Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

RETAIL Retailing is the distribution of products to the final consumer for personal use. It is an indispensable and sophisticated activity in a capitalist economy, and the degree of development of an economy at large can often be measured by the development of its retail sector.

Sector. Retailing is counted toward the service sector of an economy. Wholesale and retail businesses together are sometimes referred to as distributive trade. In the statistics of the United States, retailing comprises groups 52-59 in the Standard Industrial Classification (SIC) and groups 44-45 in the North American Industrial Classification System (NAICS). In the European Union, retailing covers divisions 50 and 52 in the Statistical Classification of Economic Activities (NACE Rev. 1). According to the Census of Retail Trade of 1997 (which is part of the Economic Census conducted every five years), there were 1,561,195 retail establishments in the United States (+2.3% over 1992) generating sales of $2.546 trillion (+34.7% over 1992) using 21,165,111 million paid employees. Survey estimates for retail sales in 2002 amount to $3.266 trillion. Retail sales (including automobiles) in the 15 member countries of the European Union amounted to 1.720 trillion in 1997. The numbers indicate a strong growth in retail sales but only a slow growth in the number of retail establishments. In the United States, the retail sector has, over many decades, experienced a significant growth of average sales per store (1948: $74,000; 1972: $ 246,000; 1992: $1,242,000; 1997: $2,200,270). This is due to a strong industry concentration. Retailing in the United States, and to some extent also in other developed economies, has increasingly become dominated by large firms. Large retailers (those with sales of more than $10 million) account for just 2.1% of all retail firms but for 68.0% of total retail sales while small retailers (those with sales less than 1 million) account for 80% of all retail firms but only 12% of sales. In some retail sectors, the largest four firms account for more than half of total sales (athletic footwear: 65%; toys: 58%; general merchandisers: 58%).

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

Measured in terms in revenues, Wal-Mart, a U.S.-based chain of discount mass merchandisers and warehouse clubs, is the largest company worldwide (sales in 2001: $219.812 billion). The second largest retailer, French chain Carrefour, occupies place 35 on the 2002 Fortune Global 500 list (sales in 2001: $62.225 billion), followed by U.S. specialty retailer Home Depot at place 46 (sales in 2001: $53.553 billion).

Functions. Retailers are intermediaries in distribution channels that connect producers and consumers. Their function in a capitalist economy is to facilitate exchange and to create value for buyers and sellers alike. For manufacturers, retailers as intermediaries reduce the costs of distribution by reducing the number of necessary transactions. Under direct distribution, i.e. without intermediaries, four different products to be placed with eight buyers require 4 8 = 32 contacts, while a single intermediary reduces this to 4 + 8 = 12 contacts. The additional costs of using retailers rather than selling directly to consumers are therefore, in many instances, outweighed by increased efficiency. Retailers increase efficiency also by making products more readily available to target markets. Closeness to the consumer can be a strong competitive advantage. Retailers not only reduce transaction costs but also create value by assuming a number of economic and marketing functions from producers. They provide information about products, store goods, engage in sales promotion and advertising, take physical (and usually also legal) possession of products, and provide information about consumer demand. For consumers, they provide an assortment of products supplied by different manufacturers that could individually be found only at much higher search costs and offer these at convenient locations and times. Retailers also offer a repeatable mix to customers; with few exceptions (such as street peddlers) they are not one-off traders. In this sense, retailers create customer value in addition to the value derived from the products themselves.

Space. Most retailers serve customers within a spatially determined area around their location. With the exception of forms of direct retailing such as catalog shopping or e-

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

commerce, retailers are engaged in spatial competition, with sales areas spreading around stores as concentric circles. The probability of a particular consumer patronizing a particular store decreases with increasing distance from the store. At the same time, proximity to another store will increase, and halfway between the two store locations the consumer will, all else being equal, have an equal probability of patronizing either store. In reality, of course, the relative attractiveness of either store (as reflected in its assortment, service level, pricing etc.) will also enter the decision calculus of the consumer and will be weighed against travel costs arising from distance. A consumers probability of patronizing a retailer and the market share of this store are then related:
p ij = f ( d ik , a ik ) , k = 1, ..., j , ..., J
where

and M j =

ni pij
i

ni
i

pij : probability of potential customer from location i to patronize retail store; dij : spatial or temporal distance of potential customer from location i from retail store j in relation to distances from alternative stores k j; aij : attractiveness of retail store j for potential customer from location i in relation to attractiveness of alternative stores k j; ni : number of potential customers at location i; Mj : market share of retail store j.

Also, the number of shopping trips a consumer will make over a certain period is inversely related to the distance from a retail store. Thus, at greater distances consumers will tend to make fewer trips in order to economize on transaction costs, and average check size will be larger. Based on this general model, various gravitation models for evaluating the sales potential of retail locations have been elaborated (Jones and Simmons 2000). The most traditional one is Reillys law (published in 1929), which stipulates that the portion of household purchasing power at location i, which is located between cities A and B, that will go to A is proportional to the number of residents at A and the distance between i and A:

S iA n A = S iB n B

d iB d iA

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

where SiA : sales at A by customers from i; dij : spatial or temporal distance between i and A; nA : number of potential customers at A; A, B : cities; , : parameters expressing distance decay.

Sales areas crucially depend on the type of store. In the United States, where the number of specialty stores has declined, supermarkets generally draw their customers from a smaller area around their location than specialty stores or discounters do. In European cities, which typically have a comparatively larger number of specialty stores but fewer shopping centers or shopping malls, the latter often draw customers from a very wide area while specialty stores supply the neighborhood. A critical determinant of sales areas is also the purchase pattern of residents, particularly the number of shopping trips per week, which in turn depends on factors such as family size and location of residence (rural/suburban/urban).

Types. Retailers can be categorized by several criteria, depending on the purpose of classification. Structural and functional criteria of classification comprise ownership type, breadth of assortment, size of establishment, degree of vertical integration, degree of customer contact, modality of customer contact, location, legal form of organization, and operational technique. The most comprehensive typology of retailers is that used by the Census of Retail Trade in the United States, which places all retailers into more than 80 kind-of-business categories within eight major groups (SIC groups 52-59). At the highest level in a structural or functional typology of retailing, store retailers (such as department stores or supermarkets) may be distinguished from nonstore retailers (including all forms of direct marketing and selling), and from retail organizations (such as book clubs). The retail structures of economies, even in highly developed capitalist countries, show great differences, which are due to economic, cultural, social, legal, and geographic factors. The prevalence of types shifts over time. In less-developed countries, non-store retailers (such as open-air markets and street

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

vendors) and smaller individual stores predominate. With increasing income levels, the total number of retailers typically decreases while the average size of retail establishments increases (and types such as department stores and shopping malls are introduced). But retail structures are often quite different even in countries of similar socioeconomic development. In European cities, where agglomeration density is higher and suburban zones are smaller than in typical North American cities, individual specialty stores predominate while shopping malls are still in their infancy and are usually confined to peripheral locations. Store retailers can further be categorized by the level of service they provide or by classes of store size (usually expressed by increments in sales or number of employees). By increasing service level, they range from self-service stores via selfselection and limited-service stores to full-service stores. Another common classification is by breadth of assortment; i.e. by the number of product lines carried, and by depth of assortment, i.e. the number of items carried in each product line. Different types of store retailers can then be distinguished:
Store retailers Narrow assortment

Broad assortment

Deep product lines Department stores Supermarkets

Shallow product lines Discount stores Off-price retailers

Deep product lines Specialty stores Category killers

Shallow product lines Specialist discounters Convenience stores

Fig. 1: Classification of store retailers by assortment

Department stores (such as JCPenney, Macys or Marshall Fields in the United States, Fortnum & Mason and Harrods in Great Britain, or Galleries Lafayette and Printemps in France) are large stores that feature many product lines, each line being operated as a separate department managed by specialist buyers or merchandisers. They often embrace the store-in-store model, being organized within (and sometimes across) departments according to major brands, each of which has its own boutique or kiosk. Supermarkets

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

are relatively large stores with a low-cost and low-margin assortment focusing on food and household products. Discount stores (such as Wal-Mart and K-Mart in the United States and Metro Cash & Carry in Germany) sell standard merchandise at lower prices and lower margins. They pass on to customers advantages from lower purchase prices, lower inventory costs, a lower service level, and a faster merchandise turnover. Specialist discounters and category killers focus on one product category such as toys, home electronics, or shoes, the difference between these retail types being the depth of product lines and the relative share of branded goods. Off-price retailers are a more recent innovation and offer, as factory outlets, the surplus or discontinued products of particular manufacturers, or, as independent off-price stores (such as Marshalls), of a combination of manufacturers, at prices below the regular retail level. They offer only a minimum of service, in spartan surroundings, and are still largely confined to North America. One type of off-price stores are warehouse clubs (such as Sams Clubs and Costco in the United States), which sell a broad assortment of brands and store brands only to members at prices typically 20 to 40 percent below those of supermarkets and discount stores. Convenience stores are relatively small outlets with a limited assortment of high-turnover convenience products; they are often open every day around-the-clock and may be attached to other businesses such as gas stations. In addition, there are combinations of individual retailers, in the form of shopping centers or shopping malls, a type of retailing that has rapidly gained importance since its inception in the 1950s. Both types (though not smaller malls such as strip malls) require one or more anchor stores to attract customers. Although it provides only a small share of final consumption, non-store retailing has recently grown faster than retail stores have. The main types of non-store retailing are: (1) system marketing (also known as multi-level selling or network marketing) as practiced by Avon Products or Amway Corp. in many countries; (2) direct selling (through the channels of the telephone, television, mail, or the Internet); (3) automatic vending (through machines); (4) buying services, i.e. intermediaries which serve a specific clientele such as the employees or members of an organization. Retail organizations are associations of retailers (such as voluntary purchasing chains, retailer cooperatives, or franchises) set up to let individual and often smaller retailers benefit

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

from economies of scale in purchasing and administration). They conduct business on organizational (business-to-business) markets. By legal types, one may distinguish fully owned stores (with ownership of real estate and buildings or only ownership of equipment and inventory) from franchises. Single stores are distinguished from proprietary chains. Individual stores cannot grow beyond a certain size at which they have achieved a maximum penetration of its spatially bounded target market. This is why retail store growth occurs horizontally, by developing chains of same-type stores at multiple locations. Franchises are contractual relations between a franchiser who develops a retail model and independent franchisees who receive marketing services and certain exclusive rights in return for franchise fees. Franchising is an alternative to the expansion of proprietary retail chains. In many countries, automobile dealerships, fast-food restaurants, gas stations, and convenience stores are organized as franchise systems.

Evolution. In capitalist economies, the retail sector is typically a very dynamic element. Several theories attempt to explain the dynamism of the sector through specific features of its evolution. The retail life cycle theory assumes that types of retailing, much like the products they offer, are subject to a life cycle, the phases of which are innovation, growth, maturity, and decline. The exact shape of the cycle may show great international variability. Department stores, which developed in the United States in the 19th century and were soon introduced in other industrialized economies, took many decades to reach maturity, as experience was gathered about their optimal organization and marketing. Catalog merchants developed in the 1870s and 1880s, experienced rapid growth, and have remained in a phase of maturity ever since, with no essential changes to the business model. Newer types such as convenience stores or factory outlets have reached maturity much quicker. In Europe, on the other hand, factory outlets are still in the introduction phase. Some types, such as general stores in the United States, have completed passing through the decline stage and have largely left the market. In Mediterranean countries, Africa and Latin America, general stores still have strong market shares and are only slowly being replaced by supermarkets. Some types of retail

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

business such as bazaars in Turkey, North Africa and the Middle East, have proven very resilient and seem to have been in the maturity phase for decades. Though imported retail types may have taken away some market share, bazaars have reacted by changing their assortment; sales to tourists now make up for what has been lost from selling to locals. On free markets, retail structure adjusts very effectively to changing consumer needs and wants and to changes in real estate value. Two explanations of retail evolution have attained particular prominence. The wheel-of-retailing hypothesis uses price and service offered to explain how retailers start in the low end of the market and move up to higher segments through the addition of extra services and store features, thus creating a gap in the low end of the market, which gives rise to new entrants (and thus the wheel turns). Thus innovation in the retail sector starts always with deciding how to satisfy consumer wants better at lower prices, and this can be achieved only at a low level of service. Research on the development of the retail sector in many countries, however, has shed doubt on whether stores always increase service levels and costs. Another explanation, the retail accordion hypothesis, suggests that the pattern of retail evolution has tended to alternate between domination by wide-assortment retailers and domination by narrow-line, specialized retailers. This hypothesis of institutional change implies that both diversification and specialization strategies can succeed under certain circumstances. In the United States, general stores came first; as settlements grew, specialists developed; in the wake of urbanization and of growing incomes, department stores which stocked wide assortments were set up for consumers to satisfy more of their wants at one location and thus save on time. More recently, again, a tendency towards more specialty stores has been noted. Critics of the hypothesis have pointed out that it does not apply to all cases of retail evolution and that is not an explanatory model that lends itself to predictions.

Management. Like all management decisions, those of retail managers are driven by the scarcity of resources (in retailing mainly shelf space) and the necessity to optimize. The principal retail management decisions (apart from planning decisions such as the choice

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

of location and of store layout and size) are those of choosing, developing and implementing the best retail mix. The retail mix includes all factors which can be controlled by a retailer, e.g., physical facilities, merchandising, pricing, promotion, services, purchasing, and personnel. These in turn determine consumer perception and influence store choice decisions. The product assortment can be analyzed in terms of the breadth of the assortment, i.e. the number of product lines offered, and the depth of each product line (or the number of distinguishable items). In retailing, the term stock-keeping unit (SKU) is used for any product that is an inventory item and takes up a slot of shelf space. Retailers manage their business primarily at the level of product forms, i.e. different sizes or package variants of the same product count as different SKUs. An important assortment decision is that of the ratio between branded products (or national brands) and store brands (or private labels). In discount supermarkets (such as Aldi or Sav-ALot), store brands typically have a much larger share than in standard supermarkets (such as Kroger or Safeway), and lines tend to be less deep. The business model of discounters relies on a quicker turnover of fewer SKUs, i.e. on the sale of higher unit volume at lower margins per unit. Many supermarkets now charge a slotting fee for accepting a new brand, to cover the costs of stocking and listing it. Positioning of products within the store and on shelves is of crucial importance, and retail management has developed rules of optimal location. Assortment decisions are always made in combination with purchasing and pricing decisions. In some cases, such as generally for food and other convenience products, retailers will order through wholesalers, in other cases directly from manufacturers. Pricing strategies generally have to choose between high-volume, low-markup (market penetration pricing) and lower-volume, higher-markup (price skimming). Everyday low pricing, as practiced by Wal-Mart, is an instance of the first strategy. Price tactics such as promotional pricing and odd-even pricing are also widely used in retailing.

Performance. The economic performance of (store) retailers is measured by ratios such as sales per floor space, gross margin (= actual sales price/purchasing cost), and

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

inventory-to-sales. In 2000, for example, the American retail chain Kohls took in an average of $279 per square foot, compared with $220 for Target and $147 for Dillards (Kotler 2003, 543). In the same year, the gross margin of all retailers in the United States was 27.8% of sales; it has remained relatively stable for at least a decade. However, there are significant differences according to types of stores and of merchandise. Mens clothing stores average a gross margin of 44.5% and furniture stores a margin of 44.1% while that of warehouse clubs and superstores is only 16.7% and that of automotive dealers 17.5%. The inventory/sales ratio of all retail stores in December 2002 amounted to 1.31 (2001: 1.48; 1996: 1.39; 1992: 1.35). Since unsold inventory is a cost item, retailers want to minimize this ratio (without at the same time defaulting on customer requests for readily available merchandise); smaller ratios indicate that merchandise is turned over faster. For motor vehicle and parts dealers, this ratio is (without seasonal adjustment) as high as 2.07, for food and beverage stores as low as 0.79. Direct product profitability is a measure of an SKUs total handling costs from the time it reaches the warehouse until a customer buys it and takes physical possession. This ratio often has little relation to gross margins, since high-volume SKUs may have high handling costs that reduce their actual profitability. Collection of scanner data allows for the in-store calculation of numerous other metrics that makes retail management one of the most sophisticated fields of business.

Trends. Some developments that are likely to characterize the retail landscape over the next years are the following: (1) Increasing emphasis on relationship marketing, i.e. on achieving higher customer loyalty by building long-term relationships based on a high level of satisfaction. (2) Further retailer domination of marketing channels, as evidenced by larger size and stronger bargaining power of stores, application of advanced technology (such as scanning and electronic data interchange), and a more sophisticated implementation of the marketing concept. (3) Further incorporation of wholesaling and even manufacturing functions as vertical integration advances; already now, grocery retailers such as Safeway and Aldi do their own wholesaling while department stores and specialists like Marks & Spencer and The Gap are involved at all levels including

Hussain, S.B. (ed.): The Encyclopedia of Capitalism. New York: Facts on File, 2004.

product design and quality testing. (4) Further increase in the share of store brands in product assortments of supermarkets, and widening of the price gap to national brands. (5) Expansion of hybrid forms of retailers, e.g. supermarkets with bank branches. (6) Intensification of inter-type competition, e.g. between self-service and full-service stores. (7) Increasing shift to non-store retailing, particularly direct sales and Internet sales. (8) Further integration of bricks-and-mortar and virtual retailers, as more store-based retailers offer online shopping and retailers with exclusively online-based customers seek a more secure cash-flow. (9) Intensification of competition, mainly based on price, in most categories. (10) Stagnation or slow reduction of industry concentration, as the share of large chains will likely decline in some markets.

Bibliography. Barry Berman and Joel R. Evans, Retail Management: A Strategic Approach (2000); Patrick M. Dunne, Robert F. Lusch and David A. Griffith, Retailing (2002); John W. Ferry, A History of the Department Store (1960); Avijit Ghosh, Retail Management (1994); Ken Jones and Jim Simmons, Retail Environment (2000); Philip Kotler, Marketing Management (2003); Michael Levy and Barton A. Weitz, Retailing Management (2004); James M. Mayo, The American Grocery Store: The Evolution of a Business Space (1993); Peter McGoldrick, Retail Marketing (2002).

Wolfgang Grassl Hillsdale College