Revisiting the Wheel of Retailing The Case of a Turkish Discount Retailer?

1. Revisiting the Wheel of RetailingThe Case of a Turkish Discount Retailer? Muge CEVIK,Neva YALMAN Yeditepe University, Istanbul, TURKEY

2. Objective of the Study • To summarize the existing literature- developing country perspective • To examine the evolution of discount retailing in Turkey • To identify the applicability of the wheel of retailing theory • For a discount retailer • In a developing country

3. The need • The Wheel of Retaling Theory is still in debate • Generalizability; universal and format based applicability • Forces that cause trading-up process • Lack of attempt in the literature to explain the applicability of the theory in developing countries • Lack of studies on discount retailing in Turkey. • Re-assessment of the current state of the theory under such rapidly changing economic climate.

4. Background • More than 70 years has passed since Malcolm P. McNair (1931) first outlined his hypothesis on the ‘wheel of retailing’ theory. • A debate topic among scholars since it has been first introduced. • Though heavily criticized by many marketing scholars; • This concept ‘should be nurtured and developed rather than abandoned for borrowed concepts from economics, psychology, or sociology.’ (Sheth, Gardner and Garrett, 1988) • ‘…the wheel does not need to be changed, nor does it require retreading, rebalancing, realignment. In my opinion, it needs to be road-tested more often’ (Brown, 1990). • Need for testingretail institutional change model ‘in a variety of spatial settings, particularly in the developing world’ (Brown, 1991).

5. Wheel of Retailing • Innovative Retailer • Low status • Low price • Minimal service • Poor facilities • Limited product offering • Mature Retailer • Top heaviness • Conservatism • Declining ROI ENTRY VULNERABILITY • Traditional Retailer • Elobarate facilities • Expected,essential, exotic services • Higher rent locations • Fashion orientations • Higher prices • Extended product offerings TRADING-UP

6. Background- Debate • Hollander (1960) provides non-confirmatory examples (developed and developing countries) • evolution of some retailing formats cannot be explained by the wheel pattern. • different forces causes trading-up process (other than stated by McNair). • Many institutional forms- department stores, mail order houses, supermarkets, discount houses and shopping centers began by low prices and evolved into high costs modes of distribution(Hollander,1960a). • Goldman (1975), in fact argued that not every department store, supermarket or discounter emerge as cut-price. • ‘Boutiques, convenience stores, planned shopping centers, automatic vending machines and super-specialists’ enter the market on high cost basis (Hollander, 1960b)

7. Background- Debate • The wheel pattern seems to hold mostly in developed economies. • Some studies in developing countries show that innovations are introduced at high- cost scales ( Brown, 1998;Guerin,1965; Kaynak,1979; Goldman,1982; Bernett, 1966; Alawi,1986). • Introduction of a new retail system that is crucial for wheel to revolve is limited by the socio-economic environment it exists. • Different countries with different economic, political, societal and business conditions have distinct retail systems ( Kaynak,1979).

8. Background- Turkey • Retailing activities exist with direct interaction with the environment- mainly social, economic, cultural, political and technological systems- of a developing country (Kaynak, 1976). • Economic growth and liberal policies of 1980s became the major accelerator of retail change in Turkey. • When compared with countries of the European Union, the grocery retail sector in Turkey is relatively underdeveloped. • small and independent traditional retailers still dominate the retail market (64%)

9. Retailing Sector- Turkey • The size of the Turkish retailing sector is approximately $ 47.9 billion • 53% belongs to food retailers. • The share of organized retailing sector, including hypermarkets, supermarkets and local chain stores, among food retailing is yet $16 billion. • Europe have on the average 15 hypermarkets and 150 supermarkets per one million people, Turkey has only 3 hypermarkets and 17 supermarkets.

10. Background- Discount Retailing • Results of the 2009 Global Powers of Retail report (Deloitte Touche Tohmatsu) showed that • discount retailers have strong performance • emerging market retailers are on the way of becoming world players • The discount store is defined as a ‘retailing establishment selling a range of rapid-turnover, cut-price goods and with virtually no floor-service at all’ (Eurostat, 1993). • The appearance of discount stores in Turkey occurred in 1995, just after the economic crisis of 1994. • Share of discount stores is 6.8% (2006). • Share of consumers buying private label products increased from 39% in 1999 to 55% in 2004

11. The Study • As suggested by Savitt (1984) and Brown (1991) this study concentrates on the evolution of an individual retail firm rather than ‘institutions’. • Through the case study approach, a Turkish discounter is analyzed- considering the stages that a retailer assumed to gone through by the wheel of retailing theory. • Although the discount format is transferred from Europe to Turkey, all discount chains including the chosen company for analysis, has started with consideration in low pricing as the main point of differentiation (fitting the entry phase). • At the recent times of harsh competition, fitting to trading-up process is in question? • a pattern indicated by the wheel or retailing theory or • completely innovate its existence at the end or • in contrast, adopt a dynamic strategy while keeping price as the core strategy

12. Methodology • A semi-structured interview with an executive manager has been conducted. • In order to have an understanding of the institutions’ current stage of evolution, relevant data was gathered from the company’s official web site and financial reports as well as private sector reports. • A specific measure that considers the shareholder value creation has also been used to analyze the economic profitability of the retailer. • Brown (1991) suggests the use of, market-to-book ratio (Kerin and Varaiya, 1985), when analyzing the retail institutional change. • Accordingly, the market-to-book ratios of the discount retailer has been calculated and analyzed as an indicator of the company’s current value and growth potential.

13. Findings • The position of the discount retailer on the wheel is examined using following criteria: • Price Strategy • Assortment Size and Structure • Store Interior • Location • Customer Services • Communication

14. Findings Pricing Strategy • As the main proposition of any discounter is low prices, the Company also started operating in Turkish market with an aggressive pricing strategy. • It is stated that the general price level is 8-10% below similar retailers. • To enhance low price perception, weekly special offers are provided to customers on items with varying range of products; from toy trucks and strollers to laptops. • The main reasons that enable control over prices • the strong purchasing power held by the company due to increasing number of stores • the increasing share of revenue of this retailer in the market • the concentration of private label items among the assortments ( As of 2008, the share of private label products has reached to 50-55% and the aim is to have a 75-80% ratio in the near future ).

15. Findings Assortment Size and Structure • Despite the promotional items the Company achieved to keep the assortment size with 600 SKUs. • In general the Company sells four groups of products: • Private labels: This group has the highest volume share within the assortments. From branding to formula creation the company has the overall control. • Branded goods: 37% share within the total portfolio. • Weekly promotions: 7% share within the total portfolio. These products are promoted weekly in order to increase customer visits. • Exclusive products: 7-10% share within the total portfolio. • Although not existent in the begining perishables and imported goods are added to assortments. • Private label products and promotional products- lowered the risks of vulnerability that has been expected for such a retailer along the wheel.

16. Findings Store Interior • The average store sizes vary from 200 to 600 square meters. • In line with simplicity principle, all the goods are presented inside the parcel packages on the shelf. • On the other hand, it is mentioned that the recent improvement in parcels used for display has some effect on the costs. • When the steady increase in store numbers are considered such increases in fixed costs would become one of the trading up indicators.

17. Findings Location • Being one of the largest retail chains, the Company has stores all over Turkey (from 21 stores in 1995 to 2628 in 2009). • When it has started its operations, target customer segment was consisted of C and D socio-economic classstores were located at lower income districts of the main cities. • Due to economic recession increase in conscious shopping widening target customer segmentnew stores started to open at places with higher income levels. • As the Company continues to open stores in higher income districts • An increase in the fixed costs are experienced due to higher rental costs of new store locations.   • Incremental costs in terms of transportation is to be expected. • Recently, the Company started to transfer this retail concept into international levelmore complicated management and increasing operational costs.

18. Findings Customer Services • Minimum required level of services are provided to customers when compared to other food retailers. • On the other hand, due to new locations, the company has experienced a trading-up with the addition of new services: • the credit card started to be accepted. • contour machines of GSM operators started to operate at the cashiers. • battery collecting stations are put inside the stores. • All these additional services bring additional load to in-store operations.

19. Findings Communication • In the beginning- very limited advertisement budget that is spent mainly to in-store communication. • Currently it heavily relies on mass media. • In terms of press advertisements, the company has the largest spending among other retailers (Nielsen Media Research, 2010). • In recent years, TV advertising also started to be used. • Utilization of mass media can be considered as a diverging strategy from the original one which may actually lead the company to trade up to the next level in the wheel.

20. Findings Market to Book Ratio Kerin and Varaiya (1985) points out ‘market-to-book ratio’ as an alternative indicator for profitable growth of a company. 48% increase in net profit margin ( 2.7%) in 2008 to (4.0%) in 2009 can be proposed as a supporting indicator that the Company is currently experiencing a trading up in terms of profit-margins.

21. Findings Operational Costs Considerable rise in operational costs by 178% through the years

22. Conclusions • According to the secondary data available and the semi-structured interview conducted with the company's executive, there have been some significant changes since the establishment of the company in question. • Findings confirm that this retailer is in the trading up process as suggested by the wheel of retailing concept. • When phases of the wheel are considered • Increasing operational costs • Degradation in terms of flexibility • Although, the development pattern of the discount retailer appears to fit the wheel theory proposed by McNair (1958), it is also possible that through the implementation of dynamic strategies, such formats can pursue their existence in the long run.

23. Conclusions • The retail institutional change in developing countries has been a neglected area for a long time in the existing body of literature. • This study aimed at drawing attention back to this research area through the case study approach so that results could be used for improvement in future studies. • An alternative indicator for profitable growth of a company- market to book ratio- is used in this study to understand company’s wealth creation capability (as suggested by literature).

24. Conclusions Limitations • The analysis of wheel pattern should be spread out in a long period of time. • The emerging of the discount retail concept in Turkey is quite new, precise conclusions cannot be drawn. • As this study was focusing on an individual retailer; • The company examined has very strict rules of sharing limited information with outside parties, even for academic purposes. • The limited data gathered from the interview and the publicly available information were the only data sources for this study.

25. Further Research • In order to have a complete conclusion on the compatibility pattern, longitudinal studies are crucial and is suggested for future studies. • In line with Brown's (1991) proposal, an originally developed retail pattern should be analyzed for determining the applicability of the wheel pattern. • In Turkey’s case ‘bakkals’, a version of a convenience store, small-scale, capital-weak, independent, single location and family-owned outlets would be an appropriate format • Same study can be applied in an other developing country to compare findings. • For more precise conclusions findings of this study could be re-tested through future quantitative studies.

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