Types of Retailers

RETAIL MANAGEMENT

Chapter 2 – Types of Retailers

The most basic characteristics used to describe the different type of retailers is the retail mix, the elements used by retailers to satisfy their customer’s needs and influence their purchase decisions.

Elements in the Retail Mix

Four Elements In The Retail Mix Are Particularly Useful For Classifying Retailers:

1. The Type of Merchandise and /or Services Sold – a retailer is classified according to the types of products and services it produces and sells.

2. Variety and Assortment – Even retailers sell the same type of merchandise, they might not complete directly against each other, because they appeal to different customer needs due to the differences in the assortments and variety of merchandise and services they offer.

     Variety represents the number of merchandise categories a retailer offers. Variety if often referred to as the breadth of merchandise.

     Assortment  is the number of different items in a merchandise category. It is referred to as the depth of the merchandise.

Each different item of merchandise is called an SKU (stock keeping unit).

3. Services Offered - Retailers also differ in the services they offer to customers. Customers expect almost to provide certain services: displaying merchandise, accepting credit cards, providing parking, and being open at convenient hours. Some retailers charge customers for other services, such as home delivery and gift wrapping. Retailers that cater to service-oriented consumers offer customers most theses services at no charge.

4. Price of the Merchandise – To make a profit, retailers that offer broader and deeper assortments and services need to charge higher prices. For example, department stores have higher prices because they have higher costs due to stocking a lot of fashionable merchandise, discounting merchandise when errors are made in forecasting consumer tastes, providing some personal sales service, and having expensive mall locations. In contrast, discount stores appeal to customers who are looking for lower prices and are less interested in services but want to see a wide range of merchandise brands and models. Thus, a critical retail decision involves the trade-off between the costs and benefits of maintaining additional inventory or providing additional services. To compare their offering with competitive offerings, retailers often shop their competitor’s stores.

 DIFFERENT RETAIL SECTORS

FOOD RETAILERS

          The food retailing landscape is changing dramatically. Twenty years ago, consumers purchased food primarily at conventional supermarkets.

          Now conventional supermarkets account for only 61 percent of food sales. The fastest growing segment of the food retail market is remaining 39 percent of food sales are made by supercenters, warehouse clubs, convenience stores, and new concepts such as limited assortment supermarkets.

          While other general merchandise retailers are offering more food items, traditional supermarkets are carrying more non-food items, and many offer pharmacies, photo processing centers, banks, and cafes.

Different Types of Food Retailers:

· Supermarkets

         A conventional  supermarket is a self-service food store offering groceries, meat, an produce with limited sales of nonfood items, such as health and beauty aids and general merchandise. Perishables like meat and produce account for 44 percent of supermarket sales and typically have higher margins than packaged food. A conventional supermarket carry about 30,000 SKUs.

          Limited Assortment Supermarkets, also called extreme value food retailers, only stock 1,250 SKUs.

          Rather than carrying twenty brands of laundry detergent, limited assortment stores offer one or two brands and sizes, one of which is a store brand. Stores are designed to maximize efficiency and reduce costs.

          For example, merchandise is shipped in cartons that can serve as displays so that no unloading is needed. Some costly services that consumers take for granted, such as free bags and paying with credit cards, are not provided.

         These stores are typically located in second-or third-tier shopping centers with low rents. By trimming costs, limited assortment supermarkets can offer merchandise at 40 percent lower prices than conventional supermarkets.

Trends in Food Retailing

          Although conventional supermarkets still sell a majority of the food merchandise, they are under a competitive pressure.

          Low cost competitors, supercenters, warehouse clubs are particularly troublesome for supermarkets because of their superior operating efficiencies.  

          A study in the early 1990s found out that the supermarket industry had over $30 billion in excess inventory due to its failure to employ just-in-time inventory practices adopted by Wal-Mart and other low-cost competitors.  The set of programs supermarket chains have undertaken to achieve inventory reduction is called efficient customer response (ECR) and includes just-in-time inventory management and better assortment planning.

          The supermarket format continues to be more costly than supercenters. To compete the with other food retailing formats, the conventional supermarket are differentiating their offerings by:

1. Emphasizing fresh perishables

2. Targeting health-conscious and ethnic consumers

3. Providing better in-store experience

4. Offering more private label brands

  

· Supercenters

          Supercenters, the fastest growing retail category, are large stores (150,000-200,000 square feet) that combine a supermarket with a full line discount store.

          By offering broad assortments of grocery and general merchandise products under one roof, supercenters provide a one-stop shopping experience. Customers will typically drive farther to shop at these stores than to visit conventional supermarkets ( which offer smaller selection).

          General merchandise (nonfood) items are often purchased on impulse when customer’s primary reason for coming to the supercenter is to buy groceries. The general merchandise has higher margins, enabling the supercenters to price food items more aggressively. However, because supercenters are very large, some customers find them inconvenient because it can take a long time to find the items they want.

                      Hypermarkets are also large (100,000 – 300,000 square feet) combination of food (60-70    

               percent)     and general merchandise (30-40 percent). Hypermarkets typically stock fewer SKUs

               than supercenters – between 40,000 and 60,000 items ranging from groceries, hardware, and

               sports equipment to furniture and appliances to computers and electronics.

                      Both hypermarkets and supercenters are large, carry grocery and general merchandise  

               categories, offer self service, and are located in warehouse type structures with large parking  

               facilities.

          However, hypermarkets carry a large portion of food items than supercenters with a great emphasis placed on perishable- produce, meat, fish, and bakery.  Supercenters   focus more on dry groceries, such as breakfast cereal and canned goods, instead of fresh items.

· Warehouse Clubs

          Warehouse clubs are retailers that offer a limited and irregular assortment of food and general merchandise with little service at low prices for ultimate consumers and small businesses.

          Warehouse clubs are large (at least 100,000-150,000 square feet) and typically located in low-rent districts. They have simple interiors and concrete floors. Aisles are so wide so forklifts can pick up pallets of merchandise and arrange them on the selling floor.

          Little service is offered. Customers pick merchandise off shipping pallets, take it to checkout lines in front of the store, and usually pay in cash.

          Most warehouse clubs have two types of members: wholesale members who own small businesses and individual members who purchase for their own use.

          Typically members must pay an annual fee. In some stores, individual members pay no fee but buy 5 percent over an item’s ticketed price. Wholesale members typically represent less than 30 percent of the customer base but account for over 70 percent of sales.

· Convenience Stores

          Convenience Stores provide a limited variety and assortment of merchandise at a convenient location in 2,000-3,000 square foot stores with speedy checkout. They are the modern version of the neighborhood mom-and-pop grocery/general store.

          Due to their small size and high sales, convenience stores typically receive deliveries every day. Milk, eggs, and bread once represent the majority of their sales, but now almost all convenient stores sell gasoline, which account 66 percent of annual sales. The second highest selling item is cigarettes, accounting for 14 percent of sales.

          Convenience stores also are facing increased competition from other formats. In response to his competitive pressures, convenience stores are taking steps to decrease their dependency on gasoline sales, tailoring assortments to local markets, and making their stores more convenient to shop.

           Convenience stores are now offering more fresh food and healthy fast food that appeals to today’s on-the-go consumers especially women and young adults.

GENERAL MERCHANDISE RETAILERS

          The major types of general merchandise retailers are department stores, full-line discount stores, specialty stores, category specialists, home improvement centers, off-price retailers, and extreme value retailers.

· Department Stores

          Department stores are retailers that carry a broad variety and deep assortment, offer customer services, and organize their stores into distinctly separate departments for displaying merchandise.

          Traditionally, department stores attracted customers by offering a pleasing ambience, attentive service, and a wide variety of merchandise under one roof. They sold both soft goods (apparel and bedding) and hard goods (appliances, furniture and consumer electronics). But now most department stores focus almost exclusively on soft goods.

          Department store chains can be categorized into three tiers:

1. Upscale, high fashion chains with exclusive designer merchandise and excellent customer service.

2. Upscale traditional department stores, in which retailers sell more modestly priced merchandise with less customer service.

3. Value oriented stores, which caters to more price-conscious consumers.

Department stores are not as convenient as discount stores because they are located in

large regional malls rather than local neighborhood. Customer service has diminished due to cutbacks in labor costs, and they have not been successful in reducing costs by working with their suppliers to establish JIT inventory systems, so prices are relatively high.

          To deal with their eroding market share, the department stores are:

Ø attempting to increase the amount of exclusive merchandise they sell

Ø undertaking marketing campaigns to develop strong images for their stores and brands

Ø building better relationships with their key customers

Ø placing more emphasis on developing their own brands

Ø using technology and information systems to improve customer service in a cost-effective manner.

· Full-Line Discount Stores

          Full-line discount stores are retailers that offer a broad variety of merchandise, limited service, and low prices. Discount stores offer both private labels and national brands, but these brands are typically less fashion oriented than the brands in department stores. Ex. Wal-Mart.

· Specialty Stores

          Specialty stores concentrate on a limited number of complementary merchandise categories and provide a high level of service in relatively small stores.

          Special stores tailor their retail strategy toward a very specific market segment by offering deep but narrow assortments and sales associate expertise. For example, Hot Topics focuses on  selling licensed, music inspired apparels to teenagers in mall-based stores. Its sales associates know what’s new on the radio, in record stores, on concert tours and among pop culture.

          Because specialty retailers focus on specific market segments, they are vulnerable to shifts in consumer tastes and preferences.

· Drugstores

          Drugstores are specialty stores that concentrate on health and personal grooming merchandise. Pharmaceuticals represent over 50 percent of drugstore sales and even percentage of their profits.

         To build customer loyalty, the chains are changing the role of pharmacists from simply dispensing pills to providing healthcare assistance such explaining of how to use a nebulizer. Drugstore retailers are using systems to allow pharmacists time to provide personalized service. For example, at Walgreens customer can order prescription refills via phone and receive automatic notification when the prescription is ready.

· Category Specialists

          Category specialists are big box discount stores that offer a narrow but deep assortment of merchandise. These retailers are basically discount stores. Most category specialists use self-service approach, but some specialists in consumer durables offer assistance to customers. Ex. Office Depot, Ace Hardware.

          By offering a complete assortment in a category at low prices, category specialists can “kill” a category of merchandise for other retailers and thus frequently called category killers.

          One of the largest and most successful types of category specialist is the home improvement center. A home improvement center is a category specialist offering equipment and material used by do-it-youselfers and contractors to make home improvements.

· Extreme Value Retailers

          Extreme value retailers are small, full-line discount stores that offer a limited merchandise assortment at very low prices.

          Like limited assortment food retailers, extreme value retailers reduce costs and maintain low prices by offering a limited assortment and operating in low-rent, urban, or rural locations. Ex. 99 Cents Only stores.

· Off-Price Retailers

          Off-price retailers offer an inconsistent assortment of brand name merchandise at low prices.

          Off-price retailers sell brand name and even designer label merchandise at low prices through their unique buying and merchandising practices. Most merchandise is bought opportunistically from manufacturers and other retailers with excess inventory at the end of the season. 

          The merchandise might be in odd sizes, unpopular colors and styles, or it may be irregulars (having minor defects in construction). Two special types of Off-Price retailers:

1. Closeout Retailers are off-price retailers that sell a broad but inconsistent assortment of general merchandise as well as apparel and soft home goods.

2. Outlet Stores are off-price retailers owned by manufacturers or department or specialty store chains. Those owned by manufacturers are called factory outlets.

NONSTORE RETAILERS

          Nonstore retailers are retailers that operate primarily through nonstore channels. The major nonstore channels are the Internet, catalogs and direct mail, direct selling, television home shopping, and vending machines.

· Electronic Retailers

          Electronic retailing (also called e-tailing, online retailing, and Internet retailing) is a retail format in which the retailers communicate with customers and offer products and services for sale over the Internet.

· Catalog and Direct-Mail Retailers  

          Catalog retailing is a nonstore retail format in which the retail offering is communicated to a customer through a catalog, whereas direct-mail retailers communicate with their customers using letters and brochures.

Types of Catalog and Direct-Mail Retailers:

1. General merchandise catalog retailers – offer a broad variety of merchandise in catalogs that are periodically mailed to their customers.

2. Specialty catalog retailers – focus on specific categories of merchandise. such as fruit, gardening tools, seeds and plants.

· Direct Selling

          Direct selling is a retail format in which sales people (frequently independent business people):

Ø contact customers directly in a convenient location either at the customer’s home or at work

Ø demonstrate merchandise benefits and/or explain a service

Ø  take an order

Ø deliver the merchandise or perform the service.

          Direct selling is a highly interactive form of retailing in which considerable information is conveyed to customers through face-to-face discussions with sales people. However, providing this high level of information, including extensive demonstrations, is costly.

· Television Home Shopping

          Television home shopping is a retail format in which customers watch a TV program that demonstrates merchandise and then place orders for the merchandise by telephone.

The three forms of electronic shopping retailing are:

1. Cable channels – CATV channels dedicated to television shopping

2. Informercials – are TV programs, typically 30 minutes long, that mix entertainment with product demonstrations and then solicit orders placed by telephone.

3. Direct response advertising – includes advertisements on TV and radio that describes products and provide an opportunity for consumers to order them.

          The major advantage of TV hone shopping compared with catalog retailing is that customers can see the merchandise demonstrated on their TV screens. However, customers can’t examine a particular type of merchandise or a specific item when they want to, as in catalog, but instead they have to wait for the time when the merchandise shows up on the screen.

· Vending machine Retailing

          Vending Machine Retailing is a nonstore format in which the merchandise or service are stored in a machine and dispensed to customers when they deposit cash or use a credit card. Vending machines are placed at convenient, high traffic locations, suck as in the workplace or school campuses, and primarily contain candies, snacks and drinks.

          There are 5.4 million Jidoobambaiki (vending machines) in Japan – one machine for every 23 people. Some reasons for the prevalence of vending machines in Japan are consumer’s interests in gadgets, the large number of people commuting by subway and train than by automobile, and the low crime rate of crime and vandalism in Japan.

SERVICES RETAILING  

          Service Retailers, firms selling primarily services rather than merchandise, are a growing part of the retail industry.

          There are several trends that suggest considerable growth in services retailing:

Ø the aging population will increase demand for health care services.

Ø younger people are also spending more time and money on fitness and health

Ø busy parents in two-income families are willing to pay to have their homes cleaned, lawns maintained, clothes washed and pressed, and meals prepared so they can spend more time with their families

Differences between Services and Merchandise Retailers

1. Intangibility

           Services are generally intangible – customers cannot see, touch, or feel them. They are performances or actions rather than objects. Since services are intangible, it’s difficult to evaluate services before customers buy them or even after they buy on consume them.

          Due to the intangibility of their offering, services retailers often use tangible symbols to inform customers about the quality of their services. For example, lawyers frequently have elegant, carpeted offices with expensive furniture.

          To evaluate the quality of their offering, services retailers often solicit customer evaluations and complaints.

2. Simultaneous Production and Consumption

          Product are typically made in a factory, stored and sold by a retailer, and then used by consumers in their homes. Service providers create and deliver the service as the customer is consuming it. For example, when you eat in a restaurant, the meal is prepared and consumed almost at the same time.

Some special problems for service retailers due to Simultaneity of Production and Consumption:

1. The customers are present when the service is produced, may even have an opportunity to see it produced, and in some case may be a part of the of the production process. As in making their own salad in a salad bar.

2. Other customers consuming the service at the same time can affect the quality of the service provided. For example, an obnoxious passenger next to you on an airplane can make the flight very unpleasant.

3. The services retailer often does not get a second chance to satisfy the needs of the customers. Whereas customers can return damaged merchandise to a store, customers that are dissatisfied with services have limited recourse. Thus, it is critical for service retailers to get it right the first time.

· Perishability

          Because the creation and consumption of services are inseparable, services are perishable.

They can’t be saved, stored, or resold. Once an airplane takes off with an empty seat, the sale is lost forever. In contrast to merchandise that can be held in inventory until a customer is ready to buy it.

          Due to the perishability of services, an important aspect of services retailing is matching supply and demand. Most services retailers have a capacity constraint, and the capacity cannot be changed easily. For example there are a fixed number of tables in a restaurant, seats in a classroom, beds in a hospital, and electricity that can be generated by a power plant.

· Inconsistency

          Because services are performances produced by people (employees and customers), no two services will be identical. For example, tax accountants can have different knowledge and skills for preparing tax returns.

          Thus, an important challenge for services retailers is providing consistency high quality services. Many factors that determine service quality are beyond the control of the retailers; however, services retailers expend considerable time and effort selecting, training, managing, and motivating their service providers.

TYPES OF OWNERSHIP

          Another way to classify retailers is by their ownership. The major classifications of retail ownership are (1) Independent, Single-Store Establishment (2) Corporate Chains, and (3) Franchises.

· Independent, Single-Store Establishments

          Single-store establishments are owner managed and typically rely on their owner-manager’s capabilities to make the broad range of necessary retail decisions.

          Small retailers are also very flexible and can therefore react quickly to market changes and customer needs. They are not bound by the bureaucracies inherent in large retail organizations.

         To better compete against corporate chains, some independent retailers join a wholesale-sponsored voluntary cooperative group, an organization operated by the wholesaler offering merchandising program to small, independent retailers on a voluntary basis. In addition to buying an, warehousing, and distribution, these groups offer members services such as advice on store design and layout, site selection, bookkeeping and inventory management systems, and employee training programs.

· Corporate Retail Chains

          A retail chain is a company that operates multiple retail units under common ownership and usually has centralized decision making for defining and implementing its strategy. Retail chains can range in size from a drugstore with two stores to retailers with over 1,000 stores.

· Franchising

          Franchising is a contractual agreement between a franchisor and a franchisee that allows the franchisee to operate a retail outlet using a name and format developed and supported by the franchisor.

          In a franchise contract,

Ø the franchisee pays a lump sum plus a royalty on all sales for the right to operate in a specific location.

Ø the franchisee also agrees to operate the outlet in accordance with the procedures prescribed by the franchisor.

Ø the franchisor provides assistance in locating and building the store, developing products or services sold, training managers and advertising.

Ø  the franchisor also make sure that all outlets provide the same quality of products and services, to maintain each franchisee’s reputation.

          The franchise ownership format attempts to combine the advantages of owner-managed business with the efficiencies of centralized decision making of chain store operations.

          Franchisees are motivated to make their store successful because they receive profits (after the royalty is paid). The franchisor is motivated to develop new products and systems to promote the franchise because it receives royalty on all sales.

          Advertising, product development, and system development are efficiently done by the franchisor, with costs shared by all franchisees.