Chapter 2 Types of Retailers Mc Graw-Hill Irwin Retailing

Chapter 2 Types of Retailers Mc. Graw-Hill/Irwin Retailing Management, 7/e © 2008 by The Mc. Graw-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? 2

General Trends in Retailing ■ ■ ■ New Types of Retailers Increased Concentration Globalization Growth In Services Retailer Demise of Pure Electronic Retailers (Webvan, e. Toys, etc) ■ Growth in Use of Multi-Channel Retailing by Traditional Retailers ■ Increase Use of Technology to Reduce Cost; Increase Value Delivered 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. 4

New Types of Retailers ■ Category Specialists -PETs. MART -Bed, Bath and Beyond ■ Car. Max and Auto Nation ■ Netflix, e. Bay, Priceline, Travelocity 5

Bag Borrow or Steal 6

Different Retail Mixes ■ ■ ■ Merchandise: variety (breadth) Assortment (depth) Services Store design, visual merchandising Location Pricing 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 8

NAICS Codes for Retailers 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) 10

Variety and Assortment of Kayaks in Different Retail Outlets 11

Services offered Retailers differ in the services they offer customers EMS offers assistance in selecting the appropriate kayak and repairing them VS n Outdoorplay. com and n Wal-Mart: doesn’t provide any services n 12

Illustration of Variety and Assortment Lady Foot Locker Sports Authority Active SKUs: 44 N/A Classics SKUs: 44 N/A Converse SKUs: 25 N/A Elite Running SKUs: 22 N/A Fitness N/A SKUs: 1 Running SKUs: 44 SKUs: 39 Trail Running N/A SKUs: 7 Training SKUs: 22 SKUs: 2 Walking SKUs: 11 SKUs: 12 13

Variety and Assortment of Coffee Makers Less Than 8 Cups Specialty Makers Brands Black and Decker Cuisinart, Mr. Coffee, Black and Decker, Faberware, Braun, Hamilton Beach, Krups, Sunbeam Braun, Keurig, Breville, Krups # SKUs 2 SKUs 19 SKUs 7 SKUs Price Range $19. 99 -19. 99 $29. 99 -199. 99 $59. 99 -249. 99 $19. 99 $83. 67 $157. 13 Brands Linens N’ Things Makers Greater Than 10 Cups Black and Decker, Mr. Coffee, Black and Decker, Hamilton Beach, Delonghi, Kitchen Aid, Bunn, Chefmate Keurig, Mr. Coffee, Delonghi, Philips # SKUs 4 SKUs 16 SKUs 5 SKUs Price Range $10. 48 -$29. 99 $9. 49 -$119 $29. 99 -99. 99 $22. 61 $51. 83 $74. 99 Average Price Target Average Price 14

Variety and Assortment of Bicycle Mountain Road Hybrid/ Cross BMX Comfort/ Cruisers Training/ Child Wal-Mart Pacific, Dynacraft, Huffy, Kent International, Pacific Cycle Pacific, Kent International, Huffy _______ Currie Tech. , Dumar, Dynacraft, Huffy, Kent Internation al, Pacific Cycle _______ Dumar, Dynacraft, Huffy, Kent International, MGA, Pacific Cycle, Radio Flyer SKUs 23 SKUs 15 SKUs _____ 22 SKUs _____ 53 SKUs Price $40 -$250 $130 -$1500 _____ $40 -$250 _____ $130 -$1500 Gator Cycle Trek, Gary Fisher Trek, Le. Mond Trek, Gary Fisher Trek SKUs 23 SKUs 18 SKUs 12 SKUs 4 SKUs 5 SKUs Price $290 -$5, 700 $770 -$5, 800 $360 -$1300 $360 -$590 $160 -$270 15

In-Store Digital Camera Comparison Shopping Best Buy vs. Wal-Mart Standard (Snapshooter) Sleek & Slim (Trendsetter) Advanced (Serious Amateur) Best Buy Canon, Kodak, HP, Nikon, Olympus, Sony Canon, Casio, Fuji, HP, Nikon, Olympus, Sony Canon, Kodak, Panasonic, Sony SKUs 10 11 14 Price Range $99. 99 - $199. 99 $1469. 99 - $349. 99 $179. 99 - $549. 99 Wal-Mart Canon, Fuji, Kodak, Samsung, Pentax, Polaroid Canon, Fuji, Sanyo, Samsung, Kodak, Olympus, Norcent, Pentax Canon, Fuji, Kodak, Panasonic, Sony SKUs 10 20 7 Price Range $89. 98 - $299. 96 $79. 88 - $308. 77 $198. 32 - $549. 84 16

SKUs for Digital Cameras Wal-Mart Model Best Buy Megapixels Price Model Snapshooter 8 Fujifilm Fine. Pix Z 10 7 Kodak C 813 Kodak Easyshare C 613 Price Standard Canon Powershot SX 100 Fujifilm Fine. Pix Z 5 Megapixel s 6 8 6 299. 96 Canon Powershot A 560 7 149. 99 139. 84 HP M 53 BNDL 6 179. 99 HP Photosmart M 547 6 99. 99 119. 77 Kodak Easyshare C 613 7 99. 99 89. 88 Kodak Easyshare C 613 P 6 99. 99 7 129. 99 162 Kodak Easyshare V 1003 10 149. 34 Kodak Easyshare M 753 Pentax Optio M 30 7 169. 84 Nikon Cool. Pix L 11 6 109. 99 Polaroid i 733 LP 7 99. 88 Olympus FE-340 8 199. 99 99. 77 Sony Cybershot DSC-S 700 7 149. 99 129. 77 Sony Cybershot DSC-W 55 7 179. 99 17 Samsung S 730 Samsung S 850 7 8

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 Investment Cost 18

Sales and growth rate for retail sectors 19

Food Retailers Channel preference for food shopping channel where grocery purchasers do most of their food shopping ■ Supermarkets ■ Supercenters ■ Warehouse Clubs ■ Convenience Stores 20

Characteristics of Food Retailers 21

Types of Food Retailers Conventional Supermarket Limited Assortment Supermarket Supercenter Warehouse Club Convenience Store Percentage Food 70 -80 80 -90 30 -40 60 90 Size (000 sq ft) 20 -30 7 -10 150 -220 100 -150 2 -3 SKUs (000) 20 -40 1 -1. 5 100 -150 20 2 -3 Variety average narrow broad narrow Assortment average shallow deep shallow Ambiance pleasant minimal average Service modest limited # of checkout lines 6 -10 2 -4 20 -30 10 -15 1 -2 Prices average lowest low high Gross Margin % 20 -22 10 -12 15 -18 12 -15 25 -30 22

Supermarkets ■ Conventional supermarkets n 30, 000 SKU ■ Limited assortment supermarkets (extreme value food retailers) n n n 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) 23

ALDI: German’s Wal-Mart ALDI provides quality merchandise at low prices by reducing its assortment in order to control store operating expenses 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. 25

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. 26

Trends in Supermarket Retailing Competition from Discount Stores Efficient Distribution Lower Costs Lower Prices Changing Consumption Patterns Time Pressure Eating Out More Meal Solutions 27

Conventional Supermarket Survival Pack ■ Emphasize Fresh Perishables n Wegmans ■ Target health conscious and ethnic consumers ■ Provide a better in-store experience ■ Offer more private label brands Chef-crafted meals on the go at Eat. Zi’s 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 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) 30

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

Characteristics of General Merchandise Retailers 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 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 34

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 Royalty-Free/CORBIS ■ undertaking marketing campaigns to develop strong images for their stores and brands ■ building better relationships with their key customers 35

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 Mc. Graw-Hill Companies, Inc. /Gary He, photographer ■ Competition from Category Specialists Toys-R-Us, Circuit City, Sports Authority 36

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 Mc. Graw-Hill Companies, Inc. /Andrew Resek, Photographer 37

Specialty Store Retailers Mc. Graw-Hill Companies, Inc. /Andrew Resek, Photographer 38

Issues in Drug Store Retailing ■ Consolidation – Walgreens, CVS, Rite-Aid ■ 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 39

Category Specialists ■ Deep and Narrow Assortments Destination Stores ■ Category killers ■ Low Price and Service ■ Wholesaling to Business Customers and Retailing to Consumers ■ Incredible Growth Bass Pro Shops 40

Category Specialists Sephora, France’s leading perfume/cosmetic chain LVMH’s division 41

Category Specialists: Home Improvement Centers Home Depot and Lowes act as both: Retailer Consumer and Wholesaler Business 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 Mc. Vay/Getty Images 43

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 General 99 Cents Only Store 44

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

Types of Non-store Retailers 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 47

What are Amazon and e. Bay? ■ Amazon. com – Merchandise to consumers. Provides website development and fulfillment services to other retailers ■ e. Bay – Acts as a mall or other shopping center providing a “place” for buyers and sellers to meet 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 49

Issues in Direct Selling ■ Completely bypasses retailers and wholesalers n 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 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 51

Issues in Vending Machine Retailing ■ Automatic Merchandising n 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 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 53

Examples of Service Retailers Type of Service Retail Firms Airlines American, Delta, British Airways, Singapore Airways Automobile maint/repair Jiffy Lube, Midas, AAMCO Automobile rental Hertz, Avis, Budget, Alamo Banks Citibank, NCNB, Bank of America Child care centers Kindercare, Gymboree Credit cards American Express, VISA, Mastercard Education University of Florida, Babson College Entertainment parks Disney, Universal Studios, Six Flags Express package delivery Federal Express, UPS, US Postal Service Financial services Merrill Lynch, Dean Witter Fitness Jazzercise, Bally’s, Gold’s Gym Health Care Humana, HCA Home maintenance Chemlawn, Mini. Maid, Roto-Rooter 54

Examples of Service Retailers Type of Service Retail Firms Hotels and motels Hyatt, Sheraton, Marriott, Days Inn Income tax preparation H & R Block Insurance Allstate, State Farm Internet access/Elec info. American On-Line, Compu. Serve Movie theaters AMC, Loews/Sony, Universal Real estate Century 21, Coldwell Banker Restaurants TGI Friday’s, Wendy’s, Pizza Hut Truck rentals U-Haul, Ryder Weight loss Weight Watchers, Jenny Craig Video rental Blockbuster, Hollywood Video Vision centers Lenscrafter, Pearle 55

Merchandise/Service Continuum 56

Types of Retail Ownership ■ Independent, Single Store Establishments n Wholesale-sponsored voluntary group ■ Corporate Retail Chains ■ Franchises (c) Brand X Pictures/Punch. Stock 57

Retailers Using Franchise Business Model 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 Mc. Graw-Hill Companies, Inc. /Jill Braaten, photographer 59

Reasons for Franchising Growth Technological advances Profitable utilization of capital resources Attainment of the “American Dream” Demographic expansion Product/service consistency 60

Reasons for Franchising Failure Inept management Fraudulent activities Market saturation 61

Franchisor Positions in the Marketing Channel Manufacturer - retailer Manufacturer - wholesaler Wholesaler - retailer Service sponsor - retailer 62

Franchisor Benefits Continuous market Market information Money Royalty fees Sales of products Rental and lease fees License fees Management fees 63

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. 64

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. 65

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 corporateowned outlets, and high royalties, fees, costs on equipment, supplies, merchandise, rental/lease rates and mandatory participation in promotional and support services. 66

Franchising Trends for the New Millennium Sustained growth Enduring plus un-imagined applications International expansion Increasing tensions Greater emphasis on financial returns 67