Chapter 2 : Types of Retailers

HDCS 3303 Section 12711

Introduction to Merchandising
Evangeline Caridas

I. Types of Retailers
Over time, different types
of retailers have emerged
and prospered because
they have attracted and
maintained a significant
customer base.

I. Types of Retailers (Cont.)

A. Nature of Retail Mix
The most basic characteristic of a
retailer is its retail mix-the elements
used by retailers to satisfy their
customers needs.
4 elements of the retail mix that are
particularly useful for classifying
retailers are the type of
merchandise sold, the variety and
assortment of merchandise sold,
the level of customer service, and
the price of the merchandise.

I. Types of Retailers (Cont.)

A. Nature of Retail Mix (Cont.)
The difference between the retail mix
of department and discount stores
illustrated the tradeoff retailers make
between the price of merchandise
they sell and the services they offer
to their customers.
To make profit and provide these
additional benefits to its customers,
department stores have to increase
the prices of its merchandise to
cover the additional costs. This is
referred to as the price-cost tradeoff.

I. Types of Retailers (Cont.)

B. Types of merchandise
The US Bureau of the Census
developed and uses a classification
scheme to collect data on retail activity
in the US. It classifies all retail firms into
a hierarchical set of four digit Standard
Industrial Classification (SIC) codes.
To address problems with
classification using SIC codes and
develop economic statistics similar to
international trading partners, the US
Bureau along with Mexico and
Canada, adopted a new classification
system, the North American Industrial
Classification System (NAICS), which
started to appear in 1999.

I. Types of Retailers (Cont.)

B. Types of merchandise (Cont.)
Conversion from SIC to NAICS will
be completed in 2004.
The NAISC system recognized the
growth in services and specialty store
retailing by assigning numbers to
categories such as nail salons and
pet supply stores.
The degree to which retailers
compete against each other isnt
always based on the similarity of their
merchandise. The variety and
assortment of the merchandise they
offer and the services they provide
must also be considered.

I. Types of Retailers (Cont.)

1. Variety and Assortment
Variety is the number of different merchandise
categories a retailer offers. Assortment is the
number of different items in a merchandise
category. Each different item of merchandise
is called and SKU ( stock keeping unit).
Variety is often referred to as the breadth
of merchandise and assortment is referred
to as the depth of merchandise.

I. Types of Retailers (Cont.)

C. Customer Services
Retailers also differ in the
services they offer customers.
Customers expect retailers to
provide some services-accepting personal checks,
proving parking, and
displaying merchandise.

I. Types of Retailers
D. Cost of Offering Breadth and Depth
of Merchandise and Services
When a retailer offers many SKUs, inventory
investment increases because the retailer must
have back-up stock for each SKU.
Similarly, services attract customers to the
retailer, but they are also costly.
A critical retail decision involves the trade-off
between costs and benefits of maintaining
additional inventory or providing additional
services.

II. Trends in
Retail Industry
The retail industry is
changing rapidly. Some of
the most important
changes involve the
greater diversity of
retailers, increasing
industry concentration
and globalization.

II. Trends in Retail

Industry (Cont.)
A. Greater Diversity of Retail Formats
Consumers now can purchase the same
merchandise form a wider variety of retailers.
The Internet has spawned a new set of retailers
offering consumers the opportunity to buy
merchandise and services at fixed prices, participate
in an auction, or submit a take-it-or-leave-it bid.
New types of retailers coexist with traditional
retailers. Each type of retailer offers a different set of
benefits, thus consumers patronize different retailers
for different purchase occasions.

II. Trends in Retail

Industry (Cont.)
B. Increasing Industry Concentrations
While the number of different retail
formats has grown, the number of competitors
within each format is decreasing.
A few national retailers dominate most formats.
Much of this consolidation has occurred through
acquisitions and mergers.
Historically retailing was a local business.
However, the development of efficient
distribution and communication systems meant
that large national firms could gain substantial
cost advantages over smaller regional and local
retailers.

II. Trends in Retail Industry (Cont.)

C. Globalization
Some factors stimulating globalization of
retailing are the maturation of the domestic
market, the development of skills and
systems to effectively manage
global operations, and the
removal of trade barriers.

II. Trends in Retail Industry (Cont.)

1. Maturation of Domestic Markets: Most large retailers
have saturated their domestic markets. Opening
additional stores in the U.S. results in limited
additional sales leading large U.S. retailers to look for
growth opportunities in international markets.
2. Skills and Systems: Retail firms are better prepared
with international knowledge and experience to
effectively manage stores in non-domestic markets.
To facilitate global sourcing of merchandise, retailers
operate global information and
distribution systems.
3. Trade Barriers: The relaxation of
trade barriers makes global
expansion easier.

III. Food Retailers

A. Conventional Supermarkets
A conventional supermarket is a self-serviced
food store offering groceries, meat, produce,
and limited non-food items.
Half of the conventional supermarkets are very
promotional. This is called a hi-low pricing
strategy.
The other half of conventional supermarkets
use very few promotions and sell almost all
merchandise at the same price every day.
This is called an everyday low pricing (EDLP)
policy.

III. Food Retailers (Cont.)

B. Big Box Food Retailer
Over the past 25 years, supermarkets have increased
in size and have begun to sell a broader variety of
merchandise. In 1979, conventional supermarkets
accounted for 85% of supermarket sales.
By 1998, only 41% of supermarket sales were in
conventional supermarkets due to the growth of big
box food retailing formats- superstores, combination
stores, and warehouse-type stores.
Superstores are large supermarkets (20,000 to 50,000
sq. ft) stores that combine a superstore and a full-line
discount store.
Combination stores are food-based retailers of 30,000
to 100,000 sq. ft that have over 25% of their sales
from non-food merchandise.

III. Food Retailers (Cont.)

B. Big Box Food Retailer (Cont.)
1. Supercenters are 150,000 to 200,000 sq.
ft stores that combine a superstore and a
full-line discount store
The supercenters and full-line discount
stores, sell groceries at low prices to build
store traffic.
By offering broad assortments of grocery
and general merchandise under one roof,
supercenters provide a one-stop shopping
experience.

III. Food Retailers (Cont.)

B. Big Box Food Retailer (Cont.)
2. Warehouse Club is a retailer that offers a limited
assortment of food and general merchandise with
little service at low prices to ultimate consumers
and small businesses.
Stores are large ( about 100,000 sq. ft) and
located in low rent districts.
Along with low-cost locations and store designs,
warehouse clubs reduce inventory holding costs
by carrying a limited assortment of fast-selling
items.
Typically members must pay an annual fee of
$25 to $35.

III. Food Retailers (Cont.)

C. Convenience Stores
Convenience stores provide a limited variety and
assortment of merchandise at a convenient location
in a 2,000 to 3,000 sq. ft store with a speedy
checkout. They are modern versions of the
neighborhood mom-and pop stores.
Convenience stores enable consumers to make
purchases quickly without having to search through
a large store and wait in long checkout lines.
Now almost all convenience stores sell gasoline,
that accounts for over 55% of annual sales.

III. Food Retailers (Cont.)

D. Issues in Food Retailing
Two forces affecting traditional food
retailers are the changing consumer
consumption patterns for food and
increased competition from discount
store chains.

III. Food Retailers (Cont.)

1. Adapting to Changing Food Consumption Patterns
Due to time pressures on two-income families and
favorable economic conditions, consumer are cooking
meals at home less frequently.
To gain a greater share of food expenditures,
supermarkets have made significant investments in
providing meal solutions, either hot food or partially
cooked entrees.
The response to these food service investments by
supermarkets has been disappointing. Only 15% of
supermarket customers are loyal purchasers of these
products and 43% never buy prepared foods at
supermarkets.
Convenience stores are also developing new concepts
emphasizing prepared meals.

III. Food Retailers (Cont.)

2. Competing Effectively Against Full Line Discount Stores
Traditional supermarket chains are facing increased
competition from discount chains. In response to the
inroads being made by supercenters and warehouse
clubs, supermarket chains are reducing their costs.
Discount store chains were able to undercut supermarket
prices because their distribution systems were more
efficient, and they focused on reducing inventory
investments by selling fast moving items.
Supermarkets continue to sell over 75% of the produce,
meat dry/canned goods, frozen food, diary, bakery, and
seafood. However, the big box retail formats now account
for over 50% of the sales of pet food, paper products,
beer, and personal care products.
Convenience stores are also facing significant competition
from full-line discount stores with areas near the store front
devoted to convenience store merchandise and from the
new, larger drug store formats at stand-alone locations.

IV. Traditional General

Merchandise Retail
The major types of general merchandise
retailers are department stores, full-line
discount stores, specialty stores, drug stores,
category specialists, home improvement
centers, and off-price retailers.

IV. Traditional General Merchandise Retail

A. Department Stores
Department Stores are retailers that carry a broad
variety and deep assortment, offer considerable
customer services and are organized into separate
departments for displaying merchandise.
Each department within the store has a specific selling
space allocated to it, a POS terminal to transact and
record sales, and salespeople to assist customers.
The major departments are womens , mens and
childrens clothing and accessories; home furnishing
and furniture, and kitchenware and small appliances.
In some situations, departments in a department
store or discount store are leased and operated
by an independent company.
A leased department is an area in a retail store
that is leased or rented to an independent firm.

IV. Traditional General

Merchandise Retail (Cont.)
A. Department Stores (Cont.)
Retailers lease departments when they feel they lack
expertise to efficiently operate the department.
Specialty Department stores use a department store
format but focus primarily on apparel and soft home
furnishings.
The nature of traditional department stores has
changed considerably over the years, so the
distinction between traditional, specialty, and
promotional department stores has blurred. With few
exceptions, traditional department stores have
eliminated many of the departments they originally

IV. Traditional General

Merchandise Retail (Cont.)
A. Department Stores (Cont.)
Department stores overall sales have stagnated in
recent years due to increased competition from
discount stores and specialty stores.
Many consumers wait to buy merchandise when it
goes on sale rather than at the initial retail price.
60 to 80% of all merchandise sold by department
stores is on sale.
In response to this increased competition,
department stores are altering their merchandise
mix, improving their in-stock position on fashion
merchandise and improving their customer service.

IV. Traditional General

Merchandise Retail (Cont.)
B. Discount Stores
A full-line discount store is a retailer that offers
low prices. They offer national brands, but these
brands are typically less fashion-oriented than
brands in department stores.
Category specialists and home improvement
centers compete intensely with full-line discount
stores.
To respond to category specialists domination of
hard goods, full-line discount retailers are creating
more attractive shopping environments, placing
more emphasis on apparel and developing private
label merchandise, and increasing store visits
by offering easily accessible, convenience store
merchandise.

IV. Traditional General

Merchandise Retail (Cont.)
C. Specialty Stores
A traditional specialty store concentrates on a limited
number of complementary merchandise categories
and provides a high level of service in an area
typically less than 8,000 square feet.
By carrying a narrow variety but deep assortment,
they offer customers a better assortment, they offer
customers a better selection and sales expertise in
that category than department or discount stores
provide.
In response to declining interest in high fashion
apparel,specialty stores are adopting a concept
called Lifestyle Retailing which tailors the
merchandise to the life style of a specific group of

IV. Traditional General

Merchandise Retail (Cont.)
D. Drug Stores
Drug stores are specialty stores that concentrate on
health and personal grooming merchandise. Drug
stores are facing considerable competition in
pharmaceuticals from discount stores and
supermarkets adding pharmacies as well as from mail
order retailers filling prescriptions.
Prescription pharmaceutical margins are shrinking due
to governmental health care policies and HMOs.
In response, drug store chains are building larger
stores with wider assortments and are increasing
service beyond dispensing pills.

IV. Traditional General

Merchandise Retail (Cont.)
E. Category Specialists
A category specialists is a discount store that offers
a narrow variety but deep assortment of
merchandise. These retailers are basically discount
specialty stores.
Most category specialists use a self-service
approach, but some specialists in consumer
durables offer assistance to customers.
By offering a complete assortment in a
category at low prices, category specialists
can kill a category of merchandise for
other retailers and thus are frequently
called category killers.

IV. Traditional General

Merchandise Retail (Cont.)
E. Category Specialists (Cont.)
Because category specialists dominate a category
of merchandise, they can use their buying power to
negotiate lower prices, excellent terms, and
assured supply when items are scarce.
Competition between specialists in each category is
very intense as the firms expand into the regions
originally dominated by another firm. In response,
category killers continue to concentrate on reducing
costs and acquiring smaller chains to gain
economies of scale.

IV. Traditional General

Merchandise Retail (Cont.)
F. Home Improvement Centers
A home improvement center is a category
specialist that combines the traditional hardware
store and lumberyard. It focuses on providing
material and information that enables do-ityourselfers to maintain and improve their homes.
While merchandise in home-improvement centers
is displayed in a warehouse atmosphere,
salespeople are available to assist customers in
seeking merchandise and to tell them how to use
it.

IV. Traditional General

Merchandise Retail (Cont.)
G. Off-Price Retailers
Off-price retailers offer an inconsistent
assortment of brand name, fashion-oriented soft
goods at low prices.
Off price retailers can sell brand names and even
designer-label merchandise at low prices due to
their unique buying and merchandising practices.
Typically,merchandise is purchased at one-fifth to
one-fourth of the original wholesale price. Off-price
retailers can buy at low prices because they dont
ask suppliers for advertising allowances, return
privileges, markdown adjustment ,or delayed
payments.

IV. Traditional General

Merchandise Retail (Cont.)
G. Off-Price Retailers (Cont.)
Over the last several years, the sales growth of
off-price retailers has slowed. With the increase
in sales and promotion in department stores,
consumers often are able to get fashionable,
brand name merchandise in department stores
at the same discounted prices offered by offprice retailers.
In response to these conditions ,off-price
retailers are buying more current merchandise
to complement the excess merchandise bought
at the end of a fashion season.

IV. Traditional General

Merchandise Retail (Cont.)
There a 3 types of off-price retailers
1. Outlet Stores
Outlet stores are off-price retailers owned by
manufacturers, department or specialty store chains.
Outlet stores owned by manufactures are frequently
referred to as Factory Outlets.
Manufacturers view outlet stores as an opportunity to
improve their revenue from irregulars, production overruns,
and merchandise returned by retailers.
2. Close-out retailers
Closeout retailers are off-price retailers that sell a broad
,but inconsistent assortment of general merchandise as
well as apparel and soft home goods.
3. Single price retailers
Single price retailers are closeout stores that sell all their
merchandise at a single price typically $1.

IV. Traditional General

Merchandise Retail (Cont.)
H. Hypermarket
A hypermarket is a very large retail store offering
low prices that combine a discount store and a
superstore food retailer in one warehouse-like
building.
Hypermarkets are 300,000 sq. ft. , larger than 6
football fields, and stock over 50,000 different
items. Annual revenues are typically over $100
million per store.
Hypermarkets were created in France after World
War II. And they have not been very successful in
the US for a variety of reasons including less
restrictive land laws, competition and store size.

V. Services Retailing
A. Types of Services Retailers
Many organizations that offer services to
consumers such as banks, hospitals, health
spas, doctors, legal clinics, entertainment firms
and universities traditionally havent considered
themselves as retailers. Due to increased
competition, these organizations are adopting
retailing principles to attract customers and
satisfy their needs.
All retailers provide goods and services for their
customers. Some firms , such as dry cleaners
primarily provide services. Optical centers and
restaurants lie somewhere in the middle of the
merchandise/services continuum. Supermarket
and warehouse clubs primarily provide goods.

V. Services Retailing (Cont.)

B. Differences Between Services and
Merchandise Retailers
4 Important differences in the nature of the offering
provided by services and merchandise retailers
are:
1. Intangibility
2. Simultaneous Production and Delivery
3. Perishability
4. Inconsistency of the Offerings

V. Services Retailing (Cont.)

1. Intangibility: Services are generally
intangible. Customers can not see, touch,
or feel them. On the other hand, services
are performances or actions rather than
objects. Service retailers often have
difficulty in evaluating the quality of
services they are providing. They must
solicit customer evaluations and
complaints.
2. Simultaneous production and delivery:
Service providers create and deliver the
service as the customer is consuming it.

V. Services Retailing (Cont.)

3. Perishability: Because the creation and
consumption of services is inseparable,
services are perishable. They can not be
saved, stored, or resold. In addition the
demand for services varies over time.
4. Inconsistency: Merchandise is often
produced by machines with very tight quality
control. Because services are performed by
people, no two services will be identical.

VI. Types of Ownership

Another way to classify retailers is by their
ownership.
The major classification of retail ownership are:
1. Independent, Single-Store Establishment
2. Corporate Chains
3. Franchises

VI. Types of Ownership (Cont.)

A. Independent-single-store establishments
In 1998, over 60,000 new retail business were started
in the US and many stores are owner-managed.
While single stores can tailor their offering to their
customers needs, corporate chains can more
effectively negotiate lower prices for merchandise
and advertising due to their larger size.
To better compete against corporate chains, some
independent retailers join a retail-sponsored
cooperative group or wholesale-sponsored voluntary
chain.

VI. Types of Ownership (Cont.)

B. Corporate Retail Chain
A retail chain is a company operating multiple
retail units under common ownership and
usually having some centralization of decision making in
defining and implementing strategy.
Due to economies of scale and an efficient distribution
system, corporate chains can sell at lower prices. This
forces some directly competing local retailers out of
business and alters the community fabric.
On the other hand, local retailers offering complementary
merchandise and services can prosper. Often, all stores
in a chain have the same merchandise and services, while
local retailers can provide merchandise compatible with
local market needs.
In addition, to mergers and acquisitions leading to
consolidation, the retail chains are focusing their expertise
on managing a specific retail format rather than operating
as a holding company for a diverse set of retail formats.

VI. Types of Ownership (Cont.)

C. Franchising
Franchising is a contractual agreement between a
franchiser and a franchisee that allows the
franchisee to operate a retail outlet using a name
and format developed and support by the franchiser.
Approximately one-third of all US retail sales are
made by franchisees.
The franchising ownership format attempts to
combine advantages of owner-managed businesses
with efficiencies of centralized decision making in
chain store operations.
Franchisees are motivated to make their
store successful because they receive
the profits after the royalty is paid. The
franchiser is motivated to develop new
products and systems to promote the
franchise because it receives a royalty on all sales.

VI. Types of Ownership (Cont.)

D. Other Forms of Ownership
Some retail outlets are owned by their customers
and others are owned by government agencies.
In consumer cooperatives, customers own and
operate the retail establishment. Consumers have
ownership shares, hire full-time managers, and
share in the stores profits through price
reductions or dividends.
Local, state and federal government
agencies sometime own retail
establishments.