McGraw-Hill/Irwin Retailing Management, 7/e

Chapter 2

Types of Retailers

© 2008 by The McGraw-Hill Companies, All rights reserved.

Questions ■ ■ ■ What trends shape today’s retailers?

What are the different types of retailers?

How do retailers differ in terms of how they meet the needs of their customers?

■ How do service retailers differ from merchandise retailers?

■ What are the types of ownership for retail firms?

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General Trends in Retailing ■ ■ ■ ■ ■ New Types of Retailers Increased Concentration Globalization Growth In Services Retailer ■ Demise of Pure Electronic Retailers (Webvan, eToys, etc) ■ Growth in Use of Multi-Channel Retailing by Traditional Retailers Increase Use of Technology to Reduce Cost; Increase Value Delivered 2-3

Types of Retailers ■ Retailers Use Different Retail Mixes -merchandise: variety (breadth) / assortment (depth) -services -store design, visual merchandising -location -pricing ■ ■ Infinite Variations Some combination of retail mixes satisfy the needs of significant segments and persist over time.

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New Types of Retailers ■ ■ ■ Category Specialists -PETsMART -Bed, Bath and Beyond CarMax and Auto Nation Netflix, eBay, Priceline, Travelocity 2-5

Bag Borrow or Steal 2-6

Different Retail Mixes ■ ■ ■ ■ ■ ■ Merchandise: variety (breadth) Assortment (depth) Services Store design, visual merchandising Location Pricing 2-7

Types of Merchandise Retailers

Food Retailers Mom and Pop Stores Convenience Stores Supermarkets Supercenters General Merchandise Retailers Department Stores Specialty Stores Discount Stores Category Specialists Off-Price Retailers Warehouse Clubs Value Retailers

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NAICS Codes for Retailers 2-9

Merchandise Offering

Variety (breadth of merchandise): wide vs. narrow - The number of merchandise categories Assortment (depth of merchandise): deep vs. shallow -the number of items in a category (SKUs)

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Variety and Assortment of Kayaks in Different Retail Outlets 2-11

Services offered Retailers differ in the services they offer customers    VS EMS offers assistance in selecting the appropriate kayak and repairing them Outdoorplay.com

and Wal Mart: doesn’t provide any services 2-12

Illustration of Variety and Assortment

Active Classics Converse Elite Running Fitness Running Trail Running Training Walking Lady Foot Locker

SKUs: 44 SKUs: 44 SKUs: 25 SKUs: 22 N/A SKUs: 44 N/A SKUs: 22 SKUs: 11

Sports Authority

N/A N/A N/A N/A SKUs: 1 SKUs: 39 SKUs: 7 SKUs: 2 SKUs: 12 2-13

Variety and Assortment of Coffee Makers Linens N’ Things # SKUs Price Range Average Price Target Brands Makers Less Than 8 Cups

Black and Decker 2 SKUs $19.99-19.99

$19.99

Brands # SKUs Price Range Average Price

Black and Decker, Mr. Coffee 4 SKUs $10.48-$29.99

$22.61

Makers Greater Than 10 Cups

Cuisinart, Mr. Coffee, Black and Decker, Faberware, Braun, Hamilton Beach, Krups, Sunbeam 19 SKUs $29.99-199.99

Specialty Makers

Braun, Keurig, Breville, Krups 7 SKUs $59.99-249.99

$83.67

Mr. Coffee, Black and Decker, Hamilton Beach, Delonghi, Kitchen Aid, Bunn, Chefmate 16 SKUs $9.49-$119 $51.83

$157.13

Keurig, Mr. Coffee, Delonghi, Philips 5 SKUs $29.99-99.99

$74.99

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Variety and Assortment of Bicycle SKUs

Mountain Wal-Mart

Pacific, Dynacraft, Huffy, Kent International, Pacific Cycle Pacific, Kent International, Huffy 23 SKUs

Road

15 SKUs

Hybrid/ Cross

_______ _____

BMX

Currie Tech., Dumar, Dynacraft, Huffy, Kent Internation al, Pacific Cycle 22 SKUs

Comfort/ Cruisers

_______ _____

Training/ Child

Dumar, Dynacraft, Huffy, Kent International, MGA, Pacific Cycle, Radio Flyer 53 SKUs Price $40-$250 $130-$1500 _____ $40-$250 _____ $130-$1500

Gator Cycle

SKUs Trek, Gary Fisher 23 SKUs Trek, LeMond 18 SKUs Trek 12 SKUs Price $290-$5,700 $770-$5,800 $360-$1300 Trek, Gary Fisher 4 SKUs $360-$590 Trek 5 SKUs $160-$270 2-15

In-Store Digital Camera Comparison Shopping Best Buy vs. Wal-Mart

Best Buy SKUs Price Range Wal-Mart SKUs Price Range Standard

Canon, Kodak, HP, Nikon, Olympus, Sony

Sleek & Slim

Canon, Casio, Fuji, HP, Nikon, Olympus, Sony

Advanced

(Serious Amateur) Canon, Kodak, Panasonic, Sony 10 $99.99 - $199.99

11 $1469.99 - $349.99

14 $179.99 - $549.99

Canon, Fuji, Kodak, Samsung, Pentax, Polaroid 10 $89.98 - $299.96

Canon, Fuji, Sanyo, Samsung, Kodak, Olympus, Norcent, Pentax Canon, Fuji, Kodak, Panasonic, Sony 20 $79.88 - $308.77

7 $198.32 - $549.84

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SKUs for Digital Cameras

Model Wal-Mart Megapixel s Snapshooter Canon Powershot SX100 Fujifilm FinePix Z10 8 7 Price Fujifilm FinePix Z5 Kodak C813 Kodak Easyshare C613 Kodak Easyshare V1003 6 8 6 10 Model 299.96

139.84

Canon Powershot A560 HP M53BNDL 162 HP Photosmart M547 Kodak Easyshare C613 119.77

89.88 Kodak Easyshare C613P 149.34

Kodak Easyshare M753 Best Buy Megapixel s Standard 7 6 6 7 6 7 Price 149.99

179.99

99.99

99.99 99.99

129.99

Pentax Optio M30 Polaroid i733LP Samsung S730 Samsung S850 7 7 7 8 169.84

99.88

99.77

129.77

Nikon CoolPix L11 Olympus FE-340 Sony Cybershot DSC-S700 Sony Cybershot DSC-W55 6 8 7 7 109.99

199.99

149.99

179.99

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Prices and the cost of offering breath and depth of merchandise and services Stocking a deep and broad assortment (like EMS) is costly for retailers.

Many SKUs

Because the retailer must have backup stock for each SKU in addition to holding the inventory

Inventory Investment Cost

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Sales and growth rate for retail sectors 2-19

Food Retailers ■ ■ ■

Supermarkets Supercenters Warehouse Clubs

■

Convenience Stores

Channel preference for food shopping channel where grocery purchasers do most of their food shopping 2-20

Characteristics of Food Retailers 2-21

Types of Food Retailers

Percentage Food Size (000 sq ft) SKUs (000) Variety Assortment Ambiance Service # of checkout lines Prices Gross Margin %

70-80 20-30 20-40 average average pleasant modest 6-10 average 20-22

Conventional Supermarket Limited Assortment Supermarket

80-90 7-10 1-1.5

narrow shallow minimal limited 2-4 lowest 10-12

Supercenter

30-40 150-220 100-150 broad deep average limited 20-30 low 15-18

Warehouse Club

60 100-150 20 broad shallow minimal limited 10-15 low 12-15

Convenience Store

90 2-3 2-3 narrow shallow average limited 1-2 high 25-30 2-22

Supermarkets ■ Conventional supermarkets  30,000 SKU ■ Limited assortment supermarkets (extreme value food retailers)      2000 SKU Offer one or two brands and sizes Designed to maximize efficiency and reduce costs Offer merchandise at 40-60% lower prices than conventional supermarkets Save-A Lot, ALDI (German’s Wal-Mart) 2-23

ALDI: German’s Wal-Mart ALDI provides quality merchandise at low prices by reducing its assortment in order to control store operating expenses 2-24

ALDI’s Strategy  4,100 stores in Germany and 6,600 worldwide, including 800 stores in 26 US states Cheap.. Only two brands of toilet paper and one brand of pickles  STRATEGY: Stores sell less products ALDI exclusive label High quality of products at cheaper prices  HOW?

Strong control over quality and price Simplify shipping and handling Reduce labor costs by keeping limited store staff, etc.

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Save-A-Lot Save-A Lot’s limited assortment format means that stores carry the most frequently purchased grocery items in the most popular size and variety The company carries high quality exclusive brands – many produced by the same manufacturers of leading name brands – and an assortment of nationally branded items.

Used by permission of Save-A-Lot This allows Save-A-Lot to offer savings of up to 40% compared to conventional grocery stores – without asking shoppers to sacrifice quality .

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Trends in Supermarket Retailing Competition from Discount Stores

Efficient Distribution Lower Costs Lower Prices

Changing Consumption Patterns

Time Pressure Eating Out More Meal Solutions

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Conventional Supermarket Survival Pack Chef crafted meals on the go at EatZi’s ■ ■ ■ ■ Emphasize Fresh Perishables  Wegmans Target health conscious and ethnic consumers Provide a better in-store experience Offer more private label brands 2-28

Supercenters and Warehouse Clubs Supercenters ■ ■ The fastest growing retail category Large stores (150,000 – 220,000 square feet) that combine a supermarket with a full-line discount store ■ One-stop shopping experience Warehouse Clubs ■ Offer a limited and irregular assortment of food and general merchandise with little service at low prices ■ Use low-locations, inexpensive store design, little customer service ■ Low inventory holding costs by carrying a limited assortment of fast selling items 2-29

Convenience Store ■ ■ ■ ■ ■ ■ Tailors assortments to local market Makes more convenient to shop Offers fresh, healthy food Fast, casual restaurants Financial services available Opening smaller stores closer to consumers (like airports) 2-30

Types of General Merchandise Retailers ■ ■ ■ ■ ■ ■ ■ ■ Department Stores Specialty Stores Category Specialists Home Improvement Centers Discount Stores Drugstores Off-Price retailers Extreme Value Retailers 2-31

Characteristics of General Merchandise Retailers 2-32

Issues in Department Store Retailing ■ Competition -Discount Stores on Price ■ -Specialty Stores on Service, Depth of Assortment Lower Cost by Reducing Services (?) ■ -Centralized Cash Wraps More Sales (?) ■ ■ -Customers Wait for Sale Focus on Apparel and Soft Home Develop Private Labels and Exclusive Brands 2-33

Three Tiers of Department Stores ■ First Tier: Upscale, high fashion chains with exclusive designer merchandise and excellent customer service Nordstrom, Neiman Marcus, Saks ■ Second Tier: Retailers sell more modestly priced merchandise with less customer service Macy’s ■ Third Tier: Value oriented caters to more price conscious customer JCPenney, Sears, Kohl’s

Rob Melnychuk/Getty Images

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Department Stores : What To Do With an Eroding Market

To deal with an eroding market Department stores are:

■ attempting to increase the amount of exclusive merchandise they sell ■ undertaking marketing campaigns to develop strong images for their stores and brands ■ building better relationships with their key customers

Royalty-Free/CORBIS

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Issues in Discount Store Retailing ■

Only Big Left

Wal-Mart, Target ■

Wal Mart’s Dominance

■

Differentiate Strategy

Wal-Mart = Low Price and Good value Target = More Fashionable Apparel ■

Competition from Category Specialists

Toys-R-Us, Circuit City, Sports Authority

McGraw-Hill Companies, Inc./Gary He, photographer

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Issues in Specialty Store Retailing ■ Mall-Based Apparel Retailers ■ Decline in Mall Shopping and Apparel Sales -Lack of New Fashions -Less Interest in Fashion -Increased Price Consciousness ■ Lifestyle Formats – Abercrombie and Fitch Hot Topics

McGraw-Hill Companies, Inc./Andrew Resek, Photographer

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Specialty Store Retailers

McGraw-Hill Companies, Inc./Andrew Resek, Photographer

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Issues in Drug Store Retailing ■ ■ ■ ■

Consolidation

CVS, Rite-Aid – Walgreens, Competition from Supermarkets, discount Stores and mail-in orders

Evolution

to a New Format -Stand Alone Sites with Drive Thru Windows -offering more frequent purchase food items

Improved systems

provide personalized service in the pharmacy 2-39

Category Specialists ■ ■ Category killers ■ Low Price and Service ■ Deep and Narrow Assortments Destination Stores Wholesaling to Business Customers and Retailing to Consumers ■ Incredible Growth

Bass Pro Shops

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Category Specialists

Sephora, France’s leading perfume/cosmetic chain LVMH’s division

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Category Specialists: Home Improvement Centers Home Depot and Lowes act as both: Retailer and Wholesaler Consumer Business 2-42

Home Improvement Centers ■ Displayed in a warehouse atmosphere ■ Customer Service: How to select and how to use merchandise ■ Competition focuses on price, effort to differentiate and services provided

Ryan McVay/Getty Images

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Issues in Extreme Value Retailing ■ ■ ■ ■ ■ Focuses on Lower Income Consumers Names mostly imply good value not $1 price points Low Cost Location Limited Services One of the Fastest Growing Retail Segments Dollar Tree Family Dollar Dollar General 99 Cents Only Store 2-44

Off-Price Retailers ■ ■ Close-out retailers Offer an inconsistent assortment of brand name merchandise at low prices TJX companies (T.J. Maxx, Marshalls. HomeGoods) Ross Stores, Burlington Coat factory, Big Lots, Tuesday Morning 2-45

Types of Non-store Retailers 2-46

Electronic Retailing ■ Many retailers operate from virtual storefronts on the World Wide Web, usually maintaining little or no inventory, ordering directly from vendors to fill customer orders ■ History of frenzied investments and false predictions of retail dominance ■ Primarily used by traditional retailers to compliment store and catalog offerings ■ Exclusive e-tailers target small and dispersed niche markets 2-47

What are Amazon and eBay?

■ Amazon.com

– Merchandise to consumers. Provides website development and fulfillment services to other retailers ■ eBay – Acts as a mall or other shopping center providing a “place” for buyers and sellers to meet 2-48

Don Farrall/Getty Images

Issues in Catalog Retailing ■ ■ ■ ■ ■ ■ ■ Low Start Up Cost Evolution of Multi-Channel Offering Hard to compete with large well established firms Increasing Mail Costs Clutter from other Catalogs General merchandise catalogs like JC Penney Specialty Catalogs like Victoria Secret 2-49

Issues in Direct Selling ■ Completely bypasses retailers and wholesalers  Manufacturers set up their own channels to sell their products directly to consumers ■ Party plan system : merchandise is demonstrated in a party atmosphere ■ Multi-level network : Master distributors sell to distributors who sell merchandise ■ Pyramid schemes : Firm sells to other distributors and little if any merchandise goes to end users 2-50

Issues in Television Home Shopping ■ Consumers watch cable stations, infomercials or direct response ads ■ ■ ■ ■ ■ Few consumers watch regularly Most purchases made by small proportion of viewers Customers can’t examine merchandise Customers must wait for merchandise to come on Sells predominately jewelry, apparel, cosmetics, kitchenware, and exercise equipment 2-51

Issues in Vending Machine Retailing ■ Automatic Merchandising  About $25 billion worth of convenience goods are sold to Americans through 4.7 million vending machines ■ Sales growth has been declining due to higher prices and healthier eating habits ■ ■ New technology may help sales growth Trend of placing machines in captive consumer locations 2-52

Services vs. Merchandise Retailers ■ ■ ■ ■ Intangibility Problems in Evaluating Service Quality Performance of Service Provider Simultaneous Production and Delivery Importance of Service Provider Perishability No Inventory, Must Fill Capacity Inconsistency of the Offering Importance of HR Management 2-53

Examples of Service Retailers

Type of Service Service Retail Firms Airlines Automobile maint/repair Automobile rental Banks American, Delta, British Airways, Singapore Airways Jiffy Lube, Midas, AAMCO Hertz, Avis, Budget, Alamo Citibank, NCNB, Bank of America Child care centers Credit cards Education Kindercare, Gymboree American Express, VISA, Mastercard University of Florida, Babson College Entertainment parks Disney, Universal Studios, Six Flags Express package delivery Federal Express, UPS, US Postal Service Financial services Fitness Health Care Home maintenance Merrill Lynch, Dean Witter Jazzercise, Bally’s, Gold’s Gym Humana, HCA Chemlawn, MiniMaid, Roto-Rooter

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Examples of Service Retailers

Type of Service Service Retail Firms Hotels and motels Income tax preparation Insurance Internet access/Elec info.

Movie theaters Real estate Restaurants Truck rentals Weight loss Video rental Vision centers Hyatt, Sheraton, Marriott, Days Inn H & R Block Allstate, State Farm American On-Line, CompuServe AMC, Loews/Sony, Universal Century 21, Coldwell Banker TGI Friday’s, Wendy’s, Pizza Hut U-Haul, Ryder Weight Watchers, Jenny Craig Blockbuster, Hollywood Video Lenscrafter, Pearle

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Merchandise/Service Continuum 2-56

Types of Retail Ownership ■ Independent, Single Store Establishments  Wholesale-sponsored voluntary group ■ ■ Corporate Retail Chains Franchises

(c) Brand X Pictures/PunchStock

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Retailers Using Franchise Business Model 2-58

Franchising ■ ■ ■ 30 – 40% of US Retail Sales Franchisee Pays Fixed Fee Plus % of Sales ■ Franchisee Implements Program Why is this Ownership Format Efficient?

The McGraw-Hill Companies, Inc./Jill Braaten, photographer

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Reasons for Franchising Growth

Technological advances Profitable utilization of capital resources Attainment of the “American Dream” Demographic expansion Product/service consistency

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Reasons for Franchising Failure

Inept management Fraudulent activities Market saturation

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Franchisor Positions in the Marketing Channel

Manufacturer - retailer Manufacturer - wholesaler Wholesaler - retailer Service sponsor - retailer

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Franchisor Benefits

Continuous market Market information Money Royalty fees Sales of products Rental and lease fees License fees Management fees

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Franchisee Benefits Initial Services Market survey and site selection, facility design and layout, lease negotiation advice, financing advice, operating manuals, management training programs, and employee training.

Continuous Services Field supervision, merchandising and promotional materials, management and employee retraining, quality inspection, national advertising, centralized purchasing, market data and guidance, auditing and record keeping, management reports, and group insurance plans.

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Franchisor Advantages/Disadvantages Advantages Rapid expansion, highly motivated franchisees do a good job, additional profits by selling franchisees products and services.

Disadvantages Company-owned units may be more profitable, less control then independent retailers over advertising, pricing, personnel practices, etc.

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Franchisee Advantages/Disadvantages Advantages Established/proven product/service, business and technical assistance, and reduction in risk.

Disadvantages Loss of control since only semi-independent, franchisee outlets may compete with corporate owned outlets, and high royalties, fees, costs on equipment, supplies, merchandise, rental/lease rates and mandatory participation in promotional and support services.

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Franchising Trends for the New Millennium

Sustained growth Enduring plus un-imagined applications International expansion Increasing tensions Greater emphasis on financial returns

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