BA 336 Retail Operations

Strategic Planning in Retailing (Cont’d)&

Retail Institutions by Ownership

Ownership and Management Alternatives

• Sole proprietorship is an unincorporated retail firm owned by one person

• A partnership is an unincorporated retail firm owned by two or more persons, each with a financial interest

• A corporation is a retail firm that is formally incorporated under state law; it is a legal entity apart from its officers

Checklist to Consider When Starting a New

Business

Checklist for Purchasing an Existing Retail

Business

Selected Kinds of Retail Goods and Service Establishments

Durable Goods Stores:Automotive groupFurniture and appliances groupLumber, building, and hardware groupJewelry stores

Nondurable Goods Stores:Apparel groupFood groupGeneral merchandise groupGasoline service stations

Retail Mgt. 12e (c) 2013 Pearson Education, Inc. publishing as Prentice Hall

Selected Kinds of Retail Goods and Service Establishments

Service Establishments (Personal):Laundry and dry cleaningBeauty/barber shopsFuneral servicesHealth-care services

Service Establishments (Amusement):Movie theatersBowling alleysDance hallsGolf courses

Selected Kinds of Retail Goods and Service Establishments

Service Establishments (Repair):Automobile repairCar washesConsumer electronics repairAppliance repairs

Service Establishments (Hotel):HotelsMotelsTrailer parksCamps

Image and Positioning

An image represents how a given retailer is perceivedby consumers and others.

Positioning Approaches

• Mass merchandising is a positioning approach whereby retailers offer a discount or value-oriented image, a wide or deep merchandise selection, and large store facilities.

• Niche retailing occurs when retailers identify specific customer segments and deploy unique strategies to address the desires of those segments rather than the mass market.

Niche Retailing by Babies “R” Us

Selected Retail Positioning Strategies

Target Market Selection

• Three techniques• Mass marketing• Concentrated marketing• Differentiated marketing

La Boqueria

Strategic Implications of Target Market Techniques

• Retailer’s location• Goods and service mix• Promotion efforts• Price orientation• Strategy

Developing an Overall Retail Strategy

RetailStrategy

Uncontrollable Variables:• Consumers• Competition• Technology• Economic conditions• Seasonality• Legal restrictions

Controllable Variables:• Store location• Managing business• Merchandise management and pricing• Communicating with customer

Retail Strategy– Low Costs

• Removal of bad costs• Use of private label products to

reduce costs of national/manufacturer brands

• Reduce product proliferation• Obtain best net price instead of focus

on promotional monies, trade incentives and forward buying

Retail Strategy– Low Costs (cont.)

• Supply chain initiatives• Low promotional expense (everyday low

pricing)• Proper employee utilization

Retail Strategy--Differentiation

• Well-thought out private labels• Hiring right employees (value-profit chain)• Empowering employees• Use of a fun atmosphere• “Little things that mean a lot”• Money-back guarantees

Legal Environment and Retailing

Store Location• zoning laws• blue laws• environmental laws• direct selling laws• local ordinances• leases and

mortgages

Managing the Business• licensing provisions• personnel laws• antitrust laws• franchise

agreements• business taxes• recycling laws

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Sample Strategic Plan

Sally’s is a small, independently owned, high-fashion ladies clothing shop located in a suburban strip mall. It is a full-price, full-service store for fashion-forward shoppers. Sally’s carries sportswear from popular designers, has a personal shopper for busy executives, and has an on-premises tailor. The store is updating its strategic plan as a means of getting additional financing for an anticipated expansion.

Additional Concerns for Global Retailing

• In addition to the strategic planning process:• assess your international potential• get expert advice and counseling• select your countries• develop, implement, and review an

international retailing strategy

Factors Affecting the Success of a Global Retailing Strategy

• Timing• A balanced international program• A growing middle class• Matching concept to market• Solo or partnering• Store location and facilities• Product selection

Factors to Consider When Engaging in Global Retailing

A Classification Method for Retail Institutions

I Ownership

IIStore-Based

Retail Strategy Mix

IIINonstore-Based

Retail Strategy Mix

Ownership Forms

• Independent• Chain• Franchise• Leased department• Vertical marketing system• Consumer cooperative

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• Flexibility in formats,

locations, and strategy• Control over investment

costs, personnel functions, and strategies

• Personal image• Consistency and

independence• Strong entrepreneurial

leadership

• Disadvantages• Lack of bargaining

power• Lack of economies of

scale• Labor intensive

operations• Over-dependence on

owner• Limited long-run

planning

Useful Online Publications for Small Retailers

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

Competitive State of ChainsAdvantages• 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• Excessive standardization

due to extreme concern for bargaining power

Louis Vuitton – A Powerhouse of Upscale Retailing

Franchising• 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 FormatsProduct/ 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

Business Format• Franchisee receives

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

• Common for restaurants, real-estate

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

Franchise Disclosure Document Contents

• The Franchisor and Any Predecessors • Litigation History • Bankruptcy (i.e., any franchisees who may

have filed) • Listing of the Initial Franchise Fee and Other

Initial Payments • Other Fees and Expenses • Statement of Franchisee's Initial Investment • Obligations of Franchisee to Purchase or

Lease from Designated Sources • Obligations of Franchisee to Purchase or

Lease in Accordance with Specifications or from Authorized Suppliers

Franchise Disclosure Document Contents (cont)

• Financing Arrangements • Obligations of the Franchisor; Other Supervision,

Assistance or Services• Exclusive/Designated Area of Territory • Trademarks, Service Marks, Trade Names,

Logotypes and Commercial Symbols • Patents and Copyrights • Obligations of the Franchisee to Participate in the

Actual Operation of the Franchise Business• Restrictions on Goods and Services Offered by Franchisee

Franchise Disclosure Document Contents (cont)

• Renewal, Termination, Repurchase, Modification and Assignment of the Franchise Agreement and Related Information

• Arrangements with Public Figures • Actual, Average, Projected or Forecasted

Franchise Sales, Profits or Earnings • Information Regarding Franchises of the

Franchisor • Financial Statements • Contracts • Acknowledgment of Receipt by Respective

Franchisee

Dunkin’ Donuts Franchise Disclosure Document

Pros and Cons of Dunkin’ Donuts Franchise

• Pros:– No company owned stores– Outside suppliers can be approved– No markup on approved signs – Of 4,543 franchises 16 terminated, none reacquired

by franchisor and 80 ceased operations– A failure rate of 2.1 percent

– Average sales in Metro NY $914,992– 41.4 percent at or above average

– 19 day initial training program

Pros and Cons of Dunkin’ Donuts Franchise

• Cons• No exclusive territory, can license other retailers to sell

donuts, seek to convert other donut shops to Dunkin’ Donuts, can sell donuts in supermarkets, convenience stores, airports, universities

• Referral incentives to existing franchises, franchise brokers

• Pages 12-34 litigation history. In one case DD settled with payment of $780,000 to plaintiff; in another repurchased franchise for $1.1 million

• Continuing franchise fees 5.9 percent of sales, continuing advertising fee 5.0 percent of sales, loan guarantee fee 1 percent of loan amount + net, net, net lease

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Pros and Cons of Dunkin’ Donuts Franchise

• Cons– Board member sells eggs– DD has right to approve advertising– DD can appoint additional members to Brand

Advisory Council, can dissolve council, council is only advisory

Structural Arrangements in Retail Franchising

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

Franchise and Business Opportunities

Competitive State of FranchisingAdvantages• low capital required• acquisition of well-

known 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

Potential Conflicts Between Franchisor and Franchisee

• High power of franchisor relative to franchisee. Franchisee needs franchisor approval to sell business, and to extend franchise. Lease is generally in name of franchisor

• Franchisor obtains profit based on gross sales, not on franchisee’s profitability

• Franchisor requires goods and services to be purchased from itself or approved vendor

• Franchisor can break up territory of existing franchisee, reducing its sales and profitability

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

Competitive State of Leased Departments

Benefits• provides one-stop

shopping to customers

• lessees handle management

• 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

Common Leased Departments for Department Stores

• Cosmetics/Fragrances• Beauty Salon/Spa• Fine Jewelry• Furs• Photography studio (CPI)• Optical

Vertical Marketing Systems

Independent Channel System

Functions: ManufacturingWholesaling

Retailing

Ownership:Independent ManufacturerIndependent Wholesaler

Independent Retailer

Partially Integrated Channel System

Functions: ManufacturingWholesaling

Retailing

Ownership:Two channel members own all

facilities and perform all functions.

Vertical Marketing Systems

Vertical Marketing Systems

Fully Integrated Channel System

Functions: ManufacturingWholesaling

Retailing

Ownership:All production and distribution functions are performed by one channel member.