Theories of Retailing,

Retail Life Cycle

Dr. Parveen Nagpal

 Theories of Retail Development
• Retail development can be looked at from theoretical perspective
• No single theory is universally applicable or acceptable as the
application varies from market to market, retailer to retailer and
depends on the socio – economic conditions in the market.
• The theories developed to explain the process of retail development
revolve around the importance of competitive pressures, investments
in organizational capabilities and creation of sustainable competitive
advantage.
 Theories of Retail Development
Theories of retail development can be broadly classified as:
A. Environmental – where a change in retail is attributed to a change
in the environment in which the retailers operate.
B. Cyclical – where change follows a pattern and phases can have
definite identifiable attributes associated with them
C. Conflictual – where the competition or conflict between two
opposite types of retailers leads to a new format being developed.
 Environmental Theory
• The theory of natural selection in retailing is given by Charles Darwin,
popularized by the phrase ‘Survival of the Fittest’.
• According to this, the retail types/organizations which best adjust to their
environment are the most likely to survive. In this theory, environmental
factors play major role in survival.
• The major environmental factors affecting retailing are:
i. Changes in the consumer characteristics
Demographic factors including age of the population.
Social factors including preferences of products and services.
Economic factors including changes in real income.
ii. Changes in technology
iii. Changes in competition
 Environmental Theory
• Thus retail institutions are economic entities and retailers confront an
environment which is made up of consumers, changing technology and
competitors.
• This environment can alter the profitability of the retailer. Thus, the birth,
success or decline of different forms of retail enterprises is attributed to the
business environment.
• For example, the decline of department stores in the Western markets is
attributed to the general inability of those retailers to react quickly and
positively to environmental change
• The retailers who are aware of the operating environment and react
without delay, gain from the changes.
• The ability to adapt to change successfully is the core of this theory.
 Cyclical Theory – Wheel of Retailing
• Retail sector is one of the most dynamic sectors as it is affected by the
political, economic, social, technological, legislative, environmental
factors, customer demands, intense competition etc.
• All these changes have led to creation of new opportunities even as
they are affecting the existing businesses. For instance, the internet
and web technologies have itself created ample opportunities for web-
based business model of retailing.
• The ‘Wheel of Retailing’ concept was first propagated by Professor
McNair of Harvard to describe how the retail institutions transform
during their evolutionary life cycles.
 Cyclical Theory – Wheel of Retailing
• 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.
Cyclical Theory – Wheel of Retailing
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
 Cyclical Theory – Wheel of Retailing
1. Entry Phase
• Starts with offering limited merchandise with low prices and retail organizations,
as a strategy, have low 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.
 Cyclical Theory – Wheel of Retailing
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.
 Cyclical - General–Specific–General Cycle or Accordion Theory
• This theory of retail institutional change, evolved by Hollander (1966), suggests
that retail institutions go from outlets with wide assortments to specialized
narrow line store merchants and then back again to the more general wide
assortment institution.
• It explains the development of retail in less developed markets, where the
introduction may occur at high price.
• Hollander used the analogy of an orchestra comprising exclusively of accordion
players to describe the dynamically shifting retail structure
• The so-called accordion effect describes how general stores moved to specialize,
but then widened their range of merchandise again as new classes of products
were added
• Hollander suggested that the players either have ‘open accordions’, representing
general retailers with broad product range or ‘closed accordions ’, indicating a
narrow range of products with specific merchandise.
 Cyclical - General–Specific–General Cycle or Accordion Theory
• According to Hollander, at any point in time, one type of retailer would
outnumber the other, but the situation would continually change through the
arrival and departure of different stores.
• This analogy illustrates the complexity of the retail scene and the way different
attitudes of successful retailing will come in and go out of fashion at different
times.
• There is a switch to the ‘special’ store from the ‘general’ store because:
There was greater variety of customer goods available that could not be
accommodated in the old general stores.
There was growth of cities which meant that consumer markets allowed
profitable segmentation.
It provided a social satisfaction to the shopping trip, which was required as
society became more complex
 Conflict Theory
• Conflict always exists between operators of similar formats or within broad retail
categories.
• It is believed that retail innovation does not necessarily reduce the number of
formats available to the consumer, but leads to the development of more
formats.
• Retailing thus, evolves through a dialectic process, i.e., the blending of two
opposites to create a new format. This can be applied to developments in
retailing as follows:
a. Thesis: Individual retailers as corner shops all across the country.
b. Antithesis: A position opposed to the thesis develops over a period of time.
These are the department stores. The antithesis is a "challenge" to the thesis.
c. Synthesis: There is a blending of the thesis and antithesis. The result is a
position between the thesis and antithesis. Supermarkets and hypermarkets
thrive. This synthesis becomes the thesis for the next round of evolution.
 Concept of Life Cycle in Retail
• 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
2. Development
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.
 Concept of Life Cycle in Retail
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.
 Concept of Life Cycle in Retail
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.
 Concept of Life Cycle in Retail
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.
 Concept of Life Cycle in Retail
4. Decline
• 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.
 References
1. Michael Levy & Barton A Weitz, “Retailing Management”, 8th Edition, Tata
Mc Graw Hill.
2. Swapna Pradhan, “Retailing Management – Text and Cases”, 5th Edition,
Tata Mc Graw Hill.
3. Nagpal, Sharma “Retail Management”, TYBMS, Sheth Publishers
4. Nagpal, Sharma “Retail Management”, M. Com, Vipul Prakashan.