Chapter 4

1. Chapter 4 RETAIL MANAGEMENT: A STRATEGIC APPROACH, 10th Edition Retail Institutions by Ownership BERMAN EVANS

2. Chapter Objectives • To show the ways in which retail institutions can be classified • To study retailers on the basis of ownership type and examine the characteristics of each • To explore the methods used by manufacturers, wholesalers, and retailers to exert influence in the distribution channel

3. Figure 4-1: A Classification Method for Retail Institutions I Ownership II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix

4. Ownership Forms • Independent • Chain • Franchise • Leased department • Vertical marketing system • Consumer cooperative

5. Independent Retailers • 2.2 million independent U.S. retailers • 70% of these are run by owners and their families • Account for 35% of total stores and 3% of U.S. store sales • Why so many? Ease of entry

6. Advantages Flexibility in formats, locations, and strategy Control over investment costs and personnel functions, strategies Personal image Consistency and independence Strong entrepreneurial leadership Disadvantages Lack of bargaining power Lack of economies of scale Labor intensive operations Over-dependence on owner Limited long-run planning Competitive State of Independents

7. Figure 4-2: Useful Online Publications for Small Retailers

8. Convenience store Conventional supermarket Food-based superstore Combination store Box store Warehouse store Specialty store Variety store Traditional department store Full-line discount store Off-price chain Factory outlet Membership club Flea market Store-Based Retail Strategy Mixes

9. Chain Retailers • Operate multiple outlets under common ownership • Engage in some level of centralized or coordinated purchasing and decision making • In the U.S., there are roughly 110,000 retail chains operating about 800,000 establishments

10. Advantages Bargaining power Cost efficiencies Efficiency from computerization, sharing warehouse and other functions Defined management philosophy Considerable efforts in long-run planning Disadvantages Limited flexibility Higher investment costs Complex managerial control Limited independence among personnel Competitive State of Chains

11. Figure 4-3: The Body Shop

12. Nonstore-Based Retail Strategy Mixes and Nontraditional Retailing • Direct marketing • Direct selling • Vending machines • World Wide Web • Other emerging retail formats

13. Franchising • A contractual agreement between a franchisor and a retail franchisee, which allows the franchisee to conduct business under an established name and according to a given pattern of business • Franchisee pays an initial fee and a monthly percentage of gross sales in exchange for the exclusive rights to sell goods and services in an area

14. Product/Trademark Franchisee acquires the identity of a franchisor by agreeing to sell products and/or operate under the franchisor name Franchisee operates autonomously 2/3 of retail franchising sales Business Format Franchisee receives assistance: location, quality control, accounting systems, startup practices, management training Common for restaurants, real-estate Franchise Formats

15. Figure 4-5: Business Qualifications Sought by McDonald’s for Potential Franchisees Experience Financial resources Growth capability Strong credit Ideal Franchisee Planning ability Customer and employee focus Ability to manage finances Willingness to complete training Full-time commitment

16. Figure 4-6: Structural Arrangements in Retail Franchising

17. Wholesaler-Retailer Structural Arrangements • Voluntary: A wholesaler sets up a franchise system and grants franchises to individual retailers • Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a wholesaling organization

18. Figure 4-7: Franchise and Business Opportunities

19. Advantages Low capital required Acquire well-known names Operating/ management skills taught Cooperative marketing possible Exclusive rights Less costly per unit Disadvantages Oversaturation could occur Franchisors may overstate potential Locked into contracts Agreements may be cancelled or voided Royalties are based on sales, not profits Competitive State of Franchising

20. Benefits National or global presence possible Qualifications for franchisee/operations are set and enforced Money obtained at delivery Royalties represent revenue stream Potential Problems Potential for harm to reputation Lack of uniformity may affect customer loyalty Ineffective franchised units may damage resale value, profitability Potential limits to franchisor rules From the Franchisor’s Perspective

21. Leased Departments • A leased department is a department in a retail store that is rented to an outside party • The proprietor is responsible for all aspects of its business and pays a percentage of sales as rent • The department store sets operating restrictions to ensure consistency and coordination

22. Benefits Provides one-stop shopping to customers Lessees handle management Reduces store costs Provides a stream of revenue Potential Pitfalls Lessees may negate store image Procedures may conflict with department store Problems may be blamed on department store rather than lessee Competitive State of Leased Departments

23. Figure 4-8a: Vertical Marketing Systems Independent Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Independent Manufacturer Independent Wholesaler Independent Retailer

24. Figure 4-8b: Vertical Marketing Systems Partially Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Two channel members own all facilities and perform all functions

25. Figure 4.8c: Vertical Marketing Systems Fully Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: All production and distribution functions are performed by one channel member

26. Figure 4-9: Sherwin-Williams’ Dual Vertical Marketing System