Chapter 2 : Types of Retailers

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Chapter 2 Types of Retailers

• HDCS 3303 Section 12711 Introduction to
  MerchandisingEvangeline Caridas

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I. Types of Retailers

• Over time, different types of retailers have
  emerged and prospered because they have attracted
  and maintained a significant customer 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 elements used by retailers to
  satisfy their customers 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.

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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.

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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.

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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 isnt 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.

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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.

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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.

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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.

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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.

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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 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.

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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.

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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.

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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.

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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.

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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.

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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 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.

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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.

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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.

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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.

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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.

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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 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.

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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.

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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 womens , mens and
  childrens 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.

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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 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.

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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.

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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.

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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.

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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
  HMOs.
• In response, drug store chains are building
  larger stores with wider assortments and are
  increasing service beyond dispensing pills.

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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.

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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.

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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.

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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 dont ask suppliers for advertising
  allowances, return privileges, markdown
  adjustment ,or delayed payments.

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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.

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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.

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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.

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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 havent 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.

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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

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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.

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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.

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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

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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.

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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
  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.

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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.

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