types-of-retailers-1224171190707768-9

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Chapter 2 : Types of Retailers

HDCS 3303Section 12711

Introduction to MerchandisingEvangeline Caridas


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I. Types of Retailers

Over time, different types

of retailers have emergedand prospered becausethey have attracted and

maintained a significantcustomer base.


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I. Types of Retailers (Cont.)

A. Nature of Retail Mix The most basic characteristic of a

retailer is its retail mix-the elementsused by retailers to satisfy theircustomers needs.

4 elements of the retail mix that areparticularly useful for classifyingretailers are the type ofmerchandise sold, the variety andassortment of merchandise sold,the level of customer service, andthe price of the merchandise.


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A. Nature of Retail Mix (Cont.) The difference between the retail mix

of department and discount storesillustrated the tradeoff retailers make

between the price of merchandisethey sell and the services they offerto their customers.

To make profit and provide these

additional benefits to its customers,department stores have to increasethe prices of its merchandise tocover the additional costs. This isreferred to as the price-cost tradeoff.


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I. Types of Retailers (Cont.)B. Types of merchandise

The US Bureau of the Censusdeveloped and uses a classificationscheme to collect data on retail activityin the US. It classifies all retail firms intoa hierarchical set of four digit Standard

Industrial Classification (SIC) codes. To address problems with

classification using SIC codes anddevelop economic statistics similar to

international trading partners, the USBureau along with Mexico andCanada, adopted a new classificationsystem, the North American IndustrialClassification System (NAICS), which

started to appear in 1999.


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I. Types of Retailers (Cont.)B. Types of merchandise (Cont.)

Conversion from SIC to NAICS willbe completed in 2004. The NAISC system recognized the

growth in services and specialty store

retailing by assigning numbers tocategories such as nail salons andpet supply stores.

The degree to which retailers

compete against each other isntalways based on the similarity of theirmerchandise. The variety andassortment of the merchandise theyoffer and the services they providemust also be considered.


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1. Variety and Assortment

Variety is the number of different merchandise

categories a retailer offers. Assortment is thenumber of different items in a merchandisecategory. Each different item of merchandiseis called and SKU ( stock keeping unit).

Variety is often referred to as the breadthof merchandise and assortment is referredto as the depth of merchandise.


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I. Types of Retailers (Cont.)C. Customer Services

Retailers also differ in theservices they offer customers.Customers expect retailers toprovide some services--

accepting personal checks,proving parking, anddisplaying merchandise.


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I. Types of RetailersD. Cost of Offering Breadth and Depthof Merchandise and Services

When a retailer offers many SKUs, inventoryinvestment increases because the retailer musthave 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 maintainingadditional inventory or providing additional

services.


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II. Trends inRetail Industry

The retail industry is

changing rapidly. Some ofthe most importantchanges involve thegreater diversity ofretailers, increasingindustry concentrationand globalization.


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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 buymerchandise 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 ofbenefits, thus consumers patronize different retailers

for different purchase occasions.


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II. Trends in RetailIndustry (Cont.)

B. Increasing Industry Concentrations While the number of different retail

formats has grown, the number of competitorswithin 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 efficientdistribution and communication systems meantthat large national firms could gain substantialcost advantages over smaller regional and localretailers.


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II. Trends in Retail Industry (Cont.)

C. Globalization

Some factors stimulating globalization of

retailing are the maturation of the domesticmarket, the development of skills andsystems to effectively manageglobal operations, and theremoval of trade barriers.


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II. Trends in Retail Industry (Cont.)1. Maturation of Domestic Markets: Most large retailers

have saturated their domestic markets. Openingadditional stores in the U.S. results in limitedadditional sales leading large U.S. retailers to look forgrowth opportunities in international markets.

2. Skills and Systems: Retail firms are better preparedwith international knowledge and experience toeffectively manage stores in non-domestic markets.To facilitate global sourcing of merchandise, retailers

operate global information anddistribution systems.

3. Trade Barriers: The relaxation oftrade barriers makes global

expansion easier.


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III. Food RetailersA. Conventional Supermarkets

A conventional supermarket is a self-servicedfood store offering groceries, meat, produce,and limited non-food items.

Half of the conventional supermarkets are verypromotional. This is called a hi-low pricingstrategy.

The other half of conventional supermarkets

use very few promotions and sell almost allmerchandise at the same price every day.This is called an everyday low pricing (EDLP)policy.


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III. Food Retailers (Cont.)B. Big Box Food Retailer

Over the past 25 years, supermarkets have increasedin size and have begun to sell a broader variety ofmerchandise. In 1979, conventional supermarketsaccounted for 85% of supermarket sales.

By 1998, only 41% of supermarket sales were inconventional supermarkets due to the growth of bigbox food retailing formats- superstores, combinationstores, and warehouse-type stores.

Superstores are large supermarkets (20,000 to 50,000sq. ft) stores that combine a superstore and a full-linediscount store.

Combination stores are food-based retailers of 30,000to 100,000 sq. ft that have over 25% of their sales

from non-food merchandise.


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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 afull-line discount store

The supercenters and full-line discountstores, 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 shoppingexperience.


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B. Big Box Food Retailer (Cont.)2. Warehouse Club is a retailer that offers a limited

assortment of food and general merchandise withlittle 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 costsby carrying a limited assortment of fast-sellingitems.

Typically members must pay an annual fee of

$25 to $35.


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III. Food Retailers (Cont.)C. Convenience Stores

Convenience stores provide a limited variety andassortment of merchandise at a convenient locationin a 2,000 to 3,000 sq. ft store with a speedy

checkout. They are modern versions of theneighborhood mom-and pop stores.

Convenience stores enable consumers to makepurchases 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.


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D. Issues in Food Retailing

Two forces affecting traditional foodretailers are the changing consumerconsumption patterns for food andincreased competition from discountstore chains.


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1. Adapting to Changing Food Consumption Patterns Due to time pressures on two-income families and

favorable economic conditions, consumer are cookingmeals at home less frequently.

To gain a greater share of food expenditures,supermarkets have made significant investments inproviding meal solutions, either hot food or partiallycooked entrees.

The response to these food service investments by

supermarkets has been disappointing. Only 15% ofsupermarket customers are loyal purchasers of theseproducts and 43% never buy prepared foods atsupermarkets.

Convenience stores are also developing new concepts

emphasizing prepared meals.


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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 theinroads being made by supercenters and warehouseclubs, supermarket chains are reducing their costs.

Discount store chains were able to undercut supermarketprices because their distribution systems were more

efficient, and they focused on reducing inventoryinvestments by selling fast moving items. Supermarkets continue to sell over 75% of the produce,

meat dry/canned goods, frozen food, diary, bakery, andseafood. 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 competitionfrom full-line discount stores with areas near the store frontdevoted to convenience store merchandise and from thenew, larger drug store formats at stand-alone locations.


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IV. Traditional GeneralMerchandise Retail

The major types of general merchandiseretailers are department stores, full-linediscount stores, specialty stores, drug stores,category specialists, home improvementcenters, and off-price retailers.


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IV. Traditional General Merchandise RetailA. Department Stores

Department Stores are retailers that carry a broadvariety and deep assortment, offer considerablecustomer services and are organized into separatedepartments for displaying merchandise.

Each department within the store has a specific sellingspace allocated to it, a POS terminal to transact andrecord sales, and salespeople to assist customers.

The major departments are womens , mens andchildrens 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 operatedby an independent company.

A leased department is an area in a retail storethat is leased or rented to an independent firm.


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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 homefurnishings.

The nature of traditional department stores haschanged considerably over the years, so thedistinction between traditional, specialty, andpromotional department stores has blurred. With fewexceptions, traditional department stores have

eliminated many of the departments they originally


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Merchandise Retail (Cont.)A. Department Stores (Cont.) Department stores overall sales have stagnated in

recent years due to increased competition fromdiscount 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 merchandisemix, improving their in-stock position on fashion

merchandise and improving their customer service.


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IV. Traditional GeneralMerchandise Retail (Cont.)

B. Discount Stores A full-line discount store is a retailer that offers

low prices. They offer national brands, but thesebrands are typically less fashion-oriented than

brands in department stores. Category specialists and home improvementcenters compete intensely with full-line discountstores.

To respond to category specialists domination ofhard goods, full-line discount retailers are creatingmore attractive shopping environments, placingmore emphasis on apparel and developing privatelabel merchandise, and increasing store visits

by offering easily accessible, convenience storemerchandise.


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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 areatypically less than 8,000 square feet. By carrying a narrow variety but deep assortment,

they offer customers a better assortment, they offercustomers a better selection and sales expertise in

that category than department or discount storesprovide.

In response to declining interest in high fashionapparel,specialty stores are adopting a concept

called Lifestyle Retailing which tailors themerchandise to the life st le of a s ecific rou of


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Merchandise Retail (Cont.)D. Drug Stores Drug stores are specialty stores that concentrate on

health and personal grooming merchandise. Drugstores are facing considerable competition inpharmaceuticals from discount stores andsupermarkets adding pharmacies as well as from mailorder retailers filling prescriptions.

Prescription pharmaceutical margins are shrinking dueto governmental health care policies and HMOs.

In response, drug store chains are building largerstores with wider assortments and are increasing

service beyond dispensing pills.


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E. Category Specialists A category specialists is a discount store that offers

a narrow variety but deep assortment ofmerchandise. These retailers are basically discountspecialty stores.

Most category specialists use a self-serviceapproach, but some specialists in consumerdurables offer assistance to customers.

By offering a complete assortment in acategory at low prices, category specialistscan kill a category of merchandise forother retailers and thus are frequently

called category killers.


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Merchandise Retail (Cont.)E. Category Specialists (Cont.) Because category specialists dominate a category

of merchandise, they can use their buying power tonegotiate lower prices, excellent terms, andassured supply when items are scarce.

Competition between specialists in each category isvery intense as the firms expand into the regions

originally dominated by another firm. In response,category killers continue to concentrate on reducingcosts and acquiring smaller chains to gaineconomies of scale.


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Merchandise Retail (Cont.)F. Home Improvement Centers

A home improvement center is a category

specialist that combines the traditional hardwarestore and lumberyard. It focuses on providingmaterial and information that enables do-it-yourselfers to maintain and improve their homes.

While merchandise in home-improvement centersis displayed in a warehouse atmosphere,salespeople are available to assist customers inseeking merchandise and to tell them how to use

it.

IV T diti l G l


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G. Off-Price Retailers Off-price retailers offer an inconsistent

assortment of brand name, fashion-oriented softgoods at low prices.

Off price retailers can sell brand names and evendesigner-label merchandise at low prices due totheir unique buying and merchandising practices.Typically,merchandise is purchased at one-fifth to

one-fourth of the original wholesale price. Off-priceretailers can buy at low prices because they dontask suppliers for advertising allowances, returnprivileges, markdown adjustment ,or delayedpayments.


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Merchandise Retail (Cont.)G. Off-Price Retailers (Cont.)

Over the last several years, the sales growth ofoff-price retailers has slowed. With the increasein sales and promotion in department stores,consumers often are able to get fashionable,brand name merchandise in department storesat the same discounted prices offered by off-

price retailers. In response to these conditions ,off-price

retailers are buying more current merchandiseto complement the excess merchandise bought

at the end of a fashion season.

IV Traditional General


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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 toimprove 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 aswell 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.


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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-likebuilding. Hypermarkets are 300,000 sq. ft. , larger than 6

football fields, and stock over 50,000 differentitems. Annual revenues are typically over $100million per store.

Hypermarkets were created in France after WorldWar II. And they have not been very successful inthe US for a variety of reasons including less

restrictive land laws, competition and store size.


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V. Services RetailingA. Types of Services Retailers

Many organizations that offer services toconsumers such as banks, hospitals, healthspas, doctors, legal clinics, entertainment firmsand universities traditionally havent considered

themselves as retailers. Due to increasedcompetition, these organizations are adoptingretailing principles to attract customers andsatisfy their needs.

All retailers provide goods and services for theircustomers. Some firms , such as dry cleanersprimarily provide services. Optical centers andrestaurants lie somewhere in the middle of themerchandise/services continuum. Supermarket

and warehouse clubs primarily provide goods.


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B. Differences Between Services andMerchandise Retailers

4 Important differences in the nature of the offeringprovided by services and merchandise retailersare:

1. Intangibility2. Simultaneous Production and Delivery

3. Perishability

4. Inconsistency of the Offerings

V. Services Retailing (Cont.)


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1. Intangibility: Services are generallyintangible. Customers can not see, touch,or feel them. On the other hand, services

are performances or actions rather thanobjects. Service retailers often havedifficulty in evaluating the quality ofservices they are providing. They mustsolicit customer evaluations andcomplaints.

2. Simultaneous production and delivery:Service providers create and deliver theservice as the customer is consuming it.


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3. Perishability: Because the creation andconsumption of services is inseparable,

services are perishable. They can not besaved, stored, or resold. In addition thedemand for services varies over time.

4. Inconsistency: Merchandise is often

produced by machines with very tight qualitycontrol. Because services are performed bypeople, no two services will be identical.


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VI. Types of OwnershipAnother way to classify retailers is by their

ownership.The major classification of retail ownership are:

1. Independent, Single-Store Establishment

2. Corporate Chains3. Franchises


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VI. Types of Ownership (Cont.)

A. Independent-single-store establishments

In 1998, over 60,000 new retail business were startedin the US and many stores are owner-managed.

While single stores can tailor their offering to theircustomers needs, corporate chains can moreeffectively negotiate lower prices for merchandise

and advertising due to their larger size. To better compete against corporate chains, some

independent retailers join a retail-sponsoredcooperative group or wholesale-sponsored voluntary

chain.

VI Types of Ownership (Cont )


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VI. Types of Ownership (Cont.)B. Corporate Retail Chain A retail chain is a company operating multiple

retail units under common ownership andusually having some centralization of decision making indefining and implementing strategy.

Due to economies of scale and an efficient distributionsystem, corporate chains can sell at lower prices. This

forces some directly competing local retailers out ofbusiness and alters the community fabric. On the other hand, local retailers offering complementary

merchandise and services can prosper. Often, all storesin a chain have the same merchandise and services, while

local retailers can provide merchandise compatible withlocal market needs.

In addition, to mergers and acquisitions leading toconsolidation, the retail chains are focusing their expertiseon managing a specific retail format rather than operatingas a holding company for a diverse set of retail formats.

VI Types of Ownership (Cont )


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VI. Types of Ownership (Cont.)C. Franchising Franchising is a contractual agreement between a

franchiser and a franchisee that allows thefranchisee to operate a retail outlet using a nameand format developed and support by the franchiser.

Approximately one-third of all US retail sales aremade by franchisees.

The franchising ownership format attempts tocombine advantages of owner-managed businesseswith efficiencies of centralized decision making inchain store operations.

Franchisees are motivated to make theirstore successful because they receivethe profits after the royalty is paid. Thefranchiser is motivated to develop newproducts and systems to promote thefranchise because it receives a royalty on all sales.


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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 andoperate the retail establishment. Consumers haveownership shares, hire full-time managers, andshare in the stores profits through pricereductions or dividends.

Local, state and federal governmentagencies sometime own retailestablishments.

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