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Theories of retail

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A number of explanations have been made about how retail organiza-
tions grow, develop, expand and succeed. Theories of retail change
make sense of what has happened to retail organizations in the past,
and more importantly, help retailers to foresee future scenarios for their
business, and those of their competitors.
In this chapter the main theories of retail change are presented,
explained and applied to current retail organizations.
There are three main categories of theory:

䊉 Cyclical theories.
䊉 Environmental theories.
䊉 Conflict theory.

Cyclical theories
Cyclical theories are those which trace common patterns in retail
development over time and include the earliest theories of retail
change. There are three primary cyclical theories:

1 Wheel of retailing.
2 Retail life cycle.
3 Retail accordion.

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Theories of retail change 49

The wheel of retailing

This early hypothesis (McNair, 1958) attempted to explain the evolution

of retail institutions as a wheel-like progression of three phases, as
illustrated in Figure 3.1.
According to this theory, retail organizations enter the market with a
low-cost, low-price, low-service format, using opportunistic buying and
basic premises to undercut established competitors and establish
themselves in the market. For those which succeed, there is a tendency
over time to add product lines, upgrade stores and add services, which
will tend to increase price levels for the merchandise. In stage 3, retail
organizations tend to operate at the high end of the market, offering
quality merchandise and service at price levels which alienate their
original customers, and increase vulnerability to innovative new market
In stage 1, an entrepreneurial, opportunistic management style can
lead to success, whether the organization be completely new to the
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market, or a new format brought on-stream by an existing organization.
As the organization/format grows, management strength is needed in

Figure 3.1 The wheel of retailing.

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50 Principles of Retailing

terms of leadership and organization of the growing number of staff

and units. Even organizations as resolutely embedded in stage one as
value retailers Lidl and IKEA have found it difficult to resist widening
their merchandise range or adding services such as delivery.
According to Verdict (2002), ‘scale will be a much stronger influence
over the fate of retail companies’, and opportunities for physical
expansion are now limited in many areas due to market saturation and
planning policy, so retail companies will have no alternative but to seek
alternative growth strategies, such as merger and acquisition, or use of
non-store-based retailing. IKEA, for example, has experienced problems
in UK expansion. Although 20 new stores in 10 years were planned, site
development has been restricted (the Glasgow site took 6 years to
open), and the organization has had to resort to extending its existing
stores to accommodate demand (David, 2002). Organic growth, merger
and acquisition all tend to dilute the entrepreneurial style of manage-
ment, and to make inevitable the characteristics evident in stages 2 and
3 of the wheel of retailing.
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Without doubt, many retail organizations have developed in line
with the wheel theory, for example department stores and variety stores
such as C&A and Marks & Spencer. Internet retailing also seems to be
moving the same way. Discount pricing has given way to parity pricing
in groups such as Dixons, for example. Delivery charges are the norm
rather than the exception. Expansion of the merchandise range, adding
to services and upgrading of virtual stores, has occurred in successful
online retailers such as and
There have been many criticisms of the wheel theory. One major
criticism is that it cannot be universally applied and is therefore not
valid. Not all retail organizations enter the market at stage 1 – some
enter as upmarket formats. Other retailers streamline their operations in
order to retain their reputations for value for money while upgrading
shops and services. Tesco, for example, has not traded up beyond stage
2. A second criticism is that the theory does not appear to apply to
internationalization of retail formats, which often enter new, less mature
markets as upmarket retailers and move downscale as they adapt to
local environments. An example of this ‘reversed wheel’ effect is
evident in the progress of factory outlet centre development in the UK.
Upmarket developers such as Value Retail entered the UK market as an
upscale innovative format offering value branded merchandise, but
domestic applications of the format such as those developed by
Freeport were smaller, more downmarket versions (Fernie, 1996). The
wheel theory has also been criticized by post-modernists who argue
that time is linear rather than cyclical and therefore past patterns cannot
be applied to future development (Brown, 1995). As the market
environment is now too fragmented to apply concepts from 40 years

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