1. SINGAPORE
INSTITUTE OF
MANAGEMENT
BACHELOR OF BUSINESS (BUSINESS
ADMINISTRATION
Distribution Channels (MKTG 1058)
LECTURE NOTES
 Outline Chapter Summaries
 Solutions to Computational Exercises
(Selected Chapters)
 Power Point Slides
JANUARY 2011
Please Note: the accompanying chapter summaries are based on the
required text for this course. You are reminded that reading the
assigned chapters are absolutely essential and that the notes
provided are meant to supplement the text chapters. Please ensure
that you complete your reading of the text chapters for the
respective lectures.
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2. Week Topic Chapter
1. Perspectives on Retailing 1&5
Managing the Supply Chain
2. Market Selection & Location Analysis 7
3. Strategic Planning & Operation Management 2&4
Evaluating the Competition
4. Retail Customers 3&6
Legal & Ethical Behaviour
5. Store Layout & Design 13
6. Managing a Retailer’s Finances 8
7. Merchandise Buying & Handling 9
8. Merchandise Pricing 10
9. Advertising & Promotion 11
10 Customer Service & Retail Selling 12
11. Managing People 14
12. Course Review (& Catch up lecture)
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3. Lecture One
Topics:
Perspectives on Retailing
Managing the Supply Chain
Dunne: Chapters 1 and 5
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4. Chapter 1
Perspectives on Retailing
Overview:
In this chapter, we acquaint you with the nature and scope of retailing. We present retailing as a
major economic force in the United States and as a significant area for career opportunities.
Finally, we introduce the approach to be used throughout this text as you study and learn about
the operation of retail firms.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain what retailing is.
2. Explain why retailing is undergoing so much change today.
3. Describe five methods used to categorize retailers.
4. Understand what is involved in a retail career and be able to list the prerequisites
necessary for success in retailing.
5. Be able to explain the different methods for the study and practice of retailing.
Outline:
I. What Is Retailing?
A. Retailing - consists of the final activities and steps needed to place a product in
the hands of the consumer or to provide services to the consumer.
B. Can be performed by any firm that sells a product or provides a service to the
final consumer.
II. The Nature of Change In Retailing – Retailing, which accounts for 20 percent of the
worldwide labor force and includes every living individual as a customer, is the largest
single industry in most nations and is currently undergoing many exciting changes.
A. E-tailing – The great unknown for retail managers is what the ultimate role of the
Internet will be.
1. It is still unclear if online shopping will reach its projections for ―every
day‖ needs.
2. A dramatic change created by e-tailing is a shift in power between
retailers and consumers. The information dissemination capabilities of
the Internet are making consumers better informed and thus increasing
their power when transacting and negotiating with retailers.
B. Price Competition - Americans are price conscious, whether shopping at brick &
mortar stores or on-line, and retailers that are able to cut costs in order to provide
lower prices will be the winners.
C. Demographic Shifts - Other significant changes in retailing over the past decade
have resulted from changing demographic factors, such as: the fluctuating birth
rate, the increasing number of immigrants, the growing importance of the 70
million Generation Y consumers, and the fact that Generation Xers are now
middle-aged and baby boomers are now reaching retirement.
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5. 1. Profit growth must come by either increasing same store sales at the
expense of the competition's market share (Same store sales is a retailing
term that compares an individual store's sales to its sales for the same
month in the previous year. Market share refers to a retailer's sales as a
percentage of total market sales for the product line or service category
under consideration.) or by reducing expenses without reducing services
to the point of losing customers.
2. As a result, today's retail firms are run by professionals who can look at
the changing environment and see opportunities, exert enormous buying
power over manufacturers, and anticipate future changes before they
impact the market, rather than just react to these changes after they occur.
D. Store Size - The size of retail stores has increased in recent years because of:
1. The phenomenon referred to as scrambled merchandising, whereby
stores handle many different unrelated items, and;
2. The growth of category killer stores. These retailers got their name from
their marketing strategy: carry such a large amount of merchandise in a
single category at such good prices that it makes it impossible for the
customer to walk-out without purchasing what they needed; thus "killing"
the competition.
III. Categorizing Retailers - There are five popular schemes for categorizing retailers.
A. Census Bureau Classification
1. North American Industry Classification System (NAICS) codes -
Reflects the type of merchandise a retailer sells. The major portion of a
retailer's competition comes from other retailers in its NAICS category.
2. Three-digit codes are very broad; four-digit codes provide much more
information on the structure of retail competition and are easier to work
with.
B. Number of Outlets
1. Another method of classifying retailers is by the number of outlets each
firm operates. Generally, retailers with several units are a stronger
competitive threat because they can spread many fixed costs, such as
advertising and top management salaries, over a large number of stores
and can achieve economies in purchasing.
2. Chain Stores - account 41% of all retail sales.
a. Size categories - Broken down by the Census Bureau into "2 to 10
stores," and "11 or more stores" categories.
b. Large chains take advantage of their economies of scale and
centralized buying by using:
(1) Standard Stock List - Method whereby all stores in a
chain stock the same merchandise.
(2) Optional Stock List - Method which gives each store in a
retail chain flexibility to adjust its merchandise mix to
local tastes and demands.
(3) Providing Supply Chain Leadership - by directing the
channel and having other channel members do what they
might not otherwise do, the retailer by serving as the
channel advisor can make it more effective.
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6. (4) Private Label Branding - Chains use their own brand
name instead of a manufacturer's brand name; results in
lower costs for consumers.
3. A shortcoming of using the number of outlets scheme for classifying
retailers is that it addresses only traditional brick & mortar retailers, or
those operating in a physical building.
C. Margin vs. Turnover
1. Gross Margin Percentage - Indicates how much gross margin the
retailer makes as a percentage of sales; gross margin is used to pay the
retailer's operating expenses.
a. Gross Margin - Net sales minus the cost of goods sold.
b. Operating Expenses - Expenses the retailer incurs while running
the business other than the cost of merchandise [i.e., rent, wages,
utilities, depreciation, insurance].
2. Inventory Turnover - Number of times per year, on average, that a
retailer sells its inventory.
3. Classifying Retailers by Margin/Turnover
a. Low-margin/Low-turnover - These retailers will not be able to
generate sufficient profits to remain competitive and survive.
There are no good examples of successful retailers using this
approach.
b. Low-margin/High-turnover - Common in the United States.
Examples include the discount department stores, the warehouse
clubs, and the category killers. Amazon.com is probably the best
known example of low-margin/high-turnover e-tailers.
c. High-margin/Low-turnover - The types of retailers in this
category include brick & mortar retailers such as furniture stores,
high-end women’s specialty stores and furriers, jewelry stores,
gift shops, funeral homes and most of the mom-and-pop stores
located in small towns across the country. Some click & mortar
retailers using this approach include Coach and Sharper Image.
d. High-margin/High-turnover - Convenience store retailers fall into
this category. Best able to withstand and counter competitive
attacks. Because in the early stages of Internet commerce most
retailers are trying to achieve a high turnover rate, there are not
any examples of e-tailers using this strategy.
4. While the Margin/Turnover scheme provides an encompassing
classification, it fails to capture the complete array of retailers operating
in today's marketplace. For example, service retailers, and even some e-
tailers, such as Priceline.com, carry no inventory. Thus, while this scheme
is a good way of analyzing retail competition, it neglects an important
type of retailing.
D. Location - Retailers can improve financial performance results not only by
improving the sales per square foot of traditional sites but by operating in new
nontraditional retail areas or over the Internet.
E. Size - Retailers are often classified by sales volume or by number of employees.
1. Operating performance tends to vary according to size; larger firms
usually have lower operating costs per sales dollar.
2. While size has been useful in the past, it is unclear whether the changes
brought about by technology will not make this obsolete. For example,
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7. imagine a fully automated retailer, where as a consumer places an order
on-line, an automated stock picking warehouse packages the selected
merchandize and forwards it to the shipping area to be sent by UPS to the
customer.
IV. A Retailing Career
A. Exposure to All Business Disciplines - Retailing provides professionals with the
opportunity to gain knowledge on all facets of the business world. A retailer's role
may include a combination of the following positions and responsibilities:
1. Economist - Forecasting sales growth
2. Fashion Expert - Predicting consumer behavior and how it will affect
future fashion trends.
3. Marketing Manager - Determining how to promote, price, and display
your merchandise.
4. Financial Analyst - Reducing store expenses.
5. Personnel Manager – Hiring the right people, training them to perform
their duties in an efficient manner, and developing their work schedules.
6. Logistics Manager - Arranging delivery of a ―hot item.‖
7. Information System Manager - Analyzing sales and other data to
determine opportunities for improved management practices.
8. Accountant – Arriving at a profitable bottom line.
B. There are two major career paths in Retailing:
1. Store Management – Involves responsibility for selecting, training, and
evaluating personnel, as well as in-store promotions, displays, customer
service, building maintenance, and security.
2. Buying – Involves the use of quantitative tools to develop appropriate
buying plans for the store’s merchandise lines.
C. Common Questions About a Retailing Career
1. Salary – Starting salaries in executive training programs will be around
$38,000 to $50,000 per year. That, however, is only the short-run
perspective. In the long run, the retail manager or buyer is directly
rewarded on individual performance. Entry-level retail managers or
buyers who do exceptionally well can double or triple their incomes in
three to five years and often can have incomes twice those of classmates
who chose other career fields.
2. Career Progression - The speed of a retail professional's progression is
dependent upon an individual's capabilities and the growth of the
organization. There is no "standard" career progression for a retailer.
3. Geographic Mobility - The willingness and ability to make geographic
moves often increases a retail professional's opportunities for
advancement.
4. Women in Retailing - Retailing has always been viewed as a good career
for women. Today females constitute over 50 percent of all department
store executives, making it the profession where women have attained the
highest level of achievement.
5. Societal Perspective - Leading retail executives are well-rounded
individuals with a high social consciousness. Professionals entering the
retail field must develop a sound set of ethical principles by which they
may guide their actions.
D. Prerequisites for Success
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8. 1. Hard Work - A willingness to work extra hours, evenings and weekends
often pays off through career advancements.
2. Analytical Skills - An ability to interpret the facts and data that are related
to the past and present performance of a store, merchandise lines and
departments.
3. Creativity - An ability to develop and capitalize on unique ideas and
opportunities.
4. Decisiveness - The ability to make rapid decisions, render judgments,
take action and commit oneself to a course of action until completion.
5. Flexibility - A willingness to and enthusiasm for accommodating change;
ability to thrive in an "expect the unexpected" environment.
6. Initiative - The ability to originate action.
7. Leadership - The ability to inspire others to trust and respect your
judgment and an aptitude for delegating, guiding and persuading others.
8. Organization - The ability to establish priorities and courses of action and
to plan and follow up to achieve results.
9. Risk Taking - The willingness to take calculated risks and to accept
responsibility for the results.
10. Stress Tolerance - Retailing is a fast-paced and demanding career in a
changing environment. The retailing leaders of the 21st century must be
able to perform consistently under pressure and to thrive on constant
change and challenge.
11. Perseverance - Successful retailers must have perseverance. All too often
retailers may become frustrated due to the many things occurring that
they can't control. Individuals that have the ability to persevere and take
marketplace changes in stride will find an increasing number of career
advancement opportunities.
12. Enthusiasm - Successful retailers must have a strong warmth of feeling
for their job, otherwise they will convey the wrong image to their
customers and associates in their department. Retailers today are training
their sales force to smile even when talking to customers on the telephone
because it shows through in your voice.
V. The Study and Practice of Retailing
A. Analytical Method – The analytical retail manager is a finder and investigator of
facts. The use of models and theories of retailing as a means of making
systematic decisions about all aspects of the business; concentrate on facts.
B. Creative Method – The creative retail manager is an idea person. The use of
insight and intuition in the process of handling retail difficulties; emphasis is on
ideas
C. Two-Pronged Approach - The combination of creativity and analysis when
responding to problems.
D. A Proposed Orientation - The approach to the study and practice of retailing that
is reflected in this book is an outgrowth of the previous discussion. This approach
has four major orientations:
1. Environmental Orientation - Allows retailers to continuously adapt to
external forces in the environment.
2. Management Planning Orientation - Allows retailers to adapt
systematically to a changing environment.
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9. 3. Profit Orientation - Allows retailers to focus on the fundamental
management of assets, revenues and expenses.
4. Decision Making Orientation - Allows retailers to focus efforts on the
need to collect and analyze data for making intelligent retail decisions.
VI. Book Outline
A. Introduction to Retailing (Chapters 1-2)
B. The Retailing Environment (Chapters 3-6)
C. Market Selection and Location Analysis (Chapter 7)
D. Managing Retail Operations (Chapters 8-14)
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10. Chapter 5
Channel Behavior
Overview:
At the outset of this text, we pointed out that retailing is the final movement in the progression
of merchandise from producer to consumer. Many other movements occur through time and
geographical space, and all of them need to be executed properly for the retailer to achieve
optimum performance. Therefore, in this chapter, we examine the retailer's need to analyze
and understand the supply chain in which it operates. After looking at the activities in the
supply chain, the chapter then reviews the various types of supply chains and the benefits
each one offers the retailer. The chapter concludes with some practical suggestions to
improve supply chain relationships, especially the use of a category manager.
Learning Objectives:
After reading this chapter, you should be able to:
1. Discuss the retailer's role as one of the institutions involved in the larger supply chain.
2. Describe the types of supply chains by length, width, and control.
3. Explain the terms dependency, power, and conflict and their impact on supply chain
relations.
4. Understand the importance of having a collaborative supply chain relationship.
Outline:
VII. The Supply Chain – It is important to understand the retailer’s role in the larger supply
chain.
A. A supply chain, which is often used interchangeably with the term channel, is
a set of institutions that moves goods from the point of production to the point
of consumption.
B. The supply chain, or channel, is affected by five external forces:
1. Consumer behavior,
2. Competitor behavior,
3. The socioeconomic environment,
4. The technological environment, and
5. The legal and ethical environment.
These external forces cannot be completely controlled by the retailer or any
other institution in the supply chain, but they need to be taken into account
when retailers make decisions.
C. Eight marketing functions must be performed by a supply chain or channel:
1. Buying,
2. Selling,
3. Storing,
4. Transporting,
5. Sorting,
6. Financing,
7. Information gathering, and
8. Risk taking.
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11. - Whether the economic system is capitalistic, socialistic, or communistic,
these eight marketing functions will exist.
- These functions cannot be eliminated. They can, however, be shifted or
divided among the different institutions and the consumer in the supply chain.
- No member of the supply chain would want, or be able, to perform all eight
marketing functions. Thus, the retailer must view itself as being dependent on
others in the supply chain.
D. Marketing Institutions
1. Primary marketing institutions are supply chain members
that take title to the goods. These include manufacturers, wholesalers,
and retailers.
2. Facilitating marketing institutions are those that do not actually take
title but assist in the marketing process by specializing in the
performance of certain functions. These include agents/brokers,
financial institutions, market researchers, transporters, advertising
agencies, warehouses, and insurers.
VIII. Types of Supply Chains- There are three strategy decisions to be made when
designing an efficient and competitive supply chain: supply chain length, width, and
control.
A. Supply Chain Length refers to the number of institutions between the
manufacturer and consumer.
1. Supply chains can be direct or indirect.
a. A direct supply chain occurs when manufacturer sell their
goods directly to the final consumer or end user.
b. An indirect supply chain occurs once independent channel
members (wholesalers and retailers) are added between the
manufacturer and the consumer.
2. The desired supply chain length is determined by many customer-based
factors, such as the size of the customer base, geographical dispersion,
behavior patterns, and the particular needs of customers.
B. Supply Chain Width - pertains to the number of retailers used to cover a given
trading area.
1. Intensive distribution means that all possible retailers are used in a
trade area.
2. Selective distribution means that a moderate number of retailers are
used in a trade area.
3. Exclusive distribution means only one retailer is used to cover a
trading area.
C. Control of the Supply Chain- A pressing issue for all supply chains is "who
should control the supply chain." In seeking to control or manage a supply
chain, there are two basic supply chain patterns: the conventional marketing
channel and the vertical marketing system.
1. A Conventional Marketing Channel is one in which each member of
the channel is loosely aligned with the others and takes a short-term
orientation.
2. Vertical Marketing Channels are capital-intensive networks of
several levels that are professionally managed and centrally
programmed systems to realize the technological, managerial, and
promotional economies of long-term relationships.
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12. a. The basic premise of working as a system is to operate as close
as possible to that elusive 100 percent efficiency level.
b. Since vertical channel members now realize that it is impossible
to offer consumers "value" without being a low-cost, high
efficiency supply chain, they have developed either quick
response (QR) systems or ECR (Efficient Consumer Response)
Systems and make use of category management techniques.
c. There are three types of vertical marketing channels:
(1) Corporate vertical marketing channels typically
consist of either a manufacturer that has integrated
vertically forward to reach the customer, or a retailer
that has integrated vertically backward to create a self-
supply network.
(2) Contractual vertical marketing channels are supply
chains that use a contract to govern the working
relationship between the members. They include the
following types:
(a) Wholesaler-sponsored voluntary groups are
created when a wholesaler brings together a
group of independently owned retailers and
offers them a coordinated merchandising and
buying program that will provide these smaller
retailers with economies similar to those
obtained by their chain store rivals.
(b) Retailer-owned cooperatives are wholesale
operations organized and owned by retailers and
are most common in hardware retailing.
(c) Franchising is a form of licensing by which the
owner of a trademark, service mark, trade name,
advertising symbol or method obtains
distribution through affiliated dealers.
(3) Administered vertical marketing channels are similar
to conventional marketing channels, but one of the
members takes the initiative to lead the channel by
applying the principles of effective interorganizational
management, which is the management of relationships
between the various organizations in the supply chain.
III. Managing Retailer-Supplier Relations If retailers want to improve their
performance in these channels, they must understand the principal concepts of
interorganizational management. .
A. Dependency – None of the respective institutions can isolate itself; each
depends on others to do an effective job.
B. Power is the ability of one member to influence the decisions of the other
channel members.
1. There are six types of power:
a. Reward power is based on the ability of A to provide rewards
for B.
b. Expertise power is based on B's perception that A has some
special knowledge.
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13. c. Referent power is based on the identification of B with A. B
wants to be associated or identified with A.
d. Coercive power is based on B's belief that A has the capacity to
punish or harm B if B doesn't do what A wants.
e. Legitimate power is based on A's right to influence B, or B's
belief that B should accept A's influence.
f. Informational power is based on A’s ability to provide B with
factual data.
2. Retailers and suppliers that use reward, expertise, referent and
informational power can foster a healthy working relationship.
3. Coercive and legitimate power tend to elicit conflict and destroy
cooperation in the channel.
C. Conflict – It is inevitable in every channel relationship because retailers and
suppliers are interdependent; that is, every channel member is dependent on
every other member to perform some specific task. There are three major
sources of conflict between retailers and their suppliers:
1. Perceptual incongruity occurs when the retailer and supplier have
different perceptions of reality.
2. Goal incompatibility occurs when achieving the goals of either the
supplier or the retailer would hamper the performance of the other.
3. Domain disagreements occur when there is disagreement about which
member of the marketing channel should make decisions. Examples
include:
a. A diverter is an unauthorized member of a channel who buys
and sells excess merchandise to and from authorized channel
members.
b. Gray marketing is when branded merchandise flows through
unauthorized channels.
c. Free-riding is when a consumer seeks product information,
usage instructions, and sometimes even warranty work from a
full-service store but then, armed with the brand’s model
number, purchases the product from a limited service discounter
or over the Internet.
IV. Collaboration in the Channel – Although all channels experience some degree of
conflict,
the dominant behavior in successful channels is collaboration.
A. However, the management of collaborative relations is facilitated by three
important types of behaviors and attitudes. These are:
1. Mutual trust, which occurs when both the retailer and its supplier have
faith that each will be truthful and fair in their dealings with the other.
2. Two-way communication, which occurs when both the retailer and the
supplier openly communicate their ideas, concerns, and plans.
3. Solidarity exists when a high value is placed on the relationship
between a supplier and retailer.
B. Category management – involves the simultaneous management of price, shelf
space, merchandising strategy, promotional efforts, and other elements of the
retail mix within the category based on the firm’s goals, the changing
environment, and consumer behavior.
1. Retailers designate a category manager from among their employees
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14. for each category sold in their store. The retailer defines specific
business goals for each category. Subsequently, the category manager
leverages detailed knowledge of the consumer and consumer trends,
detailed POS information, and specific analysis provided by each
supplier to the category.
2. In some cases a supplier may serve as the retailer’s category manager.
Termed category captains and/or category advisors, these suppliers
work closely with the retail buyer ensuring that the retailer has the best
assortment and the greatest possible sales.
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15. Lecture Two
Topic:
Market Selection and Location Analysis
Dunne: Chapter7
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16. Chapter 7
Market Selection and Retail Location Analysis
Overview:
In this chapter, we will review how retailers select and reach their target markets through the
choice of location. The two broad options for reaching a target market are store-based and
nonstore-based locations. The chapter's major focus is on the decision process used to select
store-based locations. We describe the various demand and supply factors that must be evaluated
within each geographic market area under consideration. We conclude with a discussion of
alternative locations that retailers may consider as they select a specific site.
Learning objectives:
After reading this chapter, you should be able to:
1. Explain the criteria used when selecting a target market
2. Identify the different options, both store-based and nonstore-based, for effectively
reaching a target market and discuss the advantages and disadvantages of business
districts, shopping centers, and free-standing units as potential sites for retail location
3. Define geographic information systems (GIS) and discuss their potential uses in a retail
enterprise
4. Describe the factors to consider in identifying the most attractive geographic market for a
new store
5. Discuss the attributes to consider in evaluating retail sites within a retail market
6. Explain how to select the best geographic site for a store
Outline:
IX. Selecting a Target Market - To be successful, a retailer must select a target market and
identify the best way to reach this target market.
D. Geographic space and cyberspace must be considered.
4. Traditionally, reaching the target market has been associated with
selecting the best physical location for a store.
2. The Internet is becoming a viable alternative for reaching one’s
customers.
d. The equivalence of a store on the Internet is a retailer's World
Wide Web (www) site.
e. The retailer's home page is the introductory or first material
viewers see when they access a retailer's Internet site. It is
equivalent to a retailer's storefront in the physical world.
f. Virtual store is the total collection of all the pages of information
on the retailer's Internet site.
g. The counterpart to location on the Internet is the "ease of
access." This refers to the consumer’s ability to find a Web site in
cyberspace easily and quickly.
E. Market segmentation - a method retailers use to segment, or break down,
heterogeneous consumer populations into smaller, more homogeneous groups
based on their characteristics.
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17. 1. No single retailer can serve all potential customers; it is important that it
segment the market and select a target market(s).
2. A target market is the segment of the market that the retailer decides to
pursue through its marketing efforts.
3. The topics of target market selection and location analysis are combined
because a retailer must identify its target market(s) before it decides how
best to reach that market(s).
F. Identifying a target market - requires meeting three criteria.
1. Measurability – a retailer should be able to describe the selected market
segment using objective measures for which data is available, such as
age, gender, income, education, ethnic group and religion.
2. Accessibility – the degree to which the retailer can target its promotional
or distribution efforts to a particular market segment.
3. Substantialness - the segment must be substantial enough to be
profitable for the retailer.
X. Reaching Your Target Market - once a retailer identifies its target market, it must
determine the most effective way to reach this market.
A. Location of Store-Based Retailers - operate from a fixed store location that
requires customers to travel to the store in order to view and select merchandise
and/or services.
1. Business Districts. The central business district (CBD) usually consists
of an unplanned shopping area around the geographic point at which all
public transportation systems converge; it is usually located in the center
of the city where the city originated historically.
a. Strengths of the CBD include: easy access to public
transportation; wide product assortment; variety in images, prices,
and services; and proximity to commercial activities.
b. Weaknesses of the CBD include: inadequate (and usually
expensive) parking, older stores, high rents and taxes, traffic and
delivery congestion, potentially high crime rate, and the often-
decaying conditions of many inner cities.
c. In larger cities, secondary business districts (SBD) and
neighborhood business districts (NBD) have developed. A
secondary business district is a shopping area that is smaller
than the CBD and revolves around at least one department or
variety store at a major street intersection. A neighborhood
business district is a shopping area that evolves to satisfy the
convenience-oriented shopping needs of a neighborhood and
generally contains several small stores (with the major retailer
being either a supermarket, super drugstore, or a variety store) and
is located on a major artery of a residential area.
2. Shopping centers/malls - are centrally owned or managed shopping
districts that are planned, have balanced tenancy (the stores complement
each other in merchandise offerings), and are surrounded by parking
facilities.
a. A shopping center location can offer a retailer several major
advantages over CBD location. These include:
(1) heavy traffic resulting from the wide range of product
offerings
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18. (2) cooperative planning and sharing of common costs
(3) access to highways and availability of parking
(4) lower crime rate
(5) clean, neat environment
b. The disadvantages of locating in a shopping center include:
(1) inflexible store hours
(2) high rents
(3) restrictions on merchandise the retailer may sell
(4) required membership in the center's merchant organization
(5) possibility of too much competition and the fact that much
of the traffic is not interested in a particular product
offering
(6) dominance of the smaller stores by the anchor tenant.
3. Free-standing retailer - generally locates along major traffic arteries,
without any adjacent retailers selling competing products.
a. This location alternative has the following advantages:
(1) lack of direct competition
(2) generally lower rents
(3) freedom in operations and hours
(4) facilities that can be adapted to individual needs
(5) inexpensive parking
b. Free-standing locations also have multiple disadvantages:
(1) lack of drawing power of from complementary stores
(2) difficulties in attracting customers for the initial visit
(3) higher advertising and promotional costs
(4) operating costs cannot be shared with others
(5) stores may have to be built rather than rented
(6) zoning laws may restrict some activities
4. Nontraditional locations - offer more place utility or locational
convenience. Examples include stores at military bases, college
campuses, airports, hospitals, and cruise ships.
5. Nonstore-Based Retailers - include street peddlers, direct sellers, catalog
retailers, automated merchandising systems (ATMs), and e-tailers. Since
retailing is expected to remain predominantly store-based, we will focus
our attention on location analysis for these retailers. However, it should
be noted that some innovative retailers are using multiple retail formats to
reach their target markets.
XI. Geographic Information Systems (GIS) - computerized system that combines physical
geography with cultural geography.
A. Thematic maps - use visual techniques such as colors, shading, and lines to
display cultural characteristics of the physical space.
B. GIS can be used for many important retail decisions:
1. market selection
2. site analysis
3. trade area definition
4. estimating new store cannibalization
5. advertising management
6. merchandise management
7. evaluation of store managers
18

19. XII. Market Identification - involves three sequential steps. First, the retailer must identify the
most attractive markets in which to operate. Second, one must evaluate the density of
demand and supply within each market and identify the most attractive sites that are
available within each market. Third, select the best site or sites available.
A. Retail Location Theories
1. Retail gravity theory suggests that there are underlying consistencies in
shopping behavior that yield to mathematical analysis and prediction that
are based on the notion or concept of gravity.
a. Reilly's law of retail gravitation is based on Newtonian
gravitational principles and explains how large urbanized areas
attract customers from smaller rural communities.
b. In effect, Reilly's law states that two cities attract trade from an
intermediate place approximately in direct proportion to the
population of the two cities and in inverse proportion to the square
of the distance from these two cities to the intermediate point.
c. Reilly's law was later revised to determine the boundaries of a
city's trading area or to establish a point of indifference between
two cities.
(1) This point of indifference is the breaking point at which
customers would be indifferent to shopping in either city.
(2) Recent research on outshopping (i.e., leaving your
community to shop) from rural areas suggests that factors
other than those considered by retail gravity theory are
also important.
2. Saturation theory examines how the demand for goods and services in a
potential trading area is being served by current retail establishments in
comparison with other potential markets.
a. Retail store saturation is a condition where there are just enough
store facilities, for a given type of store, to efficiently and
satisfactorily serve the population and yield a fair profit to the
owners.
b. When a market has too few stores to satisfactorily meet the needs
of the customer, it is understored.
c. When a market has too many stores to yield a fair return on
investment, it is overstored.
d. The index of retail saturation is the ratio of demand for a
product divided by available supply. The higher the IRS, the
higher the potential for new retail space.
3. Buying Power Index - Sales & Marketing Management magazine
annually publishes its Survey of Buyer Power.
a. This data is available for metropolitan areas, cities, and states.
b. The buying power index (BPI) is an indicator of a market’s
overall retail potential and is comprised of weighted measures of
effective buying income (personal income, including all non-tax
payments such as social security, minus all taxes), retail sales, and
population.
c. The BPI is weighted in the following manner:
19

20. BPI = 0.5 (the area's percentage of U.S. effective buying income)
+ 0.3 (the area's percentage of U.S. retail sales) + 0.2 (the area's
percentage of U.S. population).
B. Other Demand and Supply Factors.
1. Market demand potential-some of the more important components of
market demand potential are:
a. population characteristics
b. buyer behavior characteristics
c. household income
d. household age profile
e. household composition
f. community life cycle
g. population density
h. mobility
2. Market supply factors-some of the more important factors include:
a. square feet per store
b. square feet per employee
c. growth in stores
d. quality of competition
XIII. Site Analysis - is an evaluation of the density of demand and supply within each market
with the goal of identifying the best retail site(s) available.
A. Size of trading area - the trading area of specific sites will need to be estimated.
1. Applebaum developed a technique for estimating the trade area of a
current store. It involved interviewing a customer for each $100 in weekly
sales. The customers were randomly selected and their home addresses
obtained. After the home addresses of the shoppers were plotted on a map
one could make inferences about the trading area size and the
competition.
2. For a new store the task is more difficult; however, there are some general
rules that apply.
a. Stores that sell convenience will have a smaller trading area than
stores that sell so-called specialty products.
b. As consumer mobility increases, the size of the store's trading area
increases.
c. As the size of the store increases, its trading area increases
because it can stock a broader and deeper assortment of
merchandise, which will attract customers from greater distances.
d. As the distance between competing stores increases, their trading
areas will increase.
e. Natural and manmade obstacles such as rivers, mountains,
railroads, and freeways can abruptly stop the boundaries of a
trading area.
B. Description of Trading Area - retailers can access, at relatively low cost,
information concerning the trading area for various retail locations and the buyer
behavior of the trading area.
C. Demand Density - needs to be evaluated for various sites.
1. Demand density is the extent to which the potential demand for the
retailer's goods and services is concentrated in certain census tracts, ZIP
code areas, or parts of the community.
20

21. 2. To determine the extent of demand density, retailers need to identify what
they believe to be the major variables influencing their potential demand
D. Supply density - is the extent to which retailers are concentrated in different
geographic areas of a community.
E. Site availability - one needs to determine which sites are available.
XIV. Site Selection - once the best available sites within each market have been identified, the
retailer needs to make the final location decision and select the best site(s). After all, all
retailers should attempt to find a 100 percent location for their stores. A 100 percent
location is a location where there is no better use for the site then the retail store that is
being planned. Retailers should remember that what may be a 100 percent site for one
store may not be for another. The best location for a supermarket may not be the best
location for a discount department store. When reviewing a site, a retailer must consider
A. Nature of Site – This entails determining whether or not the site is currently a
vacant store, a vacant parcel of land, or the site of a planned shopping center.
1. Traffic Characteristics – The traffic that passes a site, whether it is
vehicular or pedestrian, can be an important determinant of the potential
sales at that site.
2. Types of Neighbors – A good neighboring business will be one that is
compatible with the retailer’s line of trade. Store compatibility exists
when two similar retail businesses locate next to one another and realize a
greater sales volume than they would have achieved had they located
apart from each other.
B. Terms of Purchase or Lease – The retailer should review the length of the lease,
the exclusivity clause, the guaranteed traffic rate, and an anchor clause.
C. Expected Profitability – The final step in site selection analysis is the construction
of a pro forma return on asset model for each possible site. This includes:
1. Net profit margin
2. Asset turnover
3. Return on assets
21

22. Solutions to computational questions from Chapter 7: Location Analysis
10. Calculate the buying power indexes for the following three cities:
Percent of Effective Percent of U.S. Percent of
U.S. City Buying Income Retail Sales U.S. Population
Mansfield 0.006 0.004 0.006
Springfield 0.009 0.007 0.009
Carlyle 0.007 0.005 0.007
SOLUTION: (227)
Tyler (BPI) = .5(.006) + .3(.004) + .2(.006)
= .0054
Little Rock (BPI) = .5(.009) + .3(.007) + .2(.009)
= .0084
Cheyenne (BPI) = .5(.007) + .3(.005) + .2(.007)
= .0064
11. Compute the index of retail saturation for the following three markets. The data for
department stores are as follows:
MARKET A B C
Retail expenditures per household $789 $875 $943
Square feet of retail space 600,000 488,000 808,000
Number of households 121,000 102,000 157,000
Based on these data, which market is most attractive? What additional data would you find
helpful in determining the attractiveness of the three markets?
SOLUTION (226-227):
IRS (Market A) = (121,000 x $789) / 600,000
= 159.12
IRS (Market B) = (102,000 x $875) / 488,000
= 182.89
IRS (Market C) = (157,000 x $943) / 808,000
= 183.23
The most attractive market is Market-C with an IRS of 183.23 or $183.23 in expected sales per
square foot. It would be helpful if additional information on various factors that influence
market demand potential such as population characteristics, buyer behavior characteristics,
household income, household age profile, household composition, community life cycle,
population density and mobility. In addition supply factors such as square feet per store, square
feet of space per employee, store growth, and the quality of competition should be analyzed.
Planning Your Own Retail Business:
The retail store that you are planning has an estimated circular trade radius of four miles. Within
this four-mile radius, there is an average of 1,145 households per square mile. In a normal year,
you expect that 47 percent of these households would visit your store (referred to as penetration)
22

23. an average of 4.3 times (referred to as frequency). Based on these figures, what would you
expect to be the traffic (i.e., number of visitors to your store per year)? (Hint: Traffic can be
viewed as the square miles of the trade area multiplied by the household density multiplied by
penetration, which is in turn multiplied by frequency.)
Once you answer this question, do some sensitivity analysis, which is an assessment of
how sensitive store traffic is to changes in your assumptions about penetration and frequency.
What happens if penetration drops to 45 percent or rises to 50 percent? What happens if
frequency drops to 4.0 times annually or rises to 4.5 times annually? In this analysis, only change
one thing at a time and hold all other assumptions constant.
Suggested Answer:
One needs to first compute the following.
1. square miles of trade area = r2
= (22/7)(4)2
= 50.286
2. traffic = (square miles in trade area)
x (household density)
x (penetration)
x (frequency)
traffic = (50.286) x (1,145) X (47%) X (4.3)
traffic = 116,364
Next do some sensitivity analysis.
Consider the following possible parameter values
SQUARE HOUSEHOLD
MILES IN (x) DENSITY (x) PENETRATION (x) FREQUENCY = TRAFFIC
TRADE AREA
1 50.286 x 1145 x 47% x 4.3 = 116,364
2 50.286 x 1145 x 45% x 4.3 = 111,412
3 50.286 x 1145 x 50% x 4.3 = 123,792
4 50.286 x 1145 x 47% x 4.0 = 108,246
5 50.286 x 1145 x 47% x 4.5 = 121,776
23

24. Lecture Three
Topics:
Strategic Planning and Operations
Management
Evaluating the Competition
Dunne: Chapters 2 and 4
24

25. Chapter 2
Retail Strategic Planning and Operations Management
Overview:
In this chapter, we will explain the importance of planning in successful retail organizations.
To facilitate the discussion, we introduce a retail planning and operations management model,
which will serve as a frame of reference for the remainder of the text. This simple model
illustrates the importance of strategic planning and operations management. These two
activities, if properly conducted, will enable a retail firm to achieve results exceeding those of
the competition.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain why strategic planning is so important and be able to describe the components
of strategic planning: statement of mission; goals and objectives; an analysis of
strengths, weaknesses, opportunities, and threats; and strategy.
2. Describe the text's retail planning and operation management model which explains
the two tasks that a retailer must perform and how they lead to higher profit.
Outline:
I. Components of Strategic Planning
A. Planning - The anticipation and organization of what needs to be done to reach
an objective.
B. One form of planning is strategic planning. This type of planning involves
adapting the resources of the firm to the opportunities and threats of an
ever-changing retail environment. The strategic planning process consists of four
components:
1. Mission Statement - Basic description of the fundamental nature,
rationale, and direction of the firm. While mission statements vary from
retailer to retailer, good ones usually include three elements:
a. How the retailer uses or intends to use its resources
b. How it expects to relate to the ever-changing environment
c. The kinds of values it intends to provide in order to serve the
needs and wants of the consumer
2. Statement of Goals and Objectives - Performance results intended to be
brought about through the execution of a strategy. These goals and
objectives should be derived from, and give precision and direction to, the
retailer’s mission statement. A retailer's objectives are usually
categorized into four dimensions:
a. Market Performance – establish the amount of dominance the
retailer has in the marketplace.
(1) Sales volume
(2) Market share – the retailer’s total sales divided by total
market sales.
25

26. b. Financial - A retailer analyzes its ability to provide an adequate
profit level to continue in business.
(1) Profitability - deal directly with the monetary return a
retailer desires from its business. The most frequently
encountered profit objectives in a retail enterprise are:
(a) Net profit margin - the ratio of net profit (after
taxes) to sales and shows how much profit a
retailer makes on each dollar of sales after
expenses and taxes have been met.
(b) Asset turnover – total sales divided by total
assets. This measure shows how many dollars of
sales a retailer can generate on an annual basis
with each dollar invested in assets.
(c) Return on assets (ROA) - net profit (after taxes)
divided by total assets.
(d) Financial leverage - total assets divided by net
worth or owners' equity. This measure shows how
aggressive the retailer is in its use of debt.
(e) Return on net worth (RONW) - net profit (after
taxes) divided by owners’ equity.
(2) Productivity - Objectives that state how much output the
retailer desires for each unit of resource input. The major
resources at the retailer's disposal are:
(a) Space productivity - net sales divided by the total
square feet of retail floor space. A space
productivity objective states how many dollars in
sales the retailer wants to generate for each square
foot of store space.
(b) Labor productivity - net sales divided by the
number of full-time-equivalent employees. A
labor productivity objective reflects how many
dollars in sales the retailer desires to generate for
each full-time-equivalent employee.
(c) Merchandise productivity - net sales divided by
the average dollar investment in inventory. This
objective (also known as sales-to-stock ratio)
states the dollar sales the retailer desires to
generate for each dollar invested in inventory.
c. Societal - reflect the retailers' desire to help society fulfill some of
its needs.
(1) Employment - relate to the provision of employment
opportunities for the members of the retailer's community.
(2) Payment of taxes - recognizes the retailer's role in
helping finance societal needs that the government deems
appropriate.
(3) Consumer choice – the goal to compete in such a way
that the consumer will be given real alternatives.
(4) Equity - reflects the retailer's desire to treat the consumer
and suppliers fairly.
26

27. (5) Benefactor - reflects the retailer's desire to underwrite
certain community activities.
d. Personal - reflect the retailers’ desire to help individuals employed
in retailing fulfill some of their needs. Generally retailers tend to
pursue three types of personal objectives.
(1) Self gratification - focused on the needs and desires of
the owners, managers, or employees of the firm to pursue
what they truly want out of life.
(2) Status and respect - focus on the owners', managers', or
employees' need for status and respect in their community
or within their circle of friends.
(3) Power and authority - reflect the need of managers and
other employees to be in positions of influence.
3. Strategies - Carefully designed plans for achieving the retailer's goals and
objectives. It is a course of action that when executed will produce the
desired levels of performance.
a. Some experts believe retailers can operate with three basic
strategies:
(1) Get shoppers into your store. Many retailers think this is
one of the most difficult tasks in retailing - getting people
to visit your website or to come into your store.
(2) Convert these shoppers into customers by having them
purchase merchandise. This means having the right
merchandise, using the right layout and display, and
having the right sales force.
(3) Do this at the lowest operating cost possible that is
consistent with the level of service that your customers
expect.
b. Many retailers go further and use strategies that enable them to
differentiate themselves from the competition in order to
accomplish these three tasks. They do this by means of
differentiation -- that is, what sets them apart from their
competition:
(1) Physical differentiation of the product
(2) The selling process by offering outstanding service
(3) After-purchase satisfaction by taking care of the customer
after the sale has been made
(4) Location or the ease with which the customer can get to
the retailer
(5) Never being out-of-stock on sizes, colors, and styles that
the retailer's target market expects the retailer to carry
4. Identification and analysis of the retailer's strengths and weaknesses as
well as the threats and opportunities that exist in the environment.
a. Before developing differentiation strategies, however, the retailer
must also be aware of its current market position. It can do this
with a SWOT Analysis:
(1) Strengths -
(a) What major competitive advantage(s) do we have?
(b) What are we good at?
(c) What do customers perceive as our strong points?
27

28. (2) Weaknesses -
(a) What major competitive advantage(s) do
competitors have over us?
(b) What are competitors better at than we are?
(c) What are our major internal weaknesses?
(3) Opportunities -
(a) What favorable environmental trends may benefit
our firm?
(b) What is the competition doing in our market?
(c) What areas of business that are closely related to
ours are undeveloped?
(4) Threats -
(a) What unfortunate environmental trends exist that
may hurt our future performance?
(b) What technology is on the horizon that may soon
have an impact on our firm?
b. After performing the SWOT Analysis, the retailer should generate
strategies for achieving its goals. The retailer should have a fully
developed marketing strategy that should include:
(1) The specific target market or group(s) of customers that
the retailer is seeking to serve.
(2) The location(s) that is consistent with the needs and wants
of the desired target market.
(3) The specific retail mix that the retailer intends to use to
appeal to its target market, and thereby meet its financial
objectives. The retail mix is the combination of
merchandise, price, advertising and promotion, location,
customer services and selling, and store layout and design,
that the retailer intends to use to appeal to its target market
to meets its financial objectives.
II. The Retail Strategic Planning and Operations Management Model - A retailer must take
part in the following types of planning and management tasks:
A. Strategic Planning - The process concerned with how the retailer responds to the
environment in an effort to establish a long-term course of action. The strategic
plan reflects the line(s) of trade in which the retailer will operate, the market(s) it
will pursue, and the retail mix it will use. Strategic planning calls for the long-
term commitment of resources. The strategic planning process requires a retailer
to:
1. Define the mission; establish goals and objectives; perform a SWOT
analysis.
2. After assessing the external environment in order to uncover
opportunities to gain a differential advantage over competitors, the
retailer should develop a strong marketing plan with both market and
financial performance objectives. Major environmental factors that need
to be considered include:
a. Consumer Behavior - Understand the determinants of
consumers' shopping behavior.
b. Competitor Behavior - Develop a competitive strategy that is not
easily imitated.
28

29. c. Supply Chain Behavior - Keep abreast of supply chain members'
behavior and the possible effects it may have on one's strategy.
d. Socioeconomic Environment - Understand how economic and
demographic trends will influence future sales.
e. Technological Environment - Gather knowledge in regard to
opportunities for improving operating efficiency.
f. Legal and Ethical Environment - Be familiar with local, state
and federal regulations; stay current with evolving legal patterns
that may effect the industry while operating at the highest ethical
standards.
3. In addition, the retailer must consider the location of each retail
establishment; often an uncontrollable factor.
B. Operations Management – deals with activities directed at maximizing the
efficiency of the retailer’s use of resources. It is frequently referred to as day-to-
day management.
C. High Performance Results - Achieved through the development and
implementation of well-designed strategic, operational, and administrative plans.
High performance results are indicative of industry leaders. Retailers must set
high financial performance objectives so that they can at least maintain average
operating results if planned results are not achieved.
29

30. CHAPTER 4
Evaluating the Competition in Retailing
Overview:
The behavior of competitors is an important component of the retail planning and management
model. Effective planning and execution in any retail setting cannot be accomplished without the
proper analysis of competitors. In this chapter, we begin by reviewing the various models of
retail competition. The types of competition in retailing are described next. We then discuss the
evolution of retail competition. Finally, we examine the upcoming retail revolution in nonstore
retailing, developing retail formats, global and technological changes, and the use of private
labels as a strategic weapon.
Learning Objectives:
After reading this chapter you should be able to:
1. Explain the various models of retail competition
2. Distinguish between various types of retail competition
3. Describe the four theories used to explain the evolution of retail competition
4. Describe the changes that could effect retail competition
Outline:
I. Models of Retail Competition – This chapter examines the effects of competition on a
retailer’s performance. Today’s slower population growth rates have turned retailing into
a business where successful regional and national retailers can grow only by taking sales
away from competitors. Thus, a retailer must always be on the offensive by studying the
changing competitive environment, especially its local competition, and differentiating
itself from that competition.
A. The Competitive Marketplace - Competition can be waged on many fronts, and a
retailer must be clear about what advantages it will emphasize and where its
resources will have the greatest effect in attracting and satisfying customers.
B. Market Structure
1. Economists use four different economic terms to describe the competitive
environment in the retailing industry:
a. Pure Competition – occurs when a market has homogeneous
products and many buyers and sellers, all having perfect
knowledge of the market, and ease of entry for both buyers and
sellers.
b. Pure Monopoly – occurs when there is only one seller for a
product or service.
c. Monopolistic Competition – occurs when the products offered
are different, yet viewed as substitutable for each other and the
sellers recognize that they compete with sellers of these different
products.
d. Oligopolistic Competition – occurs when relatively few sellers,
or many small firms who follow the lead of a few larger firms,
30

31. offer essentially homogeneous products and any action by one
seller is expected to be noticed and reacted to by the other sellers.
2. Retailing can be characterized as monopolistic or, in rare cases,
oligopolistic competition. The distinction between monopolistic
competition and oligopolistic competition lies in the number of sellers.
a. Conventional economic thought suggests that for oligopoly to
occur, the top four firms have to account for over 60 to 80 percent
of the market. While some national retailers do have large market
shares; oligopolistic competition does not actually occur on a
national level. However, it is not uncommon at a local level.
b. However, if local prices become too high, merchandise selection
too limited, or services too poor, residents of these communities
will travel to larger communities to shop. This is known as
outshopping.
C. Demand Side of Retailing - Most retailers face monopolistic competition where
they are confronted with a negatively sloping demand curve caused by "the law
of diminishing returns."
D. Nonprice Decisions – Many customers place a value on attributes
other than price when selecting a place to shop. Therefore, the retailer
has to make decisions about the other elements (merchandise mix,
advertising and promotion, customer services and selling, and store layout
and design) of the retail mix in order to influence the quantity of
merchandise it sells and the profit level it achieves. Here are some ways a
retailer could make use of nonprice competition:
1. The retailer could position itself as different from the
competition by altering its merchandise mix to offer higher-
quality goods, greater personal service, special-orders handling, or
a better selection of large sizes.
2. The retailer can offer private label merchandise that has
unique features or offers better value than competitors.
3. The retailer could provide other benefits for the customer.
For example, the retailer could effectively lower transportation
costs for customers by providing free parking and/or gas.
4. The retailer could master stockkeeping with its basic
merchandise assortment.
E. Competitive Actions - With so many retail establishments competing against
each other, the profitability of all the retailers suffers.
1. Market Equilibrium - When the return on investment is high enough to
justify keeping capital invested in retailing, but not so high to invite more
competition.
2. Measure of competitive activity - The number of retail establishments per
household in a market.
a. Overstored Market – a condition in a community when the
number of stores in relation to households is so large that to
engage in retailing is usally unprofitable or marginally profitable.
b. Understored Market – a condition in a community when the
number of stores in relation to households is relatively low so that
engaging in retailing is an attractive economic endeavor.
F. Suppliers As Partners And Competitors – A retailer’s suppliers should be
considered both partners and competitors for the customer’s dollars.
31

32. 1. Suppliers as competitors – Suppliers compete for gross margins
throughout
the supply chain. The retailer must develop a loyal group of patrons that
encourages the supplier to accommodate the needs of its retail partner.
2. Suppliers as partners – Suppliers can be a critical competitive advantage
to
retailers when they provide a unique product or promotion.
II. Types of Competition - Competition is quite intense in retailing and various classification
schemes are used to describe this intensity.
A. Intratype and Intertype Competition
1. Intratype Competition – occurs when two or more retailers, of the same
type, compete with each other for the same household; the most common
type of retail competition.
2. Intertype Competition – occurs when two or more retailers, of different
types, compete directly by attempting to sell the same merchandise lines
to the same households.
B. Divertive Competition - When retailers intercept or divert customers from
competing retailers.
1. This type of behavior can be either a form of intratype or intertype
competition.
2. It is significant because many retailers operate close to their break-even
point, thus making them susceptible to any downturn in sales.
III. Theories of the Evolution of Retail Competition - Several theories have been developed
to explain and describe the evolution of competition in retailing.
A. Wheel of Retailing Hypothesis - New retailers enter the market as low-status,
low-margin, low-price operators. However, as they meet with success, these new
retailers gradually acquire more sophisticated and elaborate facilities making
them vulnerable to new types of low-margin retail competitors who progress
through the same pattern. The three stages are:
1. Entry Phase - New retailers enter the market as low-status, low-margin,
low-profit operators.
2. Trading-Up Phase - The new retailers experience success and acquire
more sophisticated and elaborate facilities.
3. Vulnerability Phase - Retailers find it necessary to raise prices and
margins and therefore become susceptible to new types of low-margin
competition.
B. The Retail Accordion - Retail institutions evolve from outlets that offer wide
assortments to specialty stores that offer narrow assortments and then return to
the wide assortment stores and continue through the pattern again and again.
C. The Retail Life Cycle - Some believe that retailing institutions pass through an
identifiable cycle:
1. Introduction - This stage is initiated by an aggressive, bold entrepreneur
who is willing and able to develop an approach to retailing that departs
from conventional approaches. Sales will grow if consumers perceive the
new advantage being offered as particularly significant.
2. Growth - Many new competitors enter the market to take part in the
success of the new form of retailing; sales and profit growth are
explosive. Market share and profits will approach their maximum levels.
32

33. 3. Maturity - Market share stabilizes and severe profit declines occur due to
inadaptable managerial capabilities, over expansion, and competitive
assaults by new forms of retailing.
4. Decline - Retailers experience major losses of market share, marginal
profits
and an inability to compete. Decline may be postponed by attempts to
reposition, modify, or adapt the firm.
D. Resource-Advantage Theory – Firms seek superior financial performance in an
ever-changing environment. Retail demand is dynamic because consumer tastes
are always changing, and supply is dynamic because, as firms search for a
superior performance, they are forced to change the elements of their retail mix to
match changing consumer preference and improve firm performance.
1. Superior performance – The result of achieving a competitive advantage
in the marketplace as a result of some tangible or intangible entity.
2. All retailers cannot achieve superior results at the same time.
IV. Future Changes in Retail Competition - Retailers in today's ever-changing marketplace
can expect dynamic changes in retail competition. A few of the trends shaping the retail
landscape include:
A. Nonstore Retailing - Analysts contend that nonstore retailing (especially those
that utilize the Internet) will experience significant growth during the next
decade.
1. Some of the forces contributing to this growth are:
a. Consumers’ need to save time.
b. Consumers’ desire to ―time-shift.‖
c. The erosion of enjoyment in the shopping experience.
d. The lack of qualified sales help in stores to provide information.
e. The explosive development of the telephone, computer, and
telecommunications equipment that facilitates nonstore shopping.
f. The consumers' preference for lower prices, which often
eliminates the middleman's profit.
2. Nonstore retailers include:
a. Direct Selling Establishments – Engage in the sale of a consumer
product or service on a person-to-person basis away from a fixed
retail location.
b. Direct Marketers – Those who sell products by catalog, mail
order, and the Internet.
c. E-Tailing – The general belief by retail experts is that electronic,
interactive, at-home shopping is definitely the place to be. Every
major player in the retail industry, computer industry,
telecommunications industry, and the transaction processing
industry is committed to this growth. However, there are six
reasons, why Internet sales will fail to reach 50 percent of total
retail sales:
(1) 26 percent of all retail sales involve automobile dealers.
The taxes paid by new car dealers to their state
governments will ensure that states will continue to ban
Internet sales and protect the current system.
33

34. (2) Discounters, who account for a third of all general
merchandise sales, will have a particularly difficult
problem selling via the Internet.
(3) Half of all food and beverage slaes, are sold by on-
premise restaurants.
(4) The U.S. is currently overstored. Thus, many consumers
will purchase at a bricks & mortar retailer instead of
waiting for an overnight delivery.
(5) Some items, especially fashion clothing, must be tried on
or seen in person before buying.
(6) A final factor limiting e-commerce is the ―security issue.‖
B. New Retailing Formats - Retailing is continually evolving. Innovation in retailing
is the result of constant pressure to improve efficiency and effectiveness in
serving the consumer. The pressure to better serve has also resulted in a shortened
life cycle for retail formats. As a result, new formats are born and old ones die.
1. Supercenters – combine a discount store and grocery store and carry
80,000 to 100,000 products in order to offer one-stop shopping.
a. These stores offer the customer one-stop shopping (and as a result
are capable of drawing customers from up to a 60 - 80 mile radius
in some rural areas) and lower the customer's total cost of
purchasing in terms of time and miles traveled without sacrificing
service and variety.
b. Recently, the supercenter concept has even branched out into the
automobile market.
2. Recycled Merchandise Retailers – establishments that sell used and
reconditioned products.
3. Liquidators - With over 15,000 retailers seeking the protection of the
bankruptcy courts annually, liquidators are needed to come in and
liquidate leftover merchandise so that the troubled retailer can shut down
or down-size.
C. Heightened Global Competition - The rate of change in retailing appears to be
directly related to the stage and speed of economic development in the countries
concerned.
1. Even the least-developed countries are experiencing dramatic changes in
retailing activities as newer formats are introduced.
2. Retailing in other countries exhibits even greater diversity in its structure
than retailing in the United States.
3. Tthe introduction of new retailing formats in one part of the country will
impact retailers in other parts of the country. This is true regardless of
whether the change occurs domestically or internationally.
4. Still, it is amazing that retailers from larger countries often do not have
the level of success when entering a new country as compared to retailers
from smaller countries. Retail experts attribute this failure by large
country retailers to two factors.
a. a lack of understanding of the new country's culture.
b. retailers from smaller countries have always had to deal with
international issues if they were to expand.
D. Integration of Technology - Technology is having and will continue to have a
dramatic influence on retailing.
1. Technological innovations can be viewed under three main areas:
34

35. a. Supply chain management
b. Customer management
c. Customer satisfaction
2. Retailers on the forefront of technology who seek to understand their
consumers will achieve higher levels of effectiveness in their efforts.
E. Increasing Use of Private Labels – As retailing continues to change, the increased
use of private labels has emerged as a key business asset in developing a
differential advantage for retailers. Private labels can set the retailer apart from
the competition, get customers into their store, and bring them back. Current
strategies being used by retailers include:
1. Develop a partnership with well-known celebrities, noted experts, and
institutional authorities.
2. Develop a partnership with traditionally higher-end suppliers to bring an
exclusive variation on their highly regarded brand name to market.
3. Reintroduce products with strong name recognition that have fallen from
the retail scene.
4. Brand an entire department or business; not just a product line.
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36. Lecture Four
Topics:
Retail Customers
Legal and Ethical Behavior
Dunne: Chapters 3 and 6
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