CHAPTER 1

Retail Business
Overview
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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Retailing Management 8e © The McGraw-Hill Companies, All rights reserved. 1-1

What is Retailing? CHAPTER 1
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Retailing – a set of business

activities that adds value to the
products and services sold to
consumers for their personal or
family use

A retailer is a business that sells

products and/or services to
consumers for personal or
family use.

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Examples of Retailers CHAPTER 1
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• Retailers:
Kohl’s, Macy’s, Wendy’s,
www.Amazon.com, Jiffy
Lube, AMC Theaters,
American Eagle Outfitter,
Avon, J.Crew

• Firms that are retailers and wholesalers - sell to other

business as well as consumers:
Office Depot, The Home Depot, United Airlines, Bank of
America, Costco
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Distribution Channel CHAPTER 1
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The Retailer’s Role in a Supply Chain CHAPTER 1
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• Retailers are the final business within a supply chain

which links manufacturers to consumers.

• A Supply Chain is a set of firms that make and deliver a

given set of goods and services to the ultimate
consumer.

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Manufacturing, Wholesaling
and Retailing
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• Vertical Integration – firm performs more than one set of

activities in the channel
• Ex: retailer invests in wholesaling or manufacturing

• Backward Integration – retailer performs some

distribution and manufacturing activities
• Ex: JCPenney sells Arizona jeans (Private Label)

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Manufacturing, Wholesaling
and Retailing
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• Forward Integration – manufacturers undertake retailing

activities
• Ex: Ralph Lauren (New York Jones, Liz Claiborne)
operates its own stores

• Large retailers engage in both wholesaling and retailing

• Ex: Wal-Mart, Lowe’s, Safeway, Brown Shoe Company

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Do Retailers Add Value? CHAPTER 1
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a box of crackers at a grocery store

Example • costs $1 to manufacturer
• sells at a price of $2

Retailers add significantly to the prices consumers face

Why not buy directly from the manufacturer?

Does that mean that grocery stores are very profitable?

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Why Not Get Rid of the Middlemen? CHAPTER 1
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Price to Price to Price to

Distributor Retailer Consumer
$1.00 $1.20 $2.00

$.85 $.15 $.70

Manufacturer Distributor Retailer Consumer

Vendor Wholesaler
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How Retailers Add Value CHAPTER 1
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■ Provide Assortment
Buy other products at the
same time
■ Break Bulk
Buy it in quantities
customers want
■ Hold Inventory
Buy it at a convenient
place when you want it
■ Offer Services
See it before you buy; get
credit; layaway Ryan McVay/Getty Images

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Decision Variables for Retailers CHAPTER 1
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Customer
Service

Store Design Merchandise

and Display Assortment

Retail
Strategy

Pricing Location

Communication
Mix

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Types of Retailers CHAPTER 1
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• Retailers Use Different Retail Mixes

-merchandise: variety (breadth) /
assortment (depth)
-services
-store design, visual merchandising
-location
-pricing
• Infinite Variations
• Some combination of retail mixes
satisfy the needs of significant
segments and persist over time.
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Retailer Characteristics CHAPTER 1
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• Variety (breadth)
• Assortment (depth)
• Services Offered
• Prices and the cost of offering breath and depth of
merchandise and services

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Merchandise Offering CHAPTER 1
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Variety (breadth of merchandise): wide vs. narrow

- The number of merchandise categories

Assortment (depth of merchandise): deep vs. shallow

-the number of items in a category (SKUs)

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Services Offered CHAPTER 1
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• Retailers differ in
the services they
offer customers
• EMS offers assistance
in selecting the
appropriate kayak
and repairing them
VS
• http://www.outdoor
play.com and
• Wal-Mart: doesn’t
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Prices and the cost of offering breath and
depth of merchandise and services
CHAPTER 1
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• Stocking a deep and broad assortment (like EMS) is

costly for retailers.

Many SKUs

Because the retailer must have backup stock for each SKU
in addition to holding the inventory

Inventory Investment Cost

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Types of Merchandise Retailers CHAPTER 1
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Food Retailers General Merchandise Retailers

Department Stores
Specialty Stores
Mom and Pop Stores Discount Stores
Convenience Stores
Supermarkets Category Specialists
Supercenters Off-Price Retailers
Warehouse Clubs
Value Retailers

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Food Retailers CHAPTER 1
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• Channel preference for food shopping channel where

grocery purchasers do most of their food shopping
• Supermarkets
• Supercenters
• Warehouse Clubs
• Convenience Stores

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Supermarkets CHAPTER 1
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• Conventional supermarkets
• 30,000 SKU
• Limited assortment supermarkets
(extreme value food retailers)
• 2000 SKU
• Offer one or two brands and sizes
• Designed to maximize efficiency and
reduce costs
• Offer merchandise at 40-60% lower
prices than conventional supermarkets

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Supercenters and Warehouse Clubs CHAPTER 1
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Supercenters (Hypermarkets) Warehouse Clubs

• The fastest growing retail
category
• Large stores (185,000 square
feet) that combine a supermarket
with a full-line discount store
• One-stop shopping experience
• Offer a limited and irregular
assortment of food and general
merchandise with little service at
low prices
• Use low-locations, inexpensive
store design, little customer
service
• Low inventory holding costs by
carrying a limited assortment of
fast selling items

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Convenience Store CHAPTER 1
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• Tailors assortments to local market

• Makes more convenient to shop
• Offers fresh, healthy food
• Fast, casual restaurants
• Financial services available
• Opening smaller stores closer to consumers (like
airports)

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Three Tiers of Department Stores CHAPTER 1
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• First Tier: Upscale, high fashion

chains with exclusive designer
merchandise and excellent
customer service
• Nordstrom, Neiman Marcus, Saks
• Second Tier: Retailers sell more
modestly priced merchandise with
less customer service
• Macy’s
• Third Tier: Value oriented caters
to more price conscious customer
• JCPenney, Sears, Kohl’s
Rob Melnychuk/Getty Images

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Specialty Store Retailers CHAPTER 1
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McGraw-Hill Companies, Inc./Andrew Resek, Photographer

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Category Specialists CHAPTER 1
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• Deep and Narrow

Assortments
• Destination Stores
• Category killers
• Low Price and Service
• Wholesaling to Business
Customers and Retailing
to Consumers
• Incredible Growth Bass Pro Shops

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Category Specialists CHAPTER 1
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Sephora, France’s leading perfume/

cosmetic chain LVMH’s division

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Off-Price Retailers CHAPTER 1
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• Close-out retailers
• Offer an inconsistent assortment of brand name
merchandise at low prices
• TJX Companies (which operates T.J.Maxx, Marshalls, Winners,
HomeGoods, TKMaxx, AJWright, and HomeSense),
• Ross Stores,
• Burlington Coat Factory,
• Big Lots.
• http://www.Overstock.com and http://www.Bluefly.com

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Services Retailing CHAPTER 1
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• Intangibility
• Problems in Evaluating Service Quality
• Performance of Service Provider
• Simultaneous Production and Delivery
• Importance of Service Provider
• Perishability
• No Inventory, Must Fill Capacity
• Inconsistency of the Offering
• Importance of HR Management
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Examples of Service Retailers CHAPTER 1
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Type of Service Service Retail Firms

Airlines American, Delta, British Airways, Singapore Airways

Automobile maint/repair Jiffy Lube, Midas, AAMCO
Automobile rental Hertz, Avis, Budget, Alamo
Banks Citibank, NCNB, Bank of America
Child care centers Kindercare, Gymboree
Credit cards American Express, VISA, Mastercard
Education University of Florida, Babson College
Entertainment parks Disney, Universal Studios, Six Flags
Express package delivery Federal Express, UPS, US Postal Service
Financial services Merrill Lynch, Dean Witter
Fitness Jazzercise, Bally’s, Gold’s Gym
Health Care Humana, HCA
Home maintenance Chemlawn, MiniMaid, Roto-Rooter

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Merchandise/Service Continuum CHAPTER 1
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Types of Retail Ownership CHAPTER 1
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• Independent, Single
Store Establishments
• Wholesale-sponsored
voluntary group
• Corporate Retail
Chains
• Franchises

(c) Brand X Pictures/PunchStock

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Retailers Using
Franchise Business Model
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Reasons for Franchising Growth CHAPTER 1
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Technological advances

Profitable utilization of capital resources

Attainment of the “American Dream”

Demographic expansion

Product/service consistency
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Reasons for Franchising Failure CHAPTER 1
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Inept management

Fraudulent activities

Market saturation

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Franchisor Positions
in the Marketing Channel
CHAPTER 1
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Manufacturer - retailer

Manufacturer - wholesaler

Wholesaler - retailer

Service sponsor - retailer

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Franchisor Benefits CHAPTER 1
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Continuous market

Market information

Money

Royalty fees

Sales of products

Rental and lease fees

License fees

Management fees
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Franchisee Benefits CHAPTER 1
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Initial Services
• Market survey and site selection, facility design and layout,
lease negotiation advice, financing advice, operating manuals,
management training programs, and employee training.

Continuous Services
• Field supervision, merchandising and promotional materials,
management and employee retraining, quality inspection,
national advertising, centralized purchasing, market data and
guidance, auditing and record keeping, management reports,
and group insurance plans.
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Franchisor Advantages/Disadvantages CHAPTER 1
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Advantages
• Rapid expansion, highly motivated franchisees do a good
job, additional profits by selling franchisees products and
services.
Disadvantages
• Company-owned units may be more profitable, less
control then independent retailers over advertising,
pricing, personnel practices, etc.

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Franchisee Advantages/Disadvantages CHAPTER 1
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Advantages
• Established/proven product/service, business and
technical assistance, and reduction in risk.

Disadvantages
• Loss of control since only semi-independent, franchisee
outlets may compete with corporate-owned outlets, and
high royalties, fees, costs on equipment, supplies,
merchandise, rental/lease rates and mandatory
participation in promotional and support services.
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Franchising Trends
for the New Millennium
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Sustained growth

Enduring plus un-imagined applications

International expansion

Increasing tensions

Greater emphasis on financial returns

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