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Introduction to the World of Retailing


The success of a small entrepreneurial retailer or a major retail corporation, in making these decisions, depends largely on how much it embraces the retailing concept. The RETAILING CONCEPT is a managerial orientation that focuses a retailer on determining its target markets needs and satisfying those needs more effectively and efficiently than its competitors.

The retailing concept emphasizes that highperformance retailers must be strong competitors. They cant achieve high performance by simply satisfying customers needs. They must also keep a close watch to ensure that competitors dont attract their customers.


The first step in the retail management decision process is getting an understanding of the world of retailing. Retail managers need a good understanding of their environment, especially their customers and competition, before they can develop and implement effective strategies. The critical environmental factors in the world of retailing are: 1. The macroenvironment 2. The microenvironment

Ethical standards and legal and public policy are critical macroeconomic factors affecting retail decisions. Strategy development and implementation must be consistent with corporate values, legal opinions, and public policies. Federal, state, and local laws are enacted to ensure that business activities are consistent with societys interests. These laws define unfair competitive practices related to suppliers and customers; regulate advertising, promotion, and pricing practices; and restrict store locations.

Retailers rely on ethical standards to guide decision making when confronting questionable situations not covered by laws. Buyers may have to decide whether to accept a suppliers offer of free tickets to a football game Some retailers have policies that outline correct behavior of employees in these situations, but in many situations people must rely on their own code of ethics.

The introductory section on the world of retailing focuses on the retailers microenvironment the retailers competitors and customers. COMPETITORS. At first glance, identifying competitors appears easy. A retailers primary competitors are those with the same format. This competition with the same type of retailers is called intratype competition.

To appeal to a broader group of consumers and provide one-stop shopping, many retailers are increasing their variety of merchandise. By offering greater variety in one store, retailers can offer one-stop shopping to satisfy more of the needs of their target market. The offering of merchandise not typically associated with the store type is called scrambled merchandising. Scrambled merchandising increases intertype competition competition between retailers that sell similar merchandise using different formats.

Increasing intertype competition has made it harder for retailers to identify and monitor their competition. In one sense, all retailers compete against each other for the dollars consumers spend buying goods and services. But the intensity of competition is greatest among retailers located close together with retail offerings that are viewed as very similar. Since convenience of location is important in store choice, a stores proximity to competitors is a critical factor in identifying competition. Managements point of competition also can differ, depending on the managers position within the retail firm.

CUSTOMERS. Customer needs are continually changing at an ever increasing rate. Retailers need to respond to broad demography and lifestyle trends in our society. To develop and implement an effective strategy, retailers also need to know the information about why customers shop, how they select a store, and how they select among that stores merchandise.


RETAIL STRATEGY indicates how the firm plans to focus its resources to accomplish its objectives. It identifies : 1. The target market toward which the retailer will direct its efforts; 2. The nature of the merchandise and services the retailer will offer to satisfy needs of the target market and 3. How the retailer will build a long-term advantage over competitors.

The retailers market strategy must be consistent with the firms financial objectives. A retailers organization design and human resource management strategy are intimately related to its market strategy. Retail information and supply chain management systems will offer a significant opportunity for retailers to gain strategic advantage in the coming decade.


The key strategic decision areas involve determining a

market strategy, financial strategy, location strategy, organizational structure and human resource strategy, and information systems strategy and customer relationship management strategies. When major environmental changes occur, the current strategy and the reasoning behind it are reexamined. The retailer then decides what, if any, strategy changes are needed to take advantage of new opportunities or avoid new threat in the environment.


- To implement a retail strategy, management develops a retail mix that satisfies the needs of its target market better than its competitors. The retail mix is the combination of factors retailers use to satisfy customer needs and influence their purchase decisions. - Elements in the retail mix include: o The types of merchandise and services offered o Merchandise pricing o Advertising and promotional programs o Store design o Merchandise display o Assistance to customers provided by salespeople o Convenience of the stores location

Chapter 2:
Types of Retailers

Types of Merchandise: North American Industry Classification System (NAICCS): The United States, Canada, and Mexico have developed a classification scheme, called the North American Industry Classification System, to collect data on business activity in each country. Every business is assigned a hierarchical, six-digit code based on the type of products and services it produces and sells. The first two digits identify the firms business sector, and the remaining four digits identify various sub sectors. Variety and Assortment: Variety: represents the number of merchandise categories a retailer offers. Assortment: is the number of different items in a merchandise category. Variety is often referred to as the breadth of merchandise carried by a retailer; Assortment is referred to as the depth of merchandise. Each different item of merchandise is called an SKU (stock keeping unit).

Warehouse club stores, discount stores, and toy stores all sell toys. However, warehouse clubs and discount stores sell many other categories of merchandise in addition to toys. Stores specializing in toys stock more types of toys.

Service Offered: Retailers also differ in the services they offer customers. Customers expect almost all retailers to provide certain services: displaying merchandise, accepting credit cards, providing parking, and being open to convenient hours. Some retailers charge customers for other services, such as home delivery and gift wrapping. Retailers that cater to serviceoriented consumers offer customers most of these services at no charge.

Prices and the cost of offering breadth and depth of merchandise and services: Stocking a deep and broad assortment like gatorcycles offering bicycles is appealing to customers but costly for retailers. When a retailer offers customers many SKUs, its inventory investment increases because the retailer must have backup stock for each SKU. Similarly, services attract customers to the retailer but theyre also costly. More salespeople are needed to provide information and assist customers, alter merchandise to meet customers needs, and demonstrate merchandise. Child care facilities, restrooms, dressing rooms, and check rooms take up valuable store space that could be used to stock and display merchandise.

To make a profit, retailers that offer broader and deeper assortments and services need to charge higher prices.

Food Retailers: Supermarkets: A Conventional supermarket is a self-serviced food store offering groceries, meat, and produce with limited sales of non food items, such as health and beauty aids and general merchandise. Whereas conventional supermarkets carry about 30,000 SKUs, Limited assortment supermarkets, also called extreme value food retailers, only stock 1,250 SKUs. Rather than carrying twenty brands of laundry detergent, limited assortment stores offer one or two brands and sizes, one of which is a store brand. Stores are designed to maximize efficiency and reduce costs.

Trends in Food Retailing: The set of programs supermarket chains have undertaken to achieve this inventory reduction is called efficient customer response (ECR) and includes just-in-time inventory management and better assortment planning.

To complete successfully against intrusions by other food retailing formats conventional supermarkets are differentiating their offering by Emphasizing fresh perishables, Targeting health-conscious and ethnic consumers, Providing a better in-store experience, and Offering more private label brands.

Fresh merchandise categories, the areas around the outside walls known as the power perimeter, have long been the mainstays of conventional supermarkets. These include the dairy, bakery meats, florist, produce, deli, and coffee bar departments - high traffic; profitable departments that help pull shoppers through the store.

Supercenters: The fastest growing retail category, are large stores that combine a supermarket with a full-line discount store. By offering broad assortments of grocery and general merchandise products under one roof, super centers provide a onestop shopping experience.

Hypermarkets: are also large combination food and general merchandise stores. Hypermarkets typically stock fewer stock than supercenters between 40,000 and 60,000 items ranging from groceries, hardware, and sports equipment to furniture and appliance to computers and electronics. Hypermarkets are not common in the United States, though hypermarkets and supercenters are similar. Both hypermarkets and supercenters are large, carry grocery and general merchandise categories, offer self-service, and are located in warehouse-type structures with large parking facilities.

o However, hypermarkets carry a larger proportion of food items than supercenters with a greater emphasis placed on perishables produce, meat, fish, and bakery. o Supercenters, on the other hand, have a larger percentage of nonfood items and focus more on dry groceries, such as breakfast cereal and canned goods, instead of fresh items

Warehouse Clubs Warehouse clubs are retailers that offer a limited and irregular assortment of food and general merchandise with little service at low prices for ultimate consumers and small businesses. Warehouse clubs are large (at least 100,000150,000 square feet) and typically located in low-rent districts. They have simple interiors and concrete floors. Aisles are wide so forklifts can pick up pallets of merchandise and arrange them on the selling floor. Little service is offered. Customers pick merchandise off shipping pallets, take it to checkout lines in the front of the store, and usually pay with cash.

Warehouse clubs can offer low prices because they use low-cost locations, inexpensive store designs, and little customer service and keep inventory holding costs low by carrying a limited assortment of fast selling items. Most warehouse clubs have two types of members: wholesale members who own small businesses and individual members who purchase for their own use. Typically, members must pay an annual fee of $25-45.

Convenience Stores Convenience stores provide a limited variety and assortment of merchandise at a convenient location in 2,000-3,000 square foot stores with speedy checkout. They are the modern version of the neighborhood mom-and pop grocery/general store. Customers can shop very quickly. Due to their small size and high sales, convenience stores typically receive deliveries every day. Convenience stores only offer limited assortments and variety, and they charge higher prices than supermarkets.

In response to competitive pressures, convenience stores are taking steps to decrease their dependency on gasoline sales, tailoring assortments to local markets, and making their stores even more convenient to shop. To increase convenience, convenience stores are opening smaller stores close to where consumers shop and work.

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

Department stores are retailers that carry a broad variety and deep assortment, offer customer services, and organize their stores into distinctly separate departments for displaying merchandise. Traditionally, department stores attracted customers by offering a pleasing ambience, attentive service, and a wide variety of merchandise under one roof. o They sold both soft goods (apparel and bedding) and hard goods (appliances, furniture, and consumer electronics).

o But now most department stores focus almost exclusively on soft goods. Department store chains can be categorized into three tiers. The first tier includes upscale, high fashion chains with exclusive designer merchandise and excellent customer service. The second tier of upscale traditional department stores, in which retailers sell more modestly priced merchandise with less customer service. The value oriented tier caters to more priceconscious consumers.

Retail chains in the first tier have established a clearly differentiated position and are producing strong financial results, while the value oriented tier is facing significant competitive challenges from discount stores. Department stores still account for some of retailings traditions multistoried downtown stores, special events, parades, Santa Claus lands, and holiday decorations and offer designer brands that are not available from other retailers. o Department stores have not been as successful as discount stores and food retailers in reducing costs by working with their vendors to establish just-in-time inventory systems, so prices are relatively high.

The performance of department stores is linked to the strengths of the brands they sell. o In light of the decline in department store patronage, many of these brands, previously sold exclusively through department stores, are pursuing other growth opportunities. To deal with their eroding market share, department stores are : o Attempting to increase the amount of exclusive merchandise they sell, o Undertaking marketing campaigns to develop strong images for their stores and brands, and

o Building better relationships with their key customers. In recent years, department stores discount sales events have increased dramatically to the point that consumers have been trained to wait for items to be placed on sale rather than buy them at full price. Finally, department stores are using technology and information systems to improve customer service in a cost effective manner.

Full-Line Discount Stores Full-line discount stores are retailers that offer a broad variety of merchandise, limited service, and low prices. Discount stores offer both private and national label, but these brands are typically less fashion oriented than the brands in department stores. Target is becoming one of the most successful retailers in terms of sales growth and profitability. Target succeeds because its stores offer fashionable merchandise at low prices in a pleasant shopping environment.

Specialty Stores Specialty stores concentrate on a limited number of complementary merchandise categories and provide a high level of service in relatively small stores. Specialty stores tailor their retail strategy toward a very specific market segment by offering deep but narrow assortments and sales associate expertise. Because specialty retailers focus on specific market segments, they are vulnerable to shifts in consumer tastes and preferences.

Drugstores Drugstores are specialty stores that concentrate on health and personal grooming merchandise. o Pharmaceuticals often represent over 50 percent of drugstore sales and an even greater percentage of their profits. Drugstores, particularly the national chains, are experiencing sustained sales growth because the aging population requires more prescription drugs.

Drugstores are also being squeezed by considerable competition from pharmacies in discount stores and supermarkets, as well as from prescription mail-order retailers. Drugstore retailers are using systems to allow pharmacists time to provide personalized service.

Category Specialists: Are big box discount stores that offer a narrow 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. For, example, office depot stores have a warehouse atmosphere, with cartons of copying paper stacked on pallets plus equipment in boxes on shelves.

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. Due their category dominance, they use their buying power to negotiate low prices and are assured of supply when items are scarce.

One of the largest and most successful types of category specialist is the home improvement center. A home improvement center is a category specialist offering equipment and material used by do-it-yourselfers and contractors to make home improvements.

Extreme Value Retailers: Are small, full-line discount stores that offer a limited merchandise assortment at very low prices. The largest extreme value retailers are dollar general and Family dollar stores. Extreme value retailers are one of the fastest growing segments in retailing. Like limited assortment food retailers, extreme value full-line retailers reduce costs and maintain low prices by offering a limited assortment and operating in low-rent, urban, or rural locations.

Off-Price Retailers Offer an inconsistent assortment of brand name merchandise at low prices. Americas largest offprice retail chains are TJX companies, Ross Stores, and Burlington Coat Factory. Off-price retailers sell brand name and even designer label merchandise at low prices through their unique buying and merchandising practices. Most merchandise is bought opportunistically from manufacturers or other retailers with excess inventory at the end of the season. Due to this pattern of opportunistic buying, customers cant be confident that the same type of merchandise will be in stock each time they visit the store.

Closeout Retailers: are off-price retailers that sell a broad but inconsistent assortment of general merchandise as well as apparel and soft home goods. The largest closeout chains are Big Lots Inc. and Tuesday Morning. Outlet stores are off-price retailers owned by manufacturers or department or specialty store chains. Those owned by manufacturers are frequently referred to as Factory Outlets. Out stores are typically found in one of the fastest growing types of malls the outlet mall.

Non Store Retailers In the preceding sections, we examined retailers whose primary channel is their stores. In this section, we will discuss types of retailers that operate primarily through non-store channels.

Electronic Retailers Electronic Retailing (also called e-tailing, online retailing, and Internet retailing) is a retail format in which the retailers communicate with customers and offer products and service for sale over the Internet. Even though online retail sales continue to grow much faster than retail sales through stores and catalogs, we now realize the internet is not a revolutionary new retail format that will replace stores and catalogs. While the Internet continues to provide opportunities for entrepreneurs in the retail industry, it is now primarily used by traditional retailers as a tool to complement their store and catalog offerings, grow their revenues, and provide more value for their customers.

Most of the retailers that sell merchandise exclusively over the Internet target niche markets markets that are so small and dispersed that they cannot be economically serviced by stores. Catalog and Direct-Mail Retailers Catalog retailing is a non-store retail format in which the retail offerings are communicated through a catalog, whereas direct-mail retailers communicate with their customers using letters and brochures. o Historically, catalog and direct-mail retailing were most successful with rural consumers who lacked ready access to retail stores. In 2003, $125 billion of merchandise and services were sold through catalogs, and over 17 billion catalogs were distributed in the United States. The merchandise categories with the greatest catalog sales are apparel, gifts, books, and home dcor.

Types of Catalog and Direct Mail Retailers General merchandise catalog retailers offer a broad variety of merchandise in catalogs that are periodically mailed to their customers. Specialty catalog retailers focus on specific categories of merchandise, such as fruit, gardening tools, and seeds and plants. Direct mail retailers typically mail brochures and pamphlets to sell a specific product or service to customers at one point in time.

Catalog retailing is very challenging. o First, it is difficult for smaller catalog and direct-mail retailers to compete with large, well-established firms with sophisticated CRM and fulfillment systems. o Second, the mailing and printing costs are high and increasing. .

o Third, it is difficult to get customers attention as they are mailed so many catalogs and direct mail promotions. o Fourth, the length of time required to design, develop, and distribute catalogs makes it difficult for catalog and direct mail retailers to respond quickly to new trends and fashions

Direct Selling Direct selling is a retail format in which salespeople, frequently independent businesspeople, contact customers directly in a convenient location, either at the customers home or at work; demonstrate merchandise benefits and/or explain a service; take an order; and deliver the merchandise or perform the service. Direct selling is a highly interactive form of retailing in which considerable information is conveyed to customers through face-to face discussions with salespeople. However, providing this high level of information, including extensive demonstrations, is costly.

Two special types of direct selling are the party plan and multilevel selling. o About 30 percent of all direct sales are made using a party plan system, in which salespeople encourage customers to act as hosts and invite friends or coworkers to a party at which the merchandise is demonstrated. Sales made at the party are influenced by the social relationship of the people attending with the host or hostess, who receives a gift or commission for arranging the meeting.

Television Home Shopping Television home shopping is a retail format in which customers watch a TV program that demonstrates merchandise and then place orders for the merchandise by telephone.

The three forms of electronic home shopping retailing are o Cable channels dedicated to television shopping o Infomercials o Direct-response advertising Direct-response advertising includes advertisements on TV and radio that describe products and provide an opportunity for consumers to order them.

Infomercials are TV programs, typically 30 minutes long that mix entertainment with product demonstrations and then solicit orders placed by telephone. The major advantage of TV home shopping compared with catalog retailing is that consumers can see the merchandise demonstrated on their TV screen. Vending Machine Retailing Vending machine retailing is a non-store format in which merchandise or services are stored in a machine and dispensed to customers when they deposit cash or use a credit card. Vending machines are placed at convenience, high-traffic locations, such as in the workplace or on university campuses, and primarily contain snacks and drinks.

o Due to increasing labor and gasoline costs, vending machine operators are increasing their prices andretrofitting machines to accept higher denomination bills. Technological developments in vending machine design may result in long-term sales growth. Some retailers are experimenting with vending machines as another channel to service their customers.

Service Retailing Service retailers firms selling primarily services rather than merchandise are a large and growing part of the retail industry. o There are several trends that suggest considerable future growth in services retailing.

Many organizations such as banks, hospitals, health spas, legal clinics, entertainment firms, and universities that offer services to consumers traditionally havent considered themselves 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.

Differences between Services and Merchandise Retailers Intangibility Services are generally intangible customers cannot see, touch, or feel them. They are performances or actions rather than objects. Due to the intangibility of their offering, service retailers often use tangible symbols to informcustomers about the quality of their services.

Services retailers also have difficulty evaluating the quality of services they are providing. o To evaluate the quality of their offering, services retailers often solicit customer evaluations and complaints.

Simultaneous Production and Consumption Products are typically made in a factory, stored and sold by a retailer, and then consumedby consumers in their homes. Services providers, however, create and deliver the service as the customer is consuming it.

The simultaneity of production and consumption also creates some special problems for service retailers. o First, the customers are present when the service is produced, may even have an opportunity to see it produced, and in some cases may be part of the production process, as in making their own salad at a salad bar. o Second, other customers consuming the service at the same time can affect the quality of the service provided. o Third, the service retailer often does not get a second chance to satisfy the needs of its customers.

Because services are produced and consumed at the same time, it is difficult to reduce costs through mass production. Most service retailers are small, local firms.

Perishability Because the creation and consumption of services are inseparable, services are perishable. They cant be saved, stored, or resold. o Due to the perishability of services, an important aspect of services retailing is matching supply and demand. Thus, services retailers often have times when their services are underutilized and other times when they have to turn customers away because they cant accommodate them. Services retailers use a variety of programs to match demand and supply. Inconsistency


Products can be produced by machines with very tight quality control so customers are reasonably assured that all boxes of cheerios will be identical. Because services are performances produced by people (employees and customers), no two services will be identical. Thus, an important challenge for services retailers is providing consistently high-quality services. Many factors that determine service quality are beyond the control of the retailers; however, services retailers expend considerable time and effort selecting, training, managing, and motivating their service providers.

Types of Ownership
Independent, Single-Store Establishments Retailing is one of the few sectors in our economy in which entrepreneurial activity is extensive. Many of these retail start-ups are owner managed, which means management has direct contact with customers and can respond quickly to their needs. Small retailers are also very flexible and can therefore react quickly to market changes and customer needs.

Whereas single-store retailers can tailor their offerings 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 wholesale-sponsored voluntary cooperative group, which is an organization operated by a wholesaler offering a merchandising program to small, independent retailers on a voluntary basis.

o In addition to buying, warehousing, and distribution, these groups offer members services such as advice on store design, and layout, site selection, bookkeeping and inventory management systems, and employee training programs.

Corporate Retail Chains A retail chain is a company that operates multiple retail units under common ownership and usually has centralized decision making for defining and implementing its strategy.

Franchising Franchising is a contractual agreement between a franchisor and a franchisee that allows the franchisee to operate a retail outlet using a name and format developed and supported by the franchisor.

In a franchise contract, the franchisee pays a lump sum plus a royalty on all sales for the right to operate a store in a specific location. The franchisee also agrees to operate the outlet in accordance with procedures prescribed by the franchisor. The franchisor provides assistance in locating and building the store, developing the products or services sold, training managers, and advertising. To maintain each franchisees reputation, the franchisor also makes sure that all outlets provide the same quality of services and products.

The franchise ownership attempts to combine the advantage of owner-managed businesses with efficiencies of centralized decision making of chain store operations. Franchisees are motivated to make their store successful because they receive the profits (after royalty is paid). The franchisor is motivated to develop new products and systems and to promote the franchise because it receives a royalty on all sales. Advertising, product development, and system development are efficiently done by the franchisor, with costs shared by all franchisees.