Chapter 2 : Types of Retailers

1. Chapter 2 : Types of Retailers HDCS 3303 – Section 12711 Introduction to MerchandisingEvangeline Caridas

2. I. Types of Retailers Over time, different types of retailers have emerged and prospered because they have attracted and maintained a significant customer base.

3. I. Types of Retailers (Cont.) A. Nature of Retail Mix • The most basic characteristic of a retailer is its retail mix-the elements used by retailers to satisfy their customer’s needs. • 4 elements of the retail mix that are particularly useful for classifying retailers are the type of merchandise sold, the variety and assortment of merchandise sold, the level of customer service, and the price of the merchandise.

4. I. Types of Retailers (Cont.) A. Nature of Retail Mix (Cont.) • The difference between the retail mix of department and discount stores illustrated the tradeoff retailers make between the price of merchandise they sell and the services they offer to their customers. • To make profit and provide these additional benefits to its customers, department stores have to increase the prices of its merchandise to cover the additional costs. This is referred to as the price-cost tradeoff.

5. I. Types of Retailers (Cont.) B. Types of merchandise • The US Bureau of the Census developed and uses a classification scheme to collect data on retail activity in the US. It classifies all retail firms into a hierarchical set of four digit Standard Industrial Classification (SIC) codes. • To address problems with classification using SIC codes and develop economic statistics similar to international trading partners, the US Bureau along with Mexico and Canada, adopted a new classification system, the North American Industrial Classification System (NAICS), which started to appear in 1999.

6. I. Types of Retailers (Cont.) B. Types of merchandise (Cont.) • Conversion from SIC to NAICS will be completed in 2004. • The NAISC system recognized the growth in services and specialty store retailing by assigning numbers to categories such as nail salons and pet supply stores. • The degree to which retailers compete against each other isn’t always based on the similarity of their merchandise. The variety and assortment of the merchandise they offer and the services they provide must also be considered.

7. I. Types of Retailers (Cont.) 1. Variety and Assortment • Variety is the number of different merchandise categories a retailer offers. Assortment is the number of different items in a merchandise category. Each different item of merchandise is called and SKU ( stock keeping unit). • Variety is often referred to as the breadth of merchandise and assortment is referred to as the depth of merchandise.

8. I. Types of Retailers (Cont.) C. Customer Services • Retailers also differ in the services they offer customers. Customers expect retailers to provide some services--accepting personal checks, proving parking, and displaying merchandise.

9. I. Types of Retailers D. Cost of Offering Breadth and Depth of Merchandise and Services • When a retailer offers many SKUs, inventory investment increases because the retailer must have 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 maintaining additional inventory or providing additional services.

10. II. Trends in Retail Industry The retail industry is changing rapidly. Some of the most important changes involve the greater diversity of retailers, increasing industry concentration and globalization.

11. 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 buy merchandise 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 of benefits, thus consumers patronize different retailers for different purchase occasions.

12. II. Trends in Retail Industry (Cont.) B. Increasing Industry Concentrations • While the number of different retail formats has grown, the number of competitors within 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 efficient distribution and communication systems meant that large national firms could gain substantial cost advantages over smaller regional and local retailers.

13. II. Trends in Retail Industry (Cont.) C. Globalization Some factors stimulating globalization of retailing are the maturation of the domestic market, the development of skills and systems to effectively manage global operations, and the removal of trade barriers.

14. II. Trends in Retail Industry (Cont.) 1. Maturation of Domestic Markets: Most large retailers have saturated their domestic markets. Opening additional stores in the U.S. results in limited additional sales leading large U.S. retailers to look for growth opportunities in international markets. 2. Skills and Systems: Retail firms are better prepared with international knowledge and experience to effectively manage stores in non-domestic markets. To facilitate global sourcing of merchandise, retailers operate global information and distribution systems. 3. Trade Barriers: The relaxation of trade barriers makes global expansion easier.

15. III. Food Retailers A. Conventional Supermarkets • A conventional supermarket is a self-serviced food store offering groceries, meat, produce, and limited non-food items. • Half of the conventional supermarkets are very promotional. This is called a hi-low pricing strategy. • The other half of conventional supermarkets use very few promotions and sell almost all merchandise at the same price every day. This is called an everyday low pricing (EDLP) policy.

16. III. Food Retailers (Cont.) B. Big Box Food Retailer • Over the past 25 years, supermarkets have increased in size and have begun to sell a broader variety of merchandise. In 1979, conventional supermarkets accounted for 85% of supermarket sales. • By 1998, only 41% of supermarket sales were in conventional supermarkets due to the growth of “big box” food retailing formats- superstores, combination stores, and warehouse-type stores. • Superstores are large supermarkets (20,000 to 50,000 sq. ft) stores that combine a superstore and a full-line discount store. • Combination stores are food-based retailers of 30,000 to 100,000 sq. ft that have over 25% of their sales from non-food merchandise.

17. 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 a full-line discount store • The supercenters and full-line discount stores, 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 shopping experience.

18. III. Food Retailers (Cont.) B. Big Box Food Retailer (Cont.) 2. Warehouse Club is a retailer that offers a limited assortment of food and general merchandise with little 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 costs by carrying a limited assortment of fast-selling items. • Typically members must pay an annual fee of $25 to $35.

19. III. Food Retailers (Cont.) C. Convenience Stores • Convenience stores provide a limited variety and assortment of merchandise at a convenient location in a 2,000 to 3,000 sq. ft store with a speedy checkout. They are modern versions of the neighborhood mom-and pop stores. • Convenience stores enable consumers to make purchases 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.

20. III. Food Retailers (Cont.) D. Issues in Food Retailing Two forces affecting traditional food retailers are the changing consumer consumption patterns for food and increased competition from discount store chains.

21. III. Food Retailers (Cont.) 1. Adapting to Changing Food Consumption Patterns • Due to time pressures on two-income families and favorable economic conditions, consumer are cooking meals at home less frequently. • To gain a greater share of food expenditures, supermarkets have made significant investments in providing meal solutions, either hot food or partially cooked entrees. • The response to these food service investments by supermarkets has been disappointing. Only 15% of supermarket customers are loyal purchasers of these products and 43% never buy prepared foods at supermarkets. • Convenience stores are also developing new concepts emphasizing prepared meals.

22. 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 the inroads being made by supercenters and warehouse clubs, supermarket chains are reducing their costs. • Discount store chains were able to undercut supermarket prices because their distribution systems were more efficient, and they focused on reducing inventory investments by selling fast moving items. • Supermarkets continue to sell over 75% of the produce, meat dry/canned goods, frozen food, diary, bakery, and seafood. 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 competition from full-line discount stores with areas near the store front devoted to convenience store merchandise and from the new, larger drug store formats at stand-alone locations.

23. IV. Traditional General Merchandise Retail The major types of general merchandise retailers are department stores, full-line discount stores, specialty stores, drug stores, category specialists, home improvement centers, and off-price retailers.

24. IV. Traditional General Merchandise Retail A. Department Stores • Department Stores are retailers that carry a broad variety and deep assortment, offer considerable customer services and are organized into separate departments for displaying merchandise. • Each department within the store has a specific selling space allocated to it, a POS terminal to transact and record sales, and salespeople to assist customers. • The major departments are women’s , men’s and children’s 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 operated by an independent company. • A leased department is an area in a retail store that is leased or rented to an independent firm.

25. 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 home furnishings. • The nature of traditional department stores has changed considerably over the years, so the distinction between traditional, specialty, and promotional department stores has blurred. With few exceptions, traditional department stores have eliminated many of the departments they originally had.

26. IV. Traditional General Merchandise Retail (Cont.) A. Department Stores (Cont.) • Department stores’ overall sales have stagnated in recent years due to increased competition from discount 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 merchandise mix, improving their in-stock position on fashion merchandise and improving their customer service.

27. IV. Traditional General Merchandise Retail (Cont.) B. Discount Stores • A full-line discount store is a retailer that offers low prices. They offer national brands, but these brands are typically less fashion-oriented than brands in department stores. • Category specialists and home improvement centers compete intensely with full-line discount stores. • To respond to category specialists’ domination of hard goods, full-line discount retailers are creating more attractive shopping environments, placing more emphasis on apparel and developing private label merchandise, and increasing store visits by offering easily accessible, convenience store merchandise.

28. IV. Traditional General Merchandise Retail (Cont.) 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 area typically less than 8,000 square feet. • By carrying a narrow variety but deep assortment, they offer customers a better assortment, they offer customers a better selection and sales expertise in that category than department or discount stores provide. • In response to declining interest in high fashion apparel,specialty stores are adopting a concept called “Lifestyle Retailing” which tailors the merchandise to the life style of a specific group of customers.

29. IV. Traditional General Merchandise Retail (Cont.) D. Drug Stores • Drug stores are specialty stores that concentrate on health and personal grooming merchandise. Drug stores are facing considerable competition in pharmaceuticals from discount stores and supermarkets adding pharmacies as well as from mail order retailers filling prescriptions. • Prescription pharmaceutical margins are shrinking due to governmental health care policies and HMO’s. • In response, drug store chains are building larger stores with wider assortments and are increasing service beyond dispensing pills.

30. IV. Traditional General Merchandise Retail (Cont.) E. Category Specialists • A category specialists is a discount store that offers a narrow variety 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. • 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”.

31. IV. Traditional General Merchandise Retail (Cont.) E. Category Specialists (Cont.) • Because category specialists dominate a category of merchandise, they can use their buying power to negotiate lower prices, excellent terms, and assured supply when items are scarce. • Competition between specialists in each category is very intense as the firms expand into the regions originally dominated by another firm. In response, category killers continue to concentrate on reducing costs and acquiring smaller chains to gain economies of scale.

32. IV. Traditional General Merchandise Retail (Cont.) F. Home Improvement Centers • A home improvement center is a category specialist that combines the traditional hardware store and lumberyard. It focuses on providing material and information that enables do-it-yourselfers to maintain and improve their homes. • While merchandise in home-improvement centers is displayed in a warehouse atmosphere, salespeople are available to assist customers in seeking merchandise and to tell them how to use it.

33. IV. Traditional General Merchandise Retail (Cont.) G. Off-Price Retailers • Off-price retailers offer an inconsistent assortment of brand name, fashion-oriented soft goods at low prices. • Off price retailers can sell brand names and even designer-label merchandise at low prices due to their unique buying and merchandising practices. Typically,merchandise is purchased at one-fifth to one-fourth of the original wholesale price. Off-price retailers can buy at low prices because they don’t ask suppliers for advertising allowances, return privileges, markdown adjustment ,or delayed payments.

34. IV. Traditional General Merchandise Retail (Cont.) G. Off-Price Retailers (Cont.) • Over the last several years, the sales growth of off-price retailers has slowed. With the increase in sales and promotion in department stores, consumers often are able to get fashionable, brand name merchandise in department stores at the same discounted prices offered by off-price retailers. • In response to these conditions ,off-price retailers are buying more current merchandise to complement the excess merchandise bought at the end of a fashion season.

35. IV. Traditional General Merchandise Retail (Cont.) 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 to improve 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 as well 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.

36. IV. Traditional General 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-like building. • Hypermarkets are 300,000 sq. ft. , larger than 6 football fields, and stock over 50,000 different items. Annual revenues are typically over $100 million per store. • Hypermarkets were created in France after World War II. And they have not been very successful in the US for a variety of reasons including less restrictive land laws, competition and store size.

37. V. Services Retailing A. Types of Services Retailers • Many organizations that offer services to consumers such as banks, hospitals, health spas, doctors, legal clinics, entertainment firms and universities traditionally haven’t considered themselves as 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. Some firms , such as dry cleaners primarily provide services. Optical centers and restaurants lie somewhere in the middle of the merchandise/services continuum. Supermarket and warehouse clubs primarily provide goods.

38. V. Services Retailing (Cont.) B. Differences Between Services and Merchandise Retailers 4 Important differences in the nature of the offering provided by services and merchandise retailers are: 1. Intangibility 2. Simultaneous Production and Delivery 3. Perishability 4. Inconsistency of the Offerings

39. V. Services Retailing (Cont.) 1. Intangibility: Services are generally intangible. Customers can not see, touch, or feel them. On the other hand, services are performances or actions rather than objects. Service retailers often have difficulty in evaluating the quality of services they are providing. They must solicit customer evaluations and complaints. 2. Simultaneous production and delivery: Service providers create and deliver the service as the customer is consuming it.

40. V. Services Retailing (Cont.) 3. Perishability: Because the creation and consumption of services is inseparable, services are perishable. They can not be saved, stored, or resold. In addition the demand for services varies over time. 4. Inconsistency: Merchandise is often produced by machines with very tight quality control. Because services are performed by people, no two services will be identical.

41. VI. Types of Ownership Another way to classify retailers is by their ownership. The major classification of retail ownership are: 1. Independent, Single-Store Establishment 2. Corporate Chains 3. Franchises

42. VI. Types of Ownership (Cont.) A. Independent-single-store establishments • In 1998, over 60,000 new retail business were started in the US and many stores are owner-managed. • While single stores can tailor their offering 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 retail-sponsored cooperative group or wholesale-sponsored voluntary chain.

43. VI. Types of Ownership (Cont.) B. Corporate Retail Chain • A retail chain is a company operating multiple retail units under common ownership and usually having some centralization of decision making in defining and implementing strategy. • Due to economies of scale and an efficient distribution system, corporate chains can sell at lower prices. This forces some directly competing local retailers out of business and alters the community fabric. • On the other hand, local retailers offering complementary merchandise and services can prosper. Often, all stores in a chain have the same merchandise and services, while local retailers can provide merchandise compatible with local market needs. • In addition, to mergers and acquisitions leading to consolidation, the retail chains are focusing their expertise on managing a specific retail format rather than operating as a holding company for a diverse set of retail formats.

44. VI. Types of Ownership (Cont.) C. Franchising • Franchising is a contractual agreement between a franchiser and a franchisee that allows the franchisee to operate a retail outlet using a name and format developed and support by the franchiser. Approximately one-third of all US retail sales are made by franchisees. • The franchising ownership format attempts to combine advantages of owner-managed businesses with efficiencies of centralized decision making in chain store operations. • Franchisees are motivated to make their store successful because they receive the profits after the royalty is paid. The franchiser is motivated to develop new products and systems to promote the franchise because it receives a royalty on all sales.

45. 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 and operate the retail establishment. Consumers have ownership shares, hire full-time managers, and share in the store’s profits through price reductions or dividends. Local, state and federal government agencies sometime own retail establishments.