Chapter 5

Retail Management: A Strategic
Approach
Thirteenth Edition
Chapter 5
Retail Institutions
By Store-based
Strategy Mix
Copyright © 2018, 2014, 2012 by Pearson Education, Inc. All Rights Reserved
Learning Objectives
5.1 To describe the wheel of retailing, scrambled merchandising, and the
retail life cycle and to show how they can help explain the
performance of retail strategy mixes
5.2 To discuss some ways in which retail strategy mixes are evolving
5.3 To examine a variety of food-oriented retailers involved with store-
based strategy mixes
5.4 To study a range of general merchandise firms involved with store-
based strategy mixes

Concepts in Planning A Retail Strategy (1 of 3)

• According to the wheel of retailing theory, retail innovators often first appear as low-price
operators with low costs and low profit margin requirements.
• Overtime, they upgrade the products they carry and improve their facilities and customer
service, and prices rise.
• As they become mature, they become vulnerable to new discounters with lower costs.
• The wheel is based on 4 principles:
• Many price-sensitive shoppers will trade customer services, wide selections, and
convenient locations for lower prices.
• Price-sensitive shoppers are often not loyal and will switch to retailers with lower prices.
Prestige-oriented customers enjoy shopping at retailers with high-end strategies.
• New institutions are frequently able to have lower operating costs than existing formats.
• As retailers move up the wheel, they typically do so to increase sales, broaden the
target market, and improve their image.

The Wheel of Retailing
• Scrambled merchandising involves a retailer increasing its width of assortment (the
number of product lines carried).
• Scrambled merchandising occurs when a retailer adds goods and services that may be
unrelated to each other and to the firm’s original business.
• Scrambled merchandising is popular for many reasons:
• Retailers want to increase overall revenues
• Fast-selling, highly profitable goods and services are usually the ones added
• Consumers make more impulse purchases
• People like one-stop shopping
• Different target markets may be reached
• The impact of seasonality and competition is reduced

Scrambled Merchandising by a Shoe

Store
• The retail life cycle concept states that retail institutions pass through identifiable life stages:
• Introduction (early growth)
• Sales and profits often rise sharply for the first firms in the new category
• Long-run success is not assured yet due to risks of acceptability by shoppers
• Growth (accelerated development)
• Sales and profits exhibit rapid growth
• Existing firms expand geographically, and competitors begin to enter
• Toward the end of this stage, cost pressures may begin to affect profits
• Maturity
• Slow sales growth due to competition, changing societal interests, and inadequate management skill
• Profit margins may have to be reduced to stimulate purchases
• Decline
• Slowed decline by redesigning interiors, lengthening store hours, offering lower prices, expanding
the use of scrambled merchandising, closing unprofitable smaller units.
Figure 5.4 The Retail Life Cycle
How Retail Institutions Are Evolving
• Mergers involve the combination of separately owned retail firms.
• By merging, firms can jointly maximise resources, enlarge their customer base,
improve productivity and bargaining power, limit weaknesses, and gain competitive
advantages.
• Mergers can take place between retailers of different types, as well as of same
type.
• With diversification, retailers become active in business outside their normal

operations, perhaps adding stores in different goods/service categories.
• Eg: the cosmetics sold in H&M
• When retailers unhappy with performance, they may opt for downsizing - whereby
unprofitable stores are closed or divisions are sold off.
• The interest in downsizing will likely to continue due to various retailers have
overextended themselves and do not have resources or management talent to
succeed without retrenching.
Table 5.1 Store-Based Retail Strategy

Mixes
Food-Oriented General Merchandise
• Convenience store •Specialty store
• Conventional supermarket •Traditional department

•Full-line discount store
• Food-based superstore
•Variety store
• Combination store
•Off-price chain
• Box (limited-line) store •Factory outlet
• Warehouse store •Membership club
•Flea market

Convenience Store Strategy Mix

• Location
– Neighborhood
• Prices
– Average to
– Above average
• Atmosphere & Services
– Average
• Merchandise
– Medium width and low depth of assortment;
– average quality
• Promotion
– Moderate

Conventional Supermarket Strategy Mix

• Location
– Neighborhood
• Prices
– Competitive
– Average
• Merchandise
– Extensive width and depth of assortment; average quality;
manufacturer, private, & generic brands
• Promotion
– Heavy use of newspapers, flyers, and coupons.

Food-Based Superstore Strategy Mix

• Location
– Community shopping
– center or isolated site
• Prices
– Competitive
– Average
• Merchandise
– Full assortment plus
– health and beauty aids and general merchandise
• Promotion
– Heavy use of newspapers, flyers

Combination Store Strategy Mix

• Location
– Community shopping
– Center or isolated site
• Prices
– Competitive
– Average
• Merchandise
– Full assortment plus health and beauty aids and general
merchandise
• Promotion
– Heavy use of newspapers, flyers

Box Store Strategy Mix

• Location
– Neighborhood
• Prices
– Very low
– Low
• Merchandise
– Low width and depth of assortment; few perishables; few national
brands
• Promotion
– Little to none
Warehouse Store Strategy Mix

• Location
– Secondary site, often in industrial area
• Prices
– Very low
– Low
• Merchandise
– Moderate width and low depth of assortment; emphasis on
manufacturer brands bought at discount
• Promotion
– Little to none
Specialty Store Strategy Mix

• Location
– Business district or shopping center
• Prices
– Competitive to Above average
– Average to excellent
• Merchandise
– Very narrow width and extensive depth of assortment; average to
good quality
• Promotion
– Heavy use of displays Extensive sales force

Traditional Department Store Strategy

Mix
• Location
– Business district, shopping center or isolated store
• Prices
– Average to Above average
– Good to excellent
• Merchandise
– Extensive width and depth of assortment; average to good quality
• Promotion
– Heavy ad and catalog use; direct mail; personal selling

Full Line Discount Store Strategy Mix

• Location
Business district, shopping center or isolated store
• Prices
Competitive
Slightly below average to average
• Merchandise
Extensive width and depth of assortment; average to good quality
• Promotion
Heavy use of newspapers; price-oriented; moderate sales force

Variety Store Strategy Mix

• Location
– Business district, shopping center or isolated store
• Prices
– Average
– Below average
• Merchandise
– Good width and some depth of assortment; below-average to
average quality
• Promotion
– Use of newspapers; self-service

Off-Price Chain Strategy Mix

• Location
– Business district, suburban shopping strip, or isolated store
• Prices
– Low
– Below average
• Merchandise
– Moderate width but poor depth of assortment; average to good
quality; low continuity
• Promotion
– Use of newspapers; brands not advertised; limited sales force
Off Price Retailing Strategy (1 of 2)

• Pay vendor quickly with no promotional allowances, cooperative
advertising funds, chargebacks, or markdown monies
• Do not promote brand name so as to anger department and specialty
shops which are vendor’s traditional customers
• Buy all of vendor’s excess inventory, cancelled orders, returns
regardless of color, size or style distributions

Off Price Retailing Strategy (2 of 2)

• Pay 10 to 20 percent of vendor’s traditional wholesale $500 jacket
purchased for $50 and sold for $100; versus sold for $250 less
allowances
• Can also arrange for vendor to produce special goods for off-price
retailer to reduce loss on fabrics, and to keep subcontractors busy

Factory Outlet Strategy Mix

• Location
– Out of the way site or discount mall
• Prices
– Very low
– Very low
• Merchandise
– Moderate width but poor depth of assortment; some irregular
merchandise; lower continuity
• Promotion
– Little; self-service

Factory Outlet Strategy (1 of 2)

• Factory outlet as an outlet for unsold merchandise at traditional stores
(ends, off season, returns, etc).
• Unspoken issue– making goods especially for factory outlet (less
complaints from traditional retailers, but issue of comparative value).
Can also diminish value of brand (Coach).

Factory Outlet Strategy (2 of 2)

• Factory outlet as a means of bypassing off-price chains; also to
control geographic distribution.
• Factory outlet as a means of attracting another market segment that
retailer would normally not access.
• Factory outlet malls as cumulative attraction

Membership Club Strategy Mix

• Location
– Isolated store or secondary site (industrial park)
• Prices
– Very low
– Very low
• Merchandise
– Moderate width and poor depth of assortment; lower continuity
• Promotion
– Little, some direct mail; limited sales force

Membership Club Strategy (1 of 2)

• Costco, BJ’s and Sam’s Club are key players
• Membership fee accounts for 85 percent to 100 percent of
membership outlet’s profits
• Costco- 14-16 percent gross margin versus 22 percent for
supermarket and 50 percent for department store

Membership Club Strategy (2 of 2)

• Will not accept higher profit margin due to concern for keeping 85
percent membership retention rate
• Response to Wall Street analysts that Costco is “too good to its
customers and too good to its employees.”

Flea Market Strategy Mix

• Location
– Isolated site; racetrack; or arena
• Prices
– Very low
– Very low
• Merchandise
– Extensive width but poor depth of assortment; lower continuity;
variable quality
• Promotion
– Limited; self-service

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Retail Management: A Strategic

Concepts in Planning A Retail Strategy (1 of 3)

• The wheel is based on 4 principles:

The Wheel of Retailing

• Scrambled merchandising is popular for many reasons:

• Retailers want to increase overall revenues

• Consumers make more impulse purchases

• People like one-stop shopping

• Different target markets may be reached

• The impact of seasonality and competition is reduced

Scrambled Merchandising by a Shoe

• Introduction (early growth)

• Long-run success is not assured yet due to risks of acceptability by shoppers

• Growth (accelerated development)

• Sales and profits exhibit rapid growth

• Existing firms expand geographically, and competitors begin to enter

• Profit margins may have to be reduced to stimulate purchases

Figure 5.4 The Retail Life Cycle

• With diversification, retailers become active in business outside their normal

• Eg: the cosmetics sold in H&M

Table 5.1 Store-Based Retail Strategy

• Conventional supermarket •Traditional department

Convenience Store Strategy Mix

Conventional Supermarket Strategy Mix

Food-Based Superstore Strategy Mix

Combination Store Strategy Mix

Box Store Strategy Mix

Warehouse Store Strategy Mix

Specialty Store Strategy Mix

Traditional Department Store Strategy

Full Line Discount Store Strategy Mix

Business district, shopping center or isolated store

Slightly below average to average

Extensive width and depth of assortment; average to good quality

Variety Store Strategy Mix

Off-Price Chain Strategy Mix

Off Price Retailing Strategy (1 of 2)

Off Price Retailing Strategy (2 of 2)

Factory Outlet Strategy Mix

Factory Outlet Strategy (1 of 2)

Factory Outlet Strategy (2 of 2)

Membership Club Strategy Mix

Membership Club Strategy (1 of 2)

Membership Club Strategy (2 of 2)

Flea Market Strategy Mix

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