Chapter 4

Evaluating the Competition in Retailing

Retailing, 6th Edition. Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

1. Explain the various models of retail competition.

2. Distinguish between various types of retail competition.

3. Describe the four theories used to explain the evolution of retail competition.

4. Describe the changes that could effect retail competition.

Models of Retail Competition

The Competitive Marketplace Market Structure The Demand Side of Retailing Nonprice Decisions Competitive Actions Suppliers as Partners and Competitors

LO 1

Models of Retail Competition

High-profit retailers want to develop strategic plans that provide a differential advantage that competitors can overcome only with a substantial investment of time and money.

LO 1

The Competitive Marketplace

Retailers compete on 5 major fronts: The price for benefits offered Service level Product selection Location or access: the overall convenience of

the retailer Customer experience

LO 1

The Competitive Marketplace

Retailers that study and respond to the local retail competition will be more profitable when they understand how and when to adapt to national trends, which don’t always affect every market in the same way.

LO 1

Market Structure

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

Market Structure

Pure Monopoly:

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

LO 1

Market Structure

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

Market Structure

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

Market Structure

Outshopping:

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

LO 1

Demand as a Function of Price

Exhibit 4.1 LO 1

The Relationship of Price Versus Nonprice Actions and Demand Curve

Price

Quantity

Price

Quantity

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

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

LO 1

Nonprice Decisions

Retailers that are able to remove themselves from price competition by differentiating themselves in some other way will achieve higher profits than those that fail to do this.

LO 1

Nonprice 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

Nonprice Decisions

The retailer can offer private label merchandise that has unique features or offers better value than competitors.

The retailer could provide other benefits to the customer.

LO 1

Some Private Labels of Major Retailers

Exhibit 4.2 LO 1

Nonprice Decisions

The retailer could master stockkeeping with its basic merchandise assortment.

LO 1

Nonprice Decisions

A variation is to become a “destination” store for certain products.

LO 1

Competitive Actions

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

LO 1

Competitive 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.

LO 1

Competitive Actions

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

Suppliers as Partners and Competitors

A retailer’s suppliers should be considered both partners and competitors for the customer’s dollar.

LO 1

Types of Competition

Intratype and Intertype Competition Divertive Competition

LO 2

Types of Competition

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.

LO 2

Types of Competition

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

Intratype and Intertype Competition

Intratype competition for books.

LO 2

Intratype and Intertype Competition

Intertype competition for video rentals.

LO 2

Intratype and Intertype Competition

Intratype Competition

Intertype Competition

Albertson’sSupermarket

SafewaySupermarket

McDonald’s

Supermarkets offeringHome Meal

Replacements (HMR)compete with fast-food

restaurants

LO 2

Types of Competition

Divertive Competition:

Occurs when retailers intercept or divert customers from competing retailers.

LO 2

Types of Competition

Break-even Point:

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

LO 2

Evolution of Retail Competition

The Wheel of Retailing The Wheel of Retailing Retail Life Cycle Resource-Advantage Theory

LO 3

Evolution of Retail Competition

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 pattern.

LO 3

Wheel of Retailing

Exhibit 4.3 LO 3

The Retail Accordion

Retail Accordion:

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

LO 3

The Retail Accordion

Wide Assortment

Wide Assortment

NarrowAssortment

Time

LO 3

The Retail Life Cycle

Retail Life Cycle:

Describes four distinct stages that a retail institution progresses through:

Introduction

Growth

Maturity

Decline

LO 3

The Retail Life Cycle

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 3

The Retail Life Cycle

Growth:

Sales and profits explode. 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.

LO 3

The Retail Life Cycle

Maturity:

Market share stabilizes and profits decline.• Shift in type of establishment• Overexpansion• Competition

LO 3

The Retail Life Cycle

Decline:

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

LO 3

Retail Institutions in the Various Stages of the Retail Life Cycle

Exhibit 4.4 LO 3

Resource-Advantage Theory

Resource-advantage theory

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

LO 3

Resource-Advantage Theory

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

Future Changes in Retail Competition

Nonstore Retailing New Retailing Formats Heightened Global Competition Integration of Technology Increasing Use of Private Labels

LO 4

Nonstore Retailing

Direct Selling:

Engaging in the sale of a consumer product or service on a person-to-person basis away from a fixed retail location.

LO 4

Nonstore Retailing

Examples of Direct Selling: The Pampered Chef Ltd. Avon Products Inc. Mary Kay Inc. Regal Ware Inc. Herbalife International

LO 4

Nonstore Retailing

Direct Marketers:

Those who sell products by catalog, mail order, and the internet.

LO 4

The Top 10 Direct-to-Consumer Catalog Retailers

Exhibit 4.5 LO 4

Nonstore Retailing

E-Tailing:

The general belief that electronic, interactive, at-home shopping is definitely the place to be.

LO 4

Nonstore Retailing

E-Tailing:• Gen Xers and Baby Boomers tend to view the

internet as a supplement to their daily lives.• Gen Y folks are able to exist in both electronic

and traditional worlds at once.

LO 4

Nonstore Retailing

Bricks & Click Approach:

An approach that involves a tangible retail store that also offers its merchandise on the internet.

LO 4

Nonstore Retailing

Online Only Approach:

An online only approach is when the retailer only offers merchandise or services via the internet and not through a tangible store.

LO 4

New Retailing Formats

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 4

New Retailing Formats

Hypermarkets:

Are one and a half times the size of a supercenter.

LO 4

New Retail Formats

Supercenters:

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

LO 4

New Retail Formats

Recycled Merchandise Retailers:

Are establishments that sell used and reconditioned products.

LO 4

New Retail Formats

Liquidators:

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

LO 4

Heightened Global Competition

Increasing Rate of Change Greater Diversity Creation of New Retail Formats

LO 4

Integration Of Technology

Supply Chain Management Customer Management Customer Satisfaction

LO 4

Increasing Use of Private Labels

Helps in protecting retailer niche Sets retailer apart from competition Get customers in the store

LO 4

Arizona Jeans Co.

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

LO 4

Increasing Use of Private Labels

Private Label Branding Strategies: Develop a partnership with well-known

celebrities, noted experts, and institutional authorities.

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

LO 4

Increasing Use of Private Labels

Private Label Branding Strategies: Reintroduce products with strong name

recognition that have fallen from the retail scene.

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

LO 4

Additional Slides

Market Structure

Pure Competition

Pure Monopoly

Monopolistic Competition

Oligopolistic Competition

Retail Competition

LO 1

Future Changes in Retail Competition

Nonstore Retailing

New Retailing Formats

Integration of Technology

Private Label Use

Heightened Global Competition

LO 4

Nonstore Retailing

E-tailingDirect

Marketing

Direct Selling

LO 4

New Retailing Formats

Liquidators

RecycledMerchandise

Retailers

Supercenters

LO 4

Heightened Global Competition

Creation of New Retail Formats

GreaterDiversity

Increased Rate of Change

LO 4

Integration of Technology

CustomerSatisfaction

CustomerManagement

Supply Chain

Management

LO 4