Retail Institutions

Objectives of the Chapter

 Theories of Institutional Change
   

Wheel of Retailing Dialectic Process Retail Accordion Natural Selection

 Classification of Retailers  Store-Based Retailer  Non Store Retailer

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Introduction
 Varied Retail store formats  Reasons for the diversity in store formats  Retail format influences the entire retail business

model  Retail format plays a key role in the retail strategies being formulated  New retail formats are getting framed around different pricing and service strategies.  This chapter covers the various theories explaining the reasons for institutional change and also examines the classification of retailers.
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Theories of Institutional Change

 Wheel of Retailing  Dialectic process  Retail accordion  Natural selection

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Wheel of Retailing
 Proposed by Malcolm. P. McNair  This theory states that in a retail institution

changes take place in a cyclical manner.

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Wheel of Retailing

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Wheel of Retailing
Entry Phase Positioning of Store Trading Up phase Vulnerability Phase Low status Low Higher status Higher Declining ROI price format price format Small High Demand Bigger Customer convenience not necessarily high demand Maximum Posh High cost, accessible customers Differentiated Traditional retailer Conservatism
7

Size of Store Type of products provided

Service to customers Shopping Atmosphere Store Location

Minimal Modest Low rental area

more to

Product Mix Type of retailer

Minimal Innovative retailer

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Dialectic Process
 Melting pot theory  Two institutional forms with different advantages

modify their formats till they develop a format that combines the advantages of both formats.  Thomas. J. Maronick and Bruce J. Walker in "The Dialectic Evolution of Retailing."  Implies that retailers mutually adapt in the face of competition from "opposites." Thus, when challenged by a competitor with a differential advantage, an established institution will adopt strategies and tactics in the direction of that advantage.
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The Dialectic Process

High margin Low turnover High price Full service Downtown location Plush facilities

Average margin Average turnover Modest price Suburban Location Model facilities

Low margin High turnover Low price Self service Low Rent location Spartan (basic) facilities
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Retail Accordion
 The theory of 'retail institutional change' states that

institutions evolve over time from outlets offering a wide variety of merchandise to stores offering specialized products, and then eventually these stores begin to offer a wide variety of merchandise.  The merchandise mix strategies of retailers change, while the retail prices and margins remain the same.  Strategies ranging from stores that offer multiple merchandise categories with a shallow assortment of goods and service to others that offer limited merchandise with a deep assortment of goods and services.
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The Retail Accordion Theory

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Natural Selection
 Based on Darwin's theory of evolution.  According to this theory, a firm or retail

institution should be flexible enough to adapt to the changing environment and should adapt its behavior.  Success depends on the degree of flexibility enjoyed by the firm.

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Classification of Retailers
 Store based retailers
  

Ownership Strategy Mix Service Vs Goods retail mix

 Non Store based retailer

 

Traditional Non traditional

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Types of Retailers

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Based on Ownership
 Independent Stores  Chain Stores  Franchise Stores  Leased Department Stores  Vertical Marketing System  Consumer Cooperatives

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Independent Store
 A store, which is owned by a single retailer.

This retailer does not own any other store.  The entry barriers are low  Licensing procedures are simple  Low initial investment.

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Independent Store - Advantages

 Freedom to select a convenient location and suitable store       

format. Can concentrate on a small target market to achieve its business objectives. Decide on the timing, product assortment and price based on target market. The cost of setting up an independent store is low. Employ a few people, have modest fixtures and do not carry much merchandise. No excess stock or duplication of store functions. Reduced time lag in Decision making. Specialization is possible as focus is on a particular consumer segment.
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Independent Store Disadvantages

 Bargaining power is less.  Reduced ability of retailers to negotiate with

suppliers  Productivity is low  Lack exposure to modern tools and techniques for managing various retail functions  Increased operational costs  Cannot promote their product aggressively in the media.
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Chain Stores
 Chain stores have two or more retail outlets

that are commonly owned and controlled.  Have a centralized buying and merchandising system and sell similar lines of merchandise. Eg: Musicworld, Titan, Tanishq, etc

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Chain Stores Advantages

 Low costs because of bulk purchases  High Bargaining power  Efficiency is more because of centralized

decision making system and use of latest technology  Can afford aggressive and expensive promotion  Full time experts employed for long term planning
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Chain Stores - Disadvantages

 Cannot

customize

strategies

for

every

location  High cost of establishment  Requires multiple stores with additional fixtures, product assortments and a large number of store personnel.  Difficult to control  Centralized management is difficult  No personal interest in management of stores
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Franchise Store
 A store based on a contractual arrangement

between a franchiser (manufacturer) and a franchisee, which allows the franchisee to conduct a given form of business under an established name and according to a given pattern of business. Eg: McDonalds

 Franchising is of two types  Product / Trademark franchising  Business format franchising

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Franchising Models
 Master Franchising System  Area Development Franchising System  Exclusive Showrooms

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Product / Trademark Franchising

 Franchised dealers acquire the identities of

their suppliers by agreeing to sell the latter's products and/or operate under the suppliers name.
 In this format, franchisees are relatively

independent from their suppliers.

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Business format Franchising

 The franchiser, gives the right to sell goods

and services, and also helps franchisees in various aspects of store management.
 Under this type of ownership pattern, the

franchiser and its franchisees work together like a chain store.

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Franchising - Advantages
 Franchiser


Can own and operate retail businesses with relatively small capital investment Get well- known brands and goods / service lines Exposure to standard operating procedures Benefit from the nation-wide promotional activities Enjoy exclusive rights to sell the franchiser's products Better bargain per unit purchase

 Franchisees
    

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Franchising Disadvantages
 Over saturation  Franchisers projects higher returns on investment  Restrictions on purchase of raw materials or goods

only from their franchiser  Termination of the franchisee license  Royalty payable is linked to gross sales  Have to renew their franchisee rights when the contract expires.
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Leased Department
 A department in a retail store that is rented to an outside party is       

called a leased department. The volume of sale depends on the existing store's customer base and store's reliability. The lessee is accountable for all the activities of the leased department. The lessee pays a part of the sales turnover to the store as rent. should ensure that the merchandise of the leased department does not cannibalize the sales of the store. Operations of the leased department should be in line with the image and overall strategy. Objective is to add variety to the merchandise offered. Leased departments offer products/services that complement the primary product/service offering of the store.
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Cannibalization
 Cannibalization refers to a reduction in the sales

volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer.  For example, if Coca Cola were to introduce a similar product (say, Diet Coke or Cherry Coke), this new product could take some of the sales away from the original Coke.  A second common case of cannibalization is when companies, particularly retail companies, open outlets too close to each other. Much of the market for the new outlet could have come from the old outlet.
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Leased Department - Advantages

 Advantage to Lessor

Reduce their cost by leasing departments.  Shortcomings in handling certain goods and specialized services can be overcome.  Regular monthly income in the form of rent.  Advantages to Lessee  Increase in customer traffic be of the established name of lessor.  The initial cost of establishing an outlet is reduced as a result of leasing is less

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Leased Department - Disadvantages

 Disadvantages to Lessor
  

Disputes may badly affect the image of the established store. Customer will blame the store for any disputes/deficiencies. Leased department may not attract additional customers. Has to function within working hours and operating pattern of the store. Restriction on the goods and service lines offered by the leased departments. The store may increase the rent if the leased department is successful. The in-store location of the leased department may negatively affect its sales.

 Disadvantages to Lessee
   

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Vertical Marketing System

 A vertical marketing system is a distribution

system in which the producers, wholesalers, and retailers act in a unified manner to facilitate the smooth flow of goods and services from producer to end-user. One channel member owns the others or has contracts with them, or has the power to control them.

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Types of Vertical Marketing System

 Independent Vertical Marketing System:


    

Consists of independent businesses like manufacturers, wholesalers and retailers. Required when customers are scattered, Manufacturers and retailers are small, Product sales are high, and Products require extensive distribution. used by stationery stores, gift shops, hardware stores, food stores, drug stores etc.
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Types of VMS
 Partially

integrated

vertical

marketing

system:
  

Only two independent business units in a distribution channel work together. These units take care of all the production and distribution functions, A manufacturer and a retailer alone manage the shipping, warehousing and distribution functions without the help of a wholesaler. Generally used in furniture stores, appliance stores, restaurants, computer retailers etc.
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Types of VMS
 Fully integrated vertical marketing system:
 

 

Only one player manages all the activities In this system, several channel members at different levels in the channel are owned by the same company. The company/store exercises full control over channel operations like production, wholesaling and retailing. The initial cost of setting up a fully integrated marketing system is very high. The company owning the entire marketing system may have difficulty handling some specialized channel activities.
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Consumer Cooperatives
 Consumer cooperatives are retail operations

owned and managed by its customer members.  In many cases, consumer cooperatives are started by the residents of an area.  These residents believe that the existing retailers in that area are not serving them well (either charging too much or providing poorquality goods/services).
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Consumer Cooperatives


The consumer cooperative structure in the country has four tiers, with the National Cooperative Consumers Federation of India Limited (NCCF) at the national level. Thirty State Cooperative Consumers Organisations are affiliated to the NCCF. At the Central/Wholesale level, there are 800 Consumer Cooperative Stores. At the primary level, there are 25,759 primary stores. In the rural areas, there are about 44,418village level Primary Agricultural Credit Societies and Marketing Societies undertaking the distribution of consumer goods along with their normal business. In the urban and semi-urban areas the consumer cooperative societies are operating about 37,226 retail outlets to meet the requirements of the consumers. The NCCF besides undertaking distribution of consumer articles, also has a Consultancy and Promotional Cell for strengthening consumer cooperative societies engaged in retailing activities. The NCCF with its Head Office at New Delhi has 32 branches/subbranches located in various parts of the country. The sales turnover achieved by the NCCF during the year 2003-04 was Rs 626.11 crore as against the sales turnover of Rs 674.06 crore last year. It has earned a net profit of Rs 8.31 crore as against the profit of Rs 4.19 crore achieved during the previous year. The accumulated losses of the NCCF in 2003-04 were Rs 16.92 crore. The government with the help of NCCF, launched the scheme called Sarvpriya in July 2000. The scheme envisages distribution of eleven selected commodities of daily use to the consumers through the existing PDS Retail Outlets and the Retail Outlets of the State Consumers' Cooperative Federations, State Civil Supplies Corporations and the Consumer Cooperative Societies in the States. The Scheme is voluntary involving no subsidy.
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Retailers based on Strategic Mix -- 1

 Food Oriented Retailers
 Convenience

Stores  Conventional Supermarket  Food-based supermarket  Combination Store  Box (limited-line) store  Warehouse stores
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Convenience Store
 Relatively small stores located near residential areas.  Open long hours, seven days a week and carry a

   

variety of products with limited assortment of merchandise. They generally carry high-turnover convenience products. Charge relatively high prices and operate in a 3000 to 8000 square foot area. Cater to customers who prefer 'convenience of buying or shopping'. May not carry all the items that are available in supermarkets, but they are very conveniently located for customers. Customers can get their products billed faster
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Conventional Supermarket
 Focus on food and household maintenance

products.  Earn very limited revenues from the sale of non-food or general merchandise goods.  Self-service operation.


Self-service enhances impulse buying.

 Every day low price (EDLP) policy may be

followed.

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Food based supermarket

 Larger

and more diversified than a conventional supermarket, but smaller and less diversified than a combination store.  The size of the store ranges from 25,000 to 50,000 square feet and the store earns 20 to 25 percent of its revenue from general merchandise goods  It provides the full range of grocery items.

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Combination Store
 A blend of a super market and a general

merchandise store,  Maintains the identity of both a food store and drug store.  Size of a combination store ranges from 30,000 to 100,000 square feet.  Designed to allow customers to have a onestop shopping experience.  Prices are less than those in a general merchandise store.
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Box (limited-line) Store

 A food-based discount store that concentrates on a     

small selection of goods. Has limited shopping hours, limited services, and limited stocks. Offers a limited number of national brands. Prices are displayed on the shelf or on overhead signs. Customers have to serve themselves and are not allowed to examine products. Sells private label brands, priced 20 to 30 percent below market prices.
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Warehouse Stores
 Warehouse stores are discount food retailers

with an average size of 100,000 square feet.  They cater to customers who look for low price deals.  Merchandise is often displayed in cut boxes or shipping pallets and services are limited.  Availability of the goods assured as the warehouse retailer's buy only deep price or quantity discount is offered.
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Types of Warehouse Stores

 Depending on their functioning style
 Warehouse

showroom  Catalog showroom  Hypermarket  Warehouse club

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Warehouse Showroom
 Owned by a single-line hard-good retailer.  Usually sell well-known brands of furniture

and appliances  As soon as a customer makes the selection and places an order, the goods are shipped from the nearest warehouse.  offers different services like credit, delivery and installation for extra charge.  located in freestanding sites that are adjacent to busy roads.
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Catalog Showrooms
 Discount operations that offer merchandise through     

a catalog or a showroom. Catalog showrooms generally offer hard goods like house ware, jewelry, consumer electronics etc. Customer orders by mentioning the corresponding number of product in the showroom or catalog. Delivery a few days after the order is placed. Retailers compete on price. Concentrate on high margin merchandise

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Hyper Market
 A large retail store that offers products at a low

price.  A combination of a discount store and a food based supermarket.  Big Bazaar is a large hypermarket format with store size ranging from 30,000-50,000 sq. ft, selling everything from home needs, utensils, luggage, white goods, electronics, cosmetics, jewellery, pharmacy, optician to grocery items at a discount.
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Warehouse Club
 A general merchandise retailer who offers a

limited merchandise assortment with limited service at low prices to consumers as well as small businesses.  Store is located in remote locations in an area of 100,000 sft.  Interiors are simple and services are limited.  Warehouse clubs operating on a membership basis are known as membership clubs.
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Retailers based on Strategic Mix -- 2

 General Merchandise Retailers

Classified based on location, merchandise, price, store atmosphere, service and promotion mix:
     

Specialty Stores Variety Stores Department stores Off price retailer Membership Club Flea Market
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Specialty Stores
 A type of general merchandise store  Sells limited lines of closely related products or     

services to a select group of customers. Types - Single line specialty stores and Limited line specialty stores. Major variable in a specialty store's strategy is the merchandise assortment. Both high margin and low margin operators can be found in the specialty store category. The size of the specialty store varies based on the nature of merchandise and mode of operation. Specialty stores are located in high traffic areas like shopping centers, downtown malls etc.
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"Reliance TimeOut- Specialty Store

 Reliance Retail Limited (RRL) announced the

launch of a new specialty store "Reliance TimeOut" on Cunningham Road in Bangalore. This store houses Books, Music, Stationery, Toys and Gifts.

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Specialty Store
 Category killer: It offers enormous selection

in a product category at relatively low prices. A category killer offers not only low price but also variety within a narrow product line.

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Variety Stores
 Variety stores offer a deep assortment of

inexpensive and popular goods like stationery, gift items, women's accessories, house wares etc.
 Also called 5 and 10-cent stores

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Department Stores
 Department stores are large retail units that

offer wide variety and a deep assortment of goods and services.

 Organized into separate departments  Provide a one-stop shopping experience to

customers.

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Criterion for classification as Department Store

i. ii. iii.

A department store should employ a minimum of fifty people. The store should generate at least 20 percent of its total revenue from the sale of apparel and soft goods. The store should have the following product lines: furniture and home furnishings; appliances, radio and TV sets; a general line of apparel for the family; household products and dry goods. The annual sales of the department store should be under $10 million, where no single product line should contribute more than 80 percent of the total sales. -- U S Bureau of Census

iv.

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Types of Department Stores

A

traditional department store offers merchandise of average quality priced above average, with minimum customer service.

 A full-line discount department store offers a

broad merchandise assortment at less than prevailing prices. Full-line discount department stores are popular because they offer well-known brands at competitive prices.
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Features of a Full Line Department Store

 High volume, low cost, fast turnover outlet

with a wide merchandise assortment.  Centralized checkout service  Self-service store  A low cost model  Offers private brands for non-durables and well-known brands for durables.

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Off-price Retailer
 Offer an inconsistent assortment of branded fashion 

 

oriented soft goods at low prices. Purchases from manufacturers who have excess inventory Off-price retailers get special prices from manufactures by agreeing to order goods in the offseason. Off price retailers sell unsuccessful samples and products. Off-price chains do not carry out many promotional activities.
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Classification of Off-price retailers

 Outlet stores  Close outlet stores  Single-price retailers

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Membership Club
 Cater to price conscious customers.  Customers pay an annual fee to become members  Very large and located in isolated areas.  Characterized by little or no advertising, plain fixtures,

wide aisles, concrete floors, limited or no delivery services, little or no credit, and very low prices.
 Get merchandise directly from manufacturers.  Also known as wholesale clubs, warehouse clubs

and wholesale centers.

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Flea Market
 The term "flea market" is a literal translation

of the French marche aux puces, an outdoor bazaar in Paris, France.  A flea market is an outdoor or indoor facility that rents out space to vendors  Entrepreneurs can start business with low investment.  Consists of many retail vendors offering a variety of products at discount prices.
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Service Vs Goods retail mix

 Entertainment firms, hospitals and banks

initially had no intention of becoming retail institutions. As competition increased, these organizations started operating like retailers to attract customers.

 Service retailing consists of the sale or rental

of an intangible activity, which usually cannot be stored or transported, but satisfies the need of the user/ customer.
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Types of Services
 Two types:


Services along with goods,

  

Rental Goods Service Owned Goods Service Non goods Service

Services without any goods (pure service).



Services that are provided without any physical product or good are called pure services.

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Non Store Retailer

 Differ in the retailing methods from store retailers.  Reach customers and market merchandise using

various methods like "infomercials," directresponse advertising, paper and electronic catalogs, door-to-door selling, in-home demonstrations, portable stalls (street vendors), and vending machines.  Non store retailing takes place in two ways:
 

Traditional Non traditional

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Traditional non store retailers

 Direct Marketing  Direct Selling  Vending Machines  Catalog marketing  Telemarketing  TV Home shopping

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Direct Marketing
 "Interactive marketing system that uses one or more

advertising media to yield a measurable response and/or transaction at any location". -- Direct Marketing Association (DMA)  Customer is informed about the product through non personal media and the customer places an order through the mail or phone.  In direct marketing, responses can be measured.  Company can concentrate its promotional activities on potential customers.
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Direct Marketing - Advantages

 The initial cost or investment for direct

marketers is comparatively less  A wide geographic area is covered by the direct marketer's promotional activities.  This form of shopping allows the customer to make purchases without having to look for a parking place or waiting in line at the cash register.

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Direct Marketing - Disadvantages

 Customers do not have the opportunity

to see and feel the goods before purchasing them.

 Cost of developing, printing and mailing

these catalogs can be very high.

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Direct Selling
 "Marketing and retailing consumer goods

directly to the consumer that relies neither on direct mail, product advertising nor fixed retail outlets". -- Direct Selling Association
 Encourages convenience shopping as well as

personal touch or feel of a product.  Can also be called door- to- door selling
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Types of Direct Selling

 Person to Person  Multilevel (network) marketing  Party plan  Direct selling benefits both consumers and

sellers.


From the consumers' point of view goods are available at their convenience. Direct selling is advantageous for retailers as it is an effective, low cost channel.
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Vending Machines
 Involves coin or card-operated dispensing of

products.  Eliminates the use of sales personnel and facilitates round-the- clock sales.  Vending machines help customers avoid the inconvenience of shopping in a store.  High Installation costs  Also called Automatic Merchandising.
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Catalog Marketing
 Catalog marketing refers to sales made

through catalogs mailed to a select list of customers or made available in a store.

 Basic product and pricing information is given

along with instructions for placing an order.

 The kind of delivery (mail, express service,

parcel post) that the customer wants can be mentioned in the order
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Telemarketing
 Provide

more convenience satisfaction to customers,

and

service

 Useful for customers who want to avoid traffic

congestion and parking problems.

 Allows

retailers to provide customers information on new merchandise and upcoming sales events.

 Deliver

merchandise to the customers' residence or hold it till it is picked up by the customer at a later date.
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TV Home Shopping
 TV home shopping works in the following

manner:  The merchandise items are displayed, described and demonstrated on television.  Using the toll-free number provided, customers can place orders.  Payments are done through credit cards.  The goods are delivered by courier service along with a guarantee.
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Non-traditional non store based retailers World Wide Web

 Retailers' websites allow customers to order

with a click of the mouse.  To attract potential customers, retailers also send details of new products through email to customers.  Use of Internet as a medium for promoting their goods and services all over the globe at minimum cost.  Can conduct research also on customers  Internet reduces the costs of retailers
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Non-traditional non store based retailers Video Kiosk

 The term kiosk is derived from a Turkish word

which means pavilion. shopping malls.

open

summer

house

or

 Kiosks are often placed near the entrances of  A video kiosk is a freestanding interactive

computer terminal that displays product and related information on a video screen
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Non-traditional non store based retailers Video Catalog

 A video catalog is a retail catalog on a CD-

ROM disk to be viewed on a computer monitor.

 After viewing the catalog, the consumer can

call up the retailer to order the goods.

 The disk allows the customer to quickly

gather information products.

about

the

retailer's

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Summary
 Theories of Institutional Change
   

Wheel of Retailing Dialectic Process Retail Accordion Natural Selection

 Classification of Retailers  Store-Based Retailer  Non Store Retailer

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