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AN INTRODUCTION TO RETAILING
The Framework of Retailing
The Impact of Retailing on the Economy
Retail Functions in Distribution - Retailing is the last stage in a channel of distribution—all the businesses
and people involved in the physical movement and transfer of ownership of goods and services from producer
to consumer. A typical distribution channel is shown in Figure 1. Retailers often act as the contact between
manufacturers, wholesalers, and the consumer. Many manufacturers would like to make one basic type of item
and sell their entire inventory to as few buyers as possible, but consumers usually want to choose from a variety
of goods and services and purchase a limited quantity. Retailers collect an assortment from various sources,
buy in large quantity, and sell in small amounts (Ayers & Odegaard, 2018).

Figure 1. Typical Channel of Distribution

Source: Retail Management: A Strategic Approach, 2018, p.27

Another job for retailers is communicating both with customers and with manufacturers and wholesalers.
Shoppers learn about the availability and characteristics of goods and services, store hours, sales, and so on
from retailer ads, salespeople, and displays. Manufacturers and wholesalers are informed by their retailers with
regard to sales forecasts, delivery delays, customer complaints, defective items, inventory turnover, and more.
Many goods and services have been modified due to retailer feedback (Ayers & Odegaard, 2018).
For small suppliers, retailers can provide assistance by transporting, storing, marking, advertising, and pre-
paying for products. Small retailers may need the same type of help from their suppliers. The tasks performed
by retailers affect the percentage of each sales dollar/peso they need to cover costs and profits (Ayers &
Odegaard, 2018).
Retailers also complete transactions with customers. This means having convenient locations, filling orders
promptly and accurately, and processing credit purchases. Some retailers also provide customer services such
as gift wrapping, delivery, and installation. To make themselves even more appealing, many firms now engage
in omnichannel retailing, whereby a retailer sells to consumers through multiple retail formats (points of contact).
Most large retailers operate both physical stores and Web sites to make shopping easier and to accommodate
consumer desires. Some firms provide information and sell to customers through multiple touch points: retail
stores, mail order, Web sites, tablets, smartphones, and a toll-free phone number (Ayers & Odegaard, 2018).
Relationships among retailers and their suppliers - Relationships among retailers and suppliers can be
complex. Because retailers are part of a distribution channel, manufacturers and wholesalers must be
concerned about the caliber of displays, customer service, store hours, and retailers’ reliability as business
partners. Retailers are also major customers of goods and services for resale, store fixtures, computers,
management consulting, and insurance (Ayers & Odegaard, 2018).
These are some issues over which retailers and their suppliers have different priorities: control over the
distribution channel, profit allocation, the number of competing retailers handling suppliers’ products, product
displays, promotion support, payment terms, and operating flexibility. Due to the growth of large chains, retailers
have more power than ever. Unless suppliers know retailer needs, they cannot have good rapport with them;
so long as retailers have a choice of suppliers, they will choose those offering more (Ayers & Odegaard, 2018).
Channel relations tend to be smoothest with exclusive distribution, whereby suppliers make agreements with
one or a few retailers that designate the latter as the only ones in specified geographic areas to carry certain
brands or products. This stimulates both parties to work together to maintain an image, assign shelf space, allot
profits and costs, and advertise. It also usually requires that retailers limit their brand selection in the specified

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product lines; they might have to decline to handle other suppliers’ brands. From the manufacturers’ perspective,
exclusive distribution may limit their long-run total sales (Ayers & Odegaard, 2018).
Channel relations tend to be most volatile with intensive distribution, whereby suppliers sell through as many
retailers as possible. This often maximizes suppliers’ sales and lets retailers offer many brands and product
versions. Competition among retailers selling the same items is high; retailers may use tactics not beneficial to
individual suppliers because they are more concerned about their own results. Retailers may assign little space
to specific brands, set very high prices on them, and not advertise them (Ayers & Odegaard, 2018).
With selective distribution, suppliers sell through a moderate number of retailers. This combines aspects of
exclusive and intensive distribution. Suppliers have higher sales than in exclusive distribution, and retailers carry
some competing brands. It encourages suppliers to provide some marketing support and retailers to give
adequate shelf space (Ayers & Odegaard, 2018).
Retail Functions
Traditional Retail Functions

Catalogues of Function

Different lists or catalogues of retail functions (or “distribution service outputs”) have been proposed to answer
the fundamental question of why retailers exist. The following explanation does not follow any of these
specifically; instead, a list of functions is derived that retailers usually perform in the value chain between
producers and consumers (Zentes, Morschett, & Schramm-Klein, 2017).

Creating an Assortment

One of the benefits a retailer provides in the value chain is goods sorting. This creates value, because
manufacturers typically produce a large quantity of a limited variety of goods, whereas consumers usually
demand only a limited quantity of a wide variety of goods.

Stock keeping unit or SKU is a machine-readable bar code that lets vendors expeditiously scan and track the
movement of inventory. Typically an alphanumeric combination of eight-or-so characters, SKUs may also be
applied to intangible but billable products, such as units of repair time or warranties (Investopedia, 2019).

Retailers use SKUs to track inventory and sales, which can provide analytical data that are beneficial to have
in order to develop relationships with vendors and customers (Hasty, 2018). Typically, SKUs are broken down
into classifications and categories. Many retailers use the next series of numbers in the SKU to group products
together for analysis. For example, 24-03xxx are refrigerators and 24-16xxx are electric ovens. The next
number might be a color indicator; 24-03001x are white refrigerators and 24-03002x are black refrigerators
(Hudson, 2019).

A shoe store might classify shoes based on customer type (men, women, and children), then style (dress or
casual), color, and material. Larger shoe stores break down categories even further, into heel types or season.
With an item’s SKU, a retailer can track inventory sales and inventory through detailed reporting. This
reporting can be shared with vendors to negotiate better terms and dating (Hudson, 2019).

Retailers provide the customer with an assortment of products and services, thereby offering variety. They
offer the customer a selection of products (the merchandise mix or product range), which they preselect from
a very broad array of products offered by existing manufacturers and bring into association with each other.
For example, an average supermarket offers a choice of about 10,000–15,000 items (SKUs) from over 500
different suppliers. Home improvement stores may offer 40,000–60,000 items. Amazon offers millions of
different products in its online shop and on its marketplace. Thus, while manufacturers can specialize in
producing a very limited product range, retailers make a broad product range available for the consumer. This
lets consumers:

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• Choose between different products in a single category (e. g., between different power drills in a home
improvement store); and
• Combine their purchases and buy items across several product categories in the same store (e. g.,
buy a power drill and a screwdriver), fulfilling the increasing need for “one-stop-shopping.”

In a way, creating an assortment is also a marketing function, since it facilitates the consumer’s search
process. For example, instead of selecting between printers from many different manufacturers by searching
for them in different locations, a retailer’s product range helps the consumer manage the product complexity,
choose between preselected printer brands and models and easily compare them in a single store (Zentes,
Morschett, & Schramm-Klein, 2017).

Breaking Bulk

In addition, retailers offer customers different lot sizes than manufacturers usually prefer to ship. To reduce
transportation costs and transaction costs, manufacturers usually have the necessary infrastructure and
systems to ship full truckloads, pallets or at least cases of products, while consumers only want to buy single
packages of a product. Thus, retailers buy products in large quantities, then break down these large shipments
(break bulk) to offer quantities that fit typical consumption patterns.

It is noteworthy that the term for this institution (re-tailor vs. wholesaler in English; commerce de détail vs.
commerce de gros in French; Einzelhandel vs. Großhandel in German) often refers to precisely this function,
relative to the wholesale level (Zentes, Morschett, & Schramm-Klein, 2017).

Bridging Space and Time

Bridging space - Manufacturers usually produce a specific product in a central location, while final
consumption takes places in households across the country. Retailers help carry out this spatial
decentralization by offering products in stores that are close to the customer. Large retailers have broad
market coverage with a network of stores, so the consumer can easily reach one.

The added value retailers provide to this logistical function has drastically increased over time. Initially, the
main advantage conferred was that of an intermediary, meaning the manufacturer’s logistics chain did not
have to extend to every single household, only to a specific retail store. In the past, it was common for stores
to either receive direct deliveries from manufacturers or for small retailers to buy their products at wholesale
markets, which also helped bridge a geographical gap.

However, with retailers setting up their own distribution centers, they now take responsibility for an even larger
part of the journey from the production facility to the consumer. Modern retail logistics concepts even involve
picking up products at manufacturing sites directly, meaning the retailer handles the full function of bridging
space. In the interplay with manufacturers, retailers now often try to obtain logistics leadership.

Furthermore, in recent years, retailers are increasingly going one step further downstream. With the increasing
use of online retailing, retailers manage the delivery of products to individual households (as catalogue
retailers have long done), thereby bridging the final part of the supply chain. Sometimes they do so with their
own truck fleet; sometimes the delivery is still carried out by logistics service providers and merely coordinated
by the retailer.

Bridging time - Consumers want to be able to buy (and consume) products when they wish, while production
is often carried out in batches or at least not immediately before purchase. This temporal gap is overcome by
retailers holding inventory. As a part of the logistics process, retailers stock products in their warehouses and
on their store shelves. This makes products available to the consumer when they want them.

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Here retailers expend a lot of effort on minimizing the inventory in the supply chain while still ensuring products
remain in stock in their stores (Zentes, Morschett, & Schramm-Klein, 2017).

Creating Demand

A further function of retailers is creating demand. This includes market analysis, evaluating and identifying
consumer needs and providing this information to suppliers (or using this information to build adequate
product ranges), etc.

Furthermore, retailers present goods to the consumer in their stores, mostly on shelves but often also in other
display forms. For example, electronic devices such as home cinemas can be tested by the consumer, along
with TVs, speakers, certain lights, and so on. Or clothing collections can be displayed on mannequins. These
measures increase demand and would be difficult for manufacturers to carry out without stores. However,
online shops can also present products to create demand, provide customer-specific advice, and set specific
prices which stimulate the customer to buy products.

Retailers often have knowledgeable salespeople who can give advice to help customers choose. Brick-and-
mortar retailers and online shops both carry out promotional activities and conduct many other activities to
stimulate demand (Zentes, Morschett, & Schramm-Klein, 2017).

Carrying out Transactions

Every purchase transaction involves ordering, pricing, and paying for goods and services. Retailers carry out
these functions and typically reduce costs here through standardization and routines. Products are offered in
a physical or online store for a particular price (including price labels which help avoid price negotiations for
every single purchase). Products are paid for at a (physical or virtual) checkout, where the purchasing contract
is closed and product possession transfers from the retailer to the consumer.

However, full routinization is not always possible. Certain cases still involve intensive negotiations in the
purchasing process (e.g., in car or furniture retailing). Products may need to be tailored to the specific
customer; prices may need to be fixed individually, etc. This is also part of the retail function.

For higher priced non-food items (such as furniture, cars or home appliances), it is also common for
consumers to have the option to pay later or in installments. Providing this option stimulates demand. For a
manufacturer, being far from the consumer can make it difficult to provide this option, as evaluating a
customer’s creditworthiness can be difficult and sometimes costly. Thus, this financing function is often carried
out (or at least coordinated) by the retailer (Zentes, Morschett, & Schramm-Klein, 2017).

Product-related Services

Even though the definition of retailing states that products are resold to the final customer “generally without
transformation,” retailers in certain sectors have long been involved in the final step of the production process,
mainly final assembly. For example, retailers of expensive bicycles often assemble customized bikes for
specific customers, while furniture retailers assemble kitchens in customers’ homes.

While the delivery of goods to households has been discussed as part of the “bridging space” function, the
installation, setup, maintenance, and repair of products are additional functions. Indeed, the provision of such
customer services by retailers is rising drastically. This can be observed, for example, with computer retailers,
who not only deliver the computer to the customer’s home but also physically set it up, configure it, install
software, connect it to peripheral devices and the Internet, transfer data from old computers, and so on.
Another example is home improvement retailers, where the trend has moved from “do it yourself” to “do it for
me,” and retailers now often provide the customer with craftspeople who assemble the product bought at the
retailer. In food retailing, ready-to-cook and ready-to-eat products are prepared by the retailer for takeaway.

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This function, however, still involves products which are bought from a manufacturer and resold by the retailer
to a consumer. The services related to these products are often a means to differentiate the retailer’s offer
from that of a competitor by complementing the product with value-added services (Zentes, Morschett, &
Schramm-Klein, 2017).

Drivers of Retail Change

Globalization
By adding jobs and payrolls, social good also results from globalization through growth in multi-country supply
chains. For supply chain managers, globalization influences range from upstream suppliers to downstream
customers. For smaller manufacturers who export to other countries, their executives must not only ensure that
the production lines are running but also that currency risks are hedged. Changing tariffs and customs
requirements also complicate the process.
The shift to “offshore” sourcing, often to cut material and/or labor costs, provides opportunities for jobs and
investment in developing countries. When this occurs, globalization puts money in people’s pockets, widening
markets for company products. Narayana Murthy echoes these thoughts. Murthy is the retired chairman of
Indian technology services firm, Infosys Technologies Limited. Infosys recently reported sales of $9.5 billion,
194,000 employees, and service delivery in 50 countries.
Murthy reports that the company started on the premise that globalization would make the world “as wired and
open as a trading floor.” The founders’ premise was that this globalization would bring a competitive advantage
to low-cost skilled workers.
He describes how India, in the beginning, was bogged down in a culture of bureaucracy. His startup faced
obstacles like a 2-year delay to buy a computer and two (2) to three (3) years to get a telephone line. His advice
was to pursue fresh ideas with vigor, maintain a meritocracy, and continuously benchmark operations and
products against the best competitors (Ayers & Odegaard, 2018).
Collaboration
The end-to-end process approach leads to the need for collaboration across internal departments and company
boundaries. Few dispute the need for collaboration in improving supply chains. Like flexibility, the term
collaboration can mean different things to different people. Certainly, both companies on either side of a supply
chain link must agree to the form of collaboration.
A big push for collaboration is technology based. To many practitioners, the term collaboration is a code word
for information sharing, which in turn becomes a call for new systems. To meet the need, many supply chain
information software applications have emerged to support collaboration. These products enable the sharing of
production and inventory data, online auctions, market places for buying and selling, and production planning
along the supply chain (Ayers & Odegaard, 2018).

REFERENCES

Ayers, J. B., & Odegaard, M. A. (2018). Retail supply chain management. Boca Raton: CRC Press.

Berman, B., & Evans, J. R. (2018). Retail management: A strategic approach (13th ed.). Harlow: Pearson Education Limited.

Bloomenthal, A. (2019, May 22). How stock keeping units (SKUs) work. Retrieved June 7, 2019, from
https://www.investopedia.com/terms/s/stock-keeping-unit-sku.asp

Hasty, J. (2018, August 30). What is a SKU number and how retailers can use them to boost sales. Retrieved June 7, 2019,
from https://www.shopify.com/retail/what-is-a-sku-number

Hudson, M. (2019, May 23). What is an SKU in retail? Retrieved June 7, 2019 from https://www.thebalancesmb.com/what-
is-a-sku-in-retail-terms-2890158

Zentes, J., Morschett, D., & Schramm-Klein, H. (2017). Strategic retail management: Text and international cases.
Wiesbaden: Springer Gabler.

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