chemlawn, MiniMaid, Roto-Rooter

Examples of Service Retailers

Examples of Service Retailers

Type of Service Service Retail Firms

Hotels and motels Hyatt, Sheraton, Marriott, Days Inn

Income tax preparation H & R Block

Insurance Allstate, State Farm

Internet access/Elec info. American On-Line, CompuServe

Long-distance telephone AT&T, MCI, Sprint

Movie theaters AMC, Loews/Sony, Universal

Real estate Century 21, Coldwell Banker

Restaurants TGI Friday’s, Wendy’s, Pizza Hut

Truck rentals U-Haul, Ryder

Weight loss Weight Watchers, Jenny Craig

Video rental Blockbuster

Vision centers Lenscrafter, Pearle

Merchandise/Service Continuum

• Selection of Store Format plays a crucial role in attracting and satisfying the target customers.

• Diversity & changing nature of the society has compelled the retailers to change their formats to provide a complete shopping experience to customers

• Thus, new retail formats are being built around different pricing & service strategies.

Theories of Retail Institution/Change

CYCLICAL THEORIES

Wheel of retailing (price/service)Accordion Theory (assortment)

EVOLUTIONARY THEORIES

Dialectic process (retailer)Natural selection (customer)

Wheel of Retailing

• Malcom P. McNair’s (Harvard University) ‘Wheel of Retailing’

• This theory states that in a retail institution changes take place in cyclical manner

• STAGES– Entry Phase: Low-status, low-profit-margin, low-price

formats

– Trading-up Phase: Move to up-market locations & stock premium goods to differentiate themselves

– Vulnerability Phase: Mature as high-cost, high-price retailers (vulnerable to new retailers who come up with some novel retailing format/concept.

Wheel of Retailing

In India “Wheel of Retailing” could be seen with the changes taking place in the Formats

• Example: Kirana Stores were replaced by chain stores like Apna Bazaar – which in turn faced competition from Hypermarkets like Big Bazaar.

The Retail Accordion Theory

• Retail Accordion:

Describes how retail institutions progress from outlets that offer wide variety of merchandise to stores offering specialized products and continue repeatedly through the pattern.

• LO 3

The Retail Accordion

• Wide Assortment

• Wide Assortment

• Narrow• Assortment

• Time

• LO 3

The Dialectic Process/Melting Pot Theory

Department store

High marginLow turnoverHigh priceFull serviceDowntown locationPlush facilities

THESIS

ANTITHESIS

SYNTHESIS

Discount store

Low marginHigh turnoverLow priceSelf-serviceLow rent locationSpartan facilities

Discount department store

Average marginsAverage turnoverModerate pricesLimited servicesSuburban locationsModest facilities

Natural Selection theory

• Based on Darwin’s Theory of Evolution.

• A retail institution should be flexible enough to adapt to the changing environment and should adapt its behaviour to survive.

• Price

• Product line

• Location

• Promotional strategies

According to the social, economical, legal and technological changes

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, and

promotional methods

• II.

• Store-Based

Retail Strategy

Mix

• III.

• Service vs.

Goods Retail

Strategy Mix• IV.

• Nonstore-Based

Retail Strategy Mix

and Nontraditional

Retailing

• I.

• Ownership

Retailer Classification

Retailer Classification

• STORE BASED

• Ownership

• Store-based retail strategy

mix

• Nonstore-based retail

strategy mix & nontraditional

retailing

• Independent

• Chain

• Franchise

• Leased department

• Vertical marketing system

• Consumer cooperative

• Convenience store

• Conventional supermarket

• Food-based supermarket

• Combination store

• Box (limited line) store

• Warehouse store

• Specialty store

• Variety store

• Traditional department store

• Full-line department store

• Off-price chain

• Factory outlet

• Membership club

• Flea (louse) market

• Direct marketing

• Direct selling

• Door to door

• Party plan

• Vending machine

• World wide web (WWW)

• Catalog ueMarketing

• Telemarketing

• TV Home shopping

• I.• Ownership

• Independent• Chain• Franchise• Lease Department• Vertical Marketing System• Consumer Cooperative

Retailer Classification

Ownership Based Retail Institutions

Independent Retailer

An independent retailer owns only one retail unit. The management has direct contact with the customers and can quickly respond to their needs.

• Advantages:

– Flexibility of choosing the retail format and retail location.

– Devising a strategy becomes easier.

– Investment costs are low.

– They are able to sustain consistency in their work.

– Better customer relationship management.

– Entry barriers are low

– Licensing procedures are simple

Contd..

• Disadvantages– In bargaining with distributors, they do not posses much power

because they buy in small quantities.

– Cannot gain economies of scale in buying and maintaining inventory because they have financial constraints.

– Operations are often handled manually with little computerization.

– Limited advertisements.

– Unequal distribution of work.

– Limited time given to planning because of over-involvement of owner into daily operations.

Chain Stores

A chain retailer operates multiple outlets under common ownership. It usually engages in some level of centralized purchasing and decision making.

• Advantages

– They have greater bargaining power due to their volume of purchase.

– Achieve cost efficiency due to performing the wholesale functions themselves.

– Efficiency in multiple stores is attained by shared warehousing facilities; large purchases, SOPs, centralized decision making etc.

– Work faster with the use of computers while ordering merchandise, forecasting etc.

– Can advertise.

– Defined management philosophies.

Contd..

• Disadvantages– May or may not be consistent in their strategy.

– Time and resources spent on long-run planning.

– Limited flexibility/customization.

– Initial investments high.

– Managerial control is difficult.

– Personnel may have limited independence.

Franchising

• It involves a contractual arrangement between a franchisor and a retail franchisee, which allows the franchisee to conduct a given business under established name and according to a given pattern of business.

• The franchisee pays an initial fee and a monthly share of gross sales in exchange for the exclusive rights to sell goods and services in a specified area.

• Franchising is a retail organizational form in which small businesses can

benefit being a part of a large retail institution.

Types of Franchising

• Product/Trademark franchising:– In this type franchisees operate independently of their franchisors.

– The franchisee adhere to certain rules and regulations but sets store operating hours, store location criteria, store facilities and display etc.

• Business format franchising:

– Involves more interactive relationship between the franchisee and franchisor.

– Franchisees receives assistance on site location, quality control, start-up practices, management training and responding to problems.

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

• Ideal• Franchisee

• Experience

• Full-time• commitment

Advantages to the franchisee: Franchisees can own retail enterprise with relatively lower

capital investment. Franchisees acquire well known name and good service lines. SOPs and management skills may be taught to the franchisees. Cooperative marketing used , that could not be afforded

otherwise. Franchisee purchases may be less costly per unit due to the

volume bought by the overall franchise.

Disadvantages to the franchisee: Over saturation can occur if there are too many franchisees

situated at one location. Franchisee may get locked into contract provisions whereby

the purchases must be made through franchisors or certain approved vendors.

Franchisee agreement can be of short duration. Under most of the contracts, royalties are percentage of gross

sales, regardless of franchisee profits.

Advantages to the franchisor:• Global presence • Less investment• After franchisee have paid for their franchised outlets, franchisor still

receive royalties• Franchisees are not owners, they have greater incentive to work hard.

Thus, benefiting the franchisor

Disadvantages to the franchisor:• Franchisee could harm the overall reputation, if they do not adhere to

the company standards.• Lack of uniformity among the outlets can adversely affect the

customer loyalty.• Intra-franchise competition is not desirable• Ineffective franchised units affect the profitability of the franchisor.

Leased Department• A department in a retail store that is rented to an outside party (floor

space within a store is leased and run as a separate business. e.g. leasing coffee shop to CCD or saree division to Meena Bazaar.

• Volume of sale is dependent on the existing store’s customer base and store’s reliability.

• Independence to furnish the department, plan the merchandise assortment, etc.

• Lessee pays a part of the sales turnover as rent.

Leased Department AdvantagesStore Perspective

• Fills Merchandise and Expertise Gaps

• Enlarged Market

• Reduces Store Costs

• Lessee Assumes Administration ROl

• Percent of Revenues

Leased Department DisadvantagesStore Perspective

• Conflicts in Operating Procedures

• Damaged Image

• Customer Blame

Leased Department AdvantagesLeasee Perspective

• Well Know Store

• Reduced Costs

Leased Department DisadvantagesLeasee Perspective

• Inflexibility in Hours

• Product Line Restrictions

• Raised Rent

• Sales Expectations Not Met

Vertical Marketing System

• A distribution system in which the producers, wholesalers and retailers act in a unified manner to facilitate the smooth flow of goods and services.

• One channel member owns the others or has contracts with them or has the power to control them.

• Independent VMS

• Partially Integrated VMS

• Fully Integrated VMS

Independent VMS

• Independent businesses like manufacturers, wholesalers, and retailers.

• Required when customers are scattered, manufacturer s and retailers are small players, product sales are high, and when the products require extensive distribution.

• Stationery stores, gift shops, hardware stores, food stores, drug stores

Partially Integrated VMS

• Only two independent business units in a distribution channel work together.

• A manufacturer and retailer alone manage the shipping, warehousing, and distribution functions without the help of wholesalers.

• Furniture stores, appliance stores, computer retailers, restaurants.

Fully Integrated VMS

• Only one players manages all the activities with the help of owned channel members.

• Full control over channel operations help in lower price.

• However initial costs are very high

• Wills Lifestyle, Raymond’s.

Consumer Cooperative

• Owned and managed by customer members who invest in the retail operations for stock certificates.

• They vote on store policies and select members to manage it.

• Food retailing, society cooperatives.

Store-based Food Oriented Retail Strategy Mix

Convenience Store

Located near residential areas and are open for long hours, seven days a week and carries a variety of products with limited assortment of merchandise.

Charge relatively high prices and operate in a 3000 to 8000 sq. ft. area.

• Tailors assortments to local market

• Makes more convenient to shop

• Offers fresh, healthy food

• Less crowd

• Faster billing than supermarkets

• 5-44

Convenience Store

Location:Neighborhood

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

Prices:Average to

Above average

Atmosphere andServices:Average

Promotion:Moderate

44

Conventional Supermarket

Similar to department stores, but focus more on food and household maintenance products.

Main characteristic is the self service operation which help in reducing costs and also lead to impulse buying.

Variety of merchandise with deep assortments.

Some may follow EDLP.

Located near residential areas and are open for long hours, seven days a week and carries a variety of products with limited assortment of merchandise.

• 5-46

Conventional Supermarket

Location:Neighborhood

Merchandise:Extensive width

and depth of assortment;

average quality; manufacturer,

private, & generic brands

Prices:Competitive

Atmosphere andServices:Average

Promotion:Heavy use of

newspapers, flyers, and coupons

46

Food-Based Supermarket

Is larger and more diversified than a conventional supermarket but smaller and less diversified than combination store.

Operate in a 25,000 to 50,000 sq. ft. area.

Full range of grocery items under one roof.

Food-Based Supermarket

Location:Community shopping center or isolated site

Merchandise:Full assortment plus

health and beauty aidsand generalmerchandise

Prices:Competitive

Atmosphere andServices:Average

Promotion:Heavy use of

newspapers, flyers

Combination Store

Is a blend of a super market and a general merchandise store.

larger and more diversified than a conventional supermarket but smaller and less diversified than combination store.

Operate in a 30,000 to 1,00,000 sq. ft. area.

Provide one stop shopping experience.

• 5-50

Combination Store

Location:Community shopping center

or isolated site

Merchandise:Full assortment plus

health and beauty aidsand general merchandise

Prices:Competitive

Atmosphere andServices:Average

Promotion:Heavy use of

newspapers, flyers

50

Box/Limited Line Store

Is a food based discount store that concentrates on a small selection of merchandise.

Limited shopping hours, services, and stock.

Operate in a 30,000 to 1,00,000 sq. ft. area.

Mostly PLBs and less NBs.

• 5-52

Box/Limited Line Strategy Mix

Location:Neighbourhood

Merchandise:Low width and depth of

assortment; fewperishables; few national

brands

Prices:Very low

Atmosphere andServices:

Low

Promotion:Little or none

52

Warehouse Stores/Cash and Carry

Discount retailers with an average size of 1,00,000 sq. ft.

Cater to customers who look for low price deals.

Merchandise displayed in cut boxes or shipping pallets.

Service limited.

• Warehouse showrooms

• Catalog showrooms

• Hypermarket

• 5-54

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

Atmosphere andServices:

Low

Promotion:Little or none

54

Warehouse Showrooms

Show the customers the price benefit when compared with conventional stores

The merchandise can be transported from the nearest warehouse.

Located in free standing sites adjacent to busy roads.

Catalogue Showrooms

Discount operations that offer merchandise through a catalogue or a showroom.

Minimal service, located in low rent area and display only a few merchandise.

Hypermarket

A giant retail store that offers a wide variety and deep assortments of merchandise at a low price.

Combination of a discount store and a food based supermarket.

Operate in a 3,00,000 to 5,00,000 sq. ft. area.

Hypermarket

A giant retail store that offers a wide variety and deep assortments of merchandise at a low price.

Combination of a discount store and a food based supermarket.

Operate in a 3,00,000 to 5,00,000 sq. ft. area.

General Merchandise Retailers

Characteristics of General Merchandise Retailers

Specialty Store Retailing

Sell single or limited line merchandise.

Deep assortment is offered ( a wide variety of brands, models, styles, sizes and colours).

Quality brands, designer labels and private labels.

Salespeople having thorough knowledge present.

Located in high traffic areas.

• 5-61

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 andServices:

Average to excellent

Promotion:Heavy use of displaysExtensive sales force

61

Category Killers

A type of specialty store that offers an enormous selection in a product category at relatively low prices.

Nalli’s .(silk sarees), S. Kumars (shirts)

Variety/10 Cents Store

Offer a deep assortment of inexpensive and popular merchandise like gift items, women’s accessories, house wares, etc.

This format is dying.

• 5-64

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

64

Department Store

Offer a wide variety and a deep assortment of merchandise.

Arrangement is done in departments.

Clothing, shoes, cosmetics, gifts, luggage, etc.

Shopper’s Stop, Westside, Globus, Lifestyle.

• 5-66

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 andServices:

Good to excellent

Promotion:Heavy ad and catalog

use; direct mail; personal selling

66

Discount Store Retailing

• Wal-Mart, Kmart, Target

• Differentiate Strategy

-Wal-Mart = Low Price and Good value

-Target = More Fashionable Apparel

• Competition from Category Specialists

-Toys-R-Us, Circuit City, Sports Authority

• 5-68

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

68

Off-Price RetailingInconsistent assortment of branded fashion

oriented soft goods at low prices.

Opportunistic buying from manufacturers who have surplus inventory.

Hurt by sales in department stores

• Factory outlet stores

• Close outlet stores (broad but inconsistent assortment)

• Single price store

• 5-70

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

70

• 5-71

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

71

• 5-72

Flea Market Strategy Mix

Location:Isolated store

Merchandise:Extensive width and

poor depth of assortment;

low continuity; variable quality

Prices:Very Low

Atmosphere/Services:Very low

Promotion:Limited

72

Non Store-based Retail Strategy Mix

Direct Marketing

• It is a form of retailing in which a customer is first exposed to a good or service through a non-personnel medium (such as direct mail, broadcast or cable TV, radio, magazine, newspaper etc.) and then orders by mail, phone (usually a toll free number), fax or by computer.

• Direct marketing can be divided into two broad categories:

– General: General marketing firms offer a full line of products from clothing to house ware.

– Specialty: Specialty firms focus on narrow product lines.

Advantages of Direct Marketing

• Reduced costs: startup cost, inventory cost, location cost, sales force cost.

• Possibility of offering lower prices.

• Shopping convenience for the customers.

• Specific consumer segments can be pin pointed using mailers.

• A store based retailer can supplement its regular business and expand its geographic area.

Disadvantages

• Products cannot be examined prior to purchase.

• Prospective entrants may underestimate the costs. Catalog preparation, printing and mailing can be an expensive job.

• The most popular catalogues draw purchases from less than 10% of recipients.

• Clutter exists

• Some firms have given a bad name to the industry due to late deliveries and providing damaged goods.

Direct Selling

• It includes both personal contact with consumers in their homes (and other non-store locations such as offices) and phone solicitations initiated by a retailer.

• Examples: Carpet selling, vacuum cleaner, other household products, cosmetics, books, encyclopedia etc.

• It emphasizes convenience in shopping and a personal touch.

Vending Machine

• It is a retailing format involving the coin or card operated dispensing of hot and cold beverages and food or snacks items.

• It eliminates the use of sales personnel.

• It allows round the clock sales.

• Location of the machines can be done according customer’s convenience.

World Wide Web

• WWW in the field of retailing relates to online retailing.

• It enables retailer’s world wide presence.

• Enhances the retailer’s brand.

• Provides information to the consumers.

• Promotes new products.

• Furnish customer service.

• Cost efficient

• Can announce special offers and also employment opportunities.

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