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Retailing Life Cycle

The concept of product life cycle as explained by Philip Kotler, is also applicable to retail organizations as
they pass through identifiable stages of:
1. Innovation / introduction
2. Growth
3. Maturity
4. Decline.
• This is commonly termed as the Retail Life Cycle.
• The Retail Life cycle is a theory about the change through time of the retailing outlets.
• It is claimed that the retail institutions show ‘s-shaped' development through their economic life, that has
been classified into four main phases.

1. Innovation
• A new organization is born — it improves the convenience or creates other advantages to the final
customers that differ from those offered by other retailers.
• Stage of innovation, where there are fewer competitors
• Rate of growth is fairly rapid
• Management fine-tunes its strategy through experimentation.
• Levels of profitability are moderate
• This stage can last up to five years depending on the organization.
2. Accelerated Growth
• Rapid increases in sales.
• Few competitors emerge.
• Since the company has been in the market for a while, it is now in a position to anticipate the conditions in
the market by establishing a position of leadership.
• Since growth is imperative, the investment level is also high, as is the profitability. Investment is largely in
systems and processes.
• This stage can last from five to eight years.
3. Maturity
• Retail organization still grows, but competitive pressures are felt from newer forms of retailing that tend to
arise. Thus, the growth rate tends to decrease.
• Gradually, as markets become more competitive, the rate of growth slows down and profits also start
declining.
• Retail organization needs to rethink its strategy and reposition itself in the market.
• Change may occur not only in the format but also in the merchandise mix offered.
4. Decline
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• Retail organization looses its competitive edge and there is a decline in sales. Thus it needs to decide if it is
still going to continue in the market.
• The rate of growth is negative, profitability declines further and overheads are high.
• The retail business in India has only recently seen the emergence of organized, corporate activity.
Traditionally, most of the retail business in India has been small owner-managed business.
• It is hence, difficult to put down a retail organization, which has passed through all the four stages of the
retail life cycle.

Wheel of Retailing
The wheel of retailing theory explains the life cycle of a retail organization and the different levels through
which it passes. The life of a business is divided into four quadrilaterals, each of which are discussed in
detail below:

Quad 1: Entry
The initial phase of the wheel of retailing is when the organization enters the market with limited products at
a very reasonable price, keeping a low margin.
Since the business entity still needs to build its reputation at this stage, and the consumers are not very much
aware of the organization.
Moreover, the organization provides minimal services and the infrastructure used is usually low cost and
temporary. Thus, at this level, the company tries to penetrate the market with a low price strategy.

Quad 2: Growth
With the low price strategy, the organization can build its reputation in the market. At this level, the retailer
can adopt growth strategies like slightly hiking the price of the products, widening the product category,
upgrading the store and providing additional services.
This is the phase where the organization can keep a better margin since more and more consumers prefer to
buy the products. Now, the retailer concentrates on the other aspects of competitiveness, rather than price.

Quad 3: Maturity
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At this phase, the organization has gained a high reputation and established itself as a well-known business
entity. Now, the business is unable to acquire more new consumers, also the customer turnover increases.
Therefore, the retailer’s main area of concern at the maturity level is customer loyalty and retention by
enhancing their satisfaction level.

Quad 4: Decline
This is the level where the business starts going down. The other firms enter the market with their low-
priced competitive products, to drag customer’s attention. In no time, the competitor’s products take over
the market, and the organization tend to lose its customers.
Thus, the organization now plans to revive the business through divestment, merger, acquisition and other
strategic alliance.

Wheel of Retailing Strategies

 The theory suggests that retail innovators often first appear as low-price operators with low-cost
structure and low-profit margin requirements, offering some real advantages, such as specific
merchandise which enables them to take customers away from more established competitors.
 As they prosper, they develop their business, offering greater range or acquiring more expensive
facilities, but this can mean they lose focus that was important when they entered the market. Such
‘trading up’ occurs as the retailer becomes established in his own right.
 This, in turn, gives chance to competitors to enter the market and repeat the process. They then
become vulnerable to new discounters and lower – cost structures that take place along the wheel.
 ‘Scrambled merchandising’ occurs as the retailer adds goods and services that are unrelated to
each other and the firm’s original business to increase the overall sales and profit margins.

The Wheel of Retailing theory states that the evolution process comprises three stages:
• Entry Phase
• Trade-up Phase
• Vulnerable Phase
This theory is diagrammed as a large wheel with three spokes dividing the wheel into three segments or
stages

1. Entry Phase
• Starts with offering limited merchandise with low prices and retail organizations, as a strategy, have low
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margins in order to increase penetration of the market.

• When these retail outlets are successful, others rival retailers rapidly imitate and adapt those
characteristics.
2. Trade-up Phase
• As the store progresses in its growth, the organization enters the second stage, which is the trade-up stage
where the organization offers full services and a range of merchandise in full prices, without any discounts.
• These retail institutions simultaneously increase their margins and prices and appeal to more middle and
upper income consumers rather than bargain hunting and lower income consumers. It is during this stage
that the firms have an increase in sales, high profits and a strong cash flow due to the improvement of
their store mix.
3. Vulnerable Phase
• In the third stage, according to the Wheel of Retailing Theory, the wheel turns as the store matures in its
growth and faces more competition.
• As a retailer reaches this stage, he will reduce prices and scale down services too in order to reduce
operating costs.
• The innovative store matures into an established firm and becomes vulnerable to the new innovator who
enters the market.
• The strategy is to drop prices and continuous innovations and sound management practices will help the
retailer to sustain growth in this phase.
• An example of this theory is that the Kiraana stores were replaced by the chain stores like Apna Bazar,
which in turn faced severe competition from supermarkets and big stores like Big Bazar and D-Mart.

Low-End Strategy at Innovation Stage

 The innovation stage is the one where a product is introduced to the customers. At this level, the
strategies are also framed for the growth of the business.
 It is usually a trial or experimental phase where the retailer adopts low-end strategies to test the
products. The organization tries to keep the things simple and attract the consumers through lowest
price factor.
 Following are the various low-end strategies which lead to the innovation stage:
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 Initially, a limited variety of products is introduced in the market.

 Only the essential facilities are provided at the entry stage.
 The services provided are also limited and nothing extraordinary.
 The price of the product is set at the lowest to gain consumer attention.
 The organization’s reputation or status is not very high since the business is at an initial
stage.
 The location selected for the store is usually a low-cost premise.
Medium-End Strategy at Trading-Up Stage
 The trading-up stage is the next phase where the organization has established its name in the market
and develops its business model.
 In this phase, the retailer usually pools in more investment into the business. The medium-end
strategies which result in this stage are as follows:
 Selling of better and improved range of products.
 The organization also provides various facilities like product exchange, home delivery,
online shopping, etc.
 It also provides additional services like customer support, demo, return, etc.
 Even the prices of the initial products are raised moderately, to increase profit margin.
 The organization gains goodwill in the market and builds its reputation.
 The business location is changed to premises located in the prime market place.
High-End Strategy at Vulnerability Stage
At the vulnerability stage, the organization seems to be overburdened by the interest liability on borrowed
funds for business growth. Moreover, the return on investment is quite low or starts declining at this phase.
The high-end strategies leading to the vulnerability stage are discussed below:
 The retailer sells only superior products at this stage.
 The organization holds a high position, reputation and status in the market.
 Premium facilities are provided to meet the needs of high-end consumers.
 Special services like five years warranty are also provided.
 The products are priced very high.
 The organization is cautious and triggers attention towards the preservation of its status.
 Gradually, the business starts declining as the new entrants take up the market.
It is a cycle which keeps ongoing since, at vulnerability stage, the organization put in all the efforts to restart
with the innovation stage.

Wheel of Retailing Example

Let us take a fictitious case of ABC and Co., an automobile company. The company was established in the
year 2001. Given below is the wheel of retailing of the company:
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Entry Stage
ABC and Co. entered the market in the year 2001 with a single model of cars which was priced extremely
low to target the middle class and the price-sensitive consumer base. It operated from various rental
showrooms located in the outskirts of the cities.
Growth Stage
The company was able to gain recognition in the market for affordable cars by the year 2006. The
consumers showed interest, and the booking for cars increased tremendously.
The retailer brand now slightly hiked up the price of its initial model and also launched three more models
with new features.
Even the stores were shifted to busy market places in various cities for better exposure. Also, activities like
credit purchase, service centres, customer relationship management, etc. were introduced.
Maturity Stage
By the year 2015, the company had almost 211 showrooms in the country selling out multiple models of
cars in different colour variants. By this time, the company is unable to attract new customers and faces a
saturation point in business.
Decline Stage
The company’s sale starts to fall by the year 2018, and the debt on it is quite high. Thus, decreasing the
return on investment on the one hand, and increasing the liabilities and operating cost on the other side.
Now, in such a situation, ABC and Co. can either shut down its non-performing showrooms or can come up
with an innovative idea which can revive the company’s position.

Limitations
Many scholars criticized the wheel of retailing on the grounds of the following shortcomings:
 Only emphasizes on Price Factor: The biggest drawback of the retailing wheel theory is that it
considers the price of a product as the primary factor to enter the market.
 Inapplicable to All Organizations: Moreover, this hypothesis is not applicable in the case of the
speciality stores and luxury products launched by new entrants. Their purpose is to target consumers
through product features rather than its price.
The wheel of retailing is considered to be of great significance in retail management. However, it overlooks
the other aspects of the business like product quality, market conditions, business environment, etc.
Also, the consumers today are brand conscious, more aware and knowledgeable; thus, the application of the
wheel of retailing becomes quite vague in the present scenario.