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Retail Institutions by Ownership and Store-based

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Chapter Objectives
Identify ways how retail institutions are classified.
Describe retail institutions characterized by ownership. Describe definition of classification by strategy mix. Describe the wheel of retailing, scrambled

merchandising and retail life cycle. Examine characteristics of institutions with store-based strategy mixes. Contrast the service-based retailing with goods-based retailing.

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Classifications of Retailers

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Figure 4-1: A Classification Method for Retail Institutions


I Ownership

II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix


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Forms of Ownership
1. Independent 2. Chain

3. Franchise
4. Leased department 5. Vertical marketing system 6. Consumer cooperative
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1. Independent Retailers
2.2 million independent U.S. retailers Account for one-third of total store sales 70% of independents operated by owners and their families Why so many?

Ease of entry

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Competitive State of Independents


Advantages Flexibility in formats, locations, and strategy Control over investment costs, personnel functions, and strategies Personal image Consistency and independence Strong entrepreneurial leadership
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Disadvantages Lack of bargaining power with suppliers Lack of economies of scale Labor intensive operations less
computerization

Over-dependence on

owner Limited long-run planning


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2. Chain Retailers
Operate multiple outlets under common ownership Engage in some level of centralized or coordinated purchasing and decision making In the U.S., there are roughly 110,000 retail chains operating about 900,000

establishments Give examples


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Competitive State of Chain stores


Advantages
Bargaining power Cost efficiencies Efficiency maintained

Disadvantages
Limited flexibility Higher investment

by computerization, warehouse sharing, and other functions Defined management philosophy Considerable efforts in long-run planning
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costs Complex managerial control Limited independence among personnel

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3. Franchising
Franchise is a contractual agreement between a franchisor and a retail franchisee that allows the franchisee to conduct business under an established name and according to a given pattern

of business Franchisee pays an initial fee and a monthly percentage of gross sales in exchange for the exclusive rights to sell goods and services in an area

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Franchise Formats
Product/ Trademark Business Format franchisee acquires franchisee receives the identity of a assistance: location, franchisor by agreeing quality control, to sell products accounting systems, and/or operate under startup practices, the franchisor name management training franchisee operates common for autonomously restaurants, real 2/3 of retail estate franchising sales
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Franchise licensed in Malaysia


STATUS LOCAL FRANCHISE FOREIGN FRANCHISE TOTAL TOTAL 426 240 666 % 64 36 100

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List of approved Registrations by sector


N0. 1. 2. 3. 4. 5. 6. SECTOR FOOD CLOTHING & ACCESSORIES SERVICE & MAINTENANCE LEARNING CENTRE& NURSERY HEALTH & BEAUTY CARE CONVENIENCE SHOP & SUPERMARKET 7. ICT & ELECTRONICS 8. OTHER BUSINESSES TOTAL TOTAL PERCENTAGE 212 34 73 12 69 11 71 11 65 10 16 3 26 87 619 4 14 100

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Figure 4-5: Business Qualifications Sought by McDonalds for Potential Franchisees


Experience
Growth capability Planning ability Ability to manage finances Full-time commitment
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Financial resources
Strong credit Ideal Franchisee Customer and employee focus Willingness to complete training

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Figure 4-6: Structural Arrangements in Retail Franchising

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Wholesaler-Retailer Structural Franchising Arrangements


Voluntary: A wholesaler sets up a franchise system

and grants franchises to individual retailers Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a wholesaling organization

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Competitive state of franchising


Advantages low capital required acquisition of wellknown names operating/ management skills taught cooperative marketing possible exclusive rights less costly per unit
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Disadvantages over-saturation could occur franchisors may overstate potential contractual confinement agreements may be cancelled or voided royalties are based on sales, not profits
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From the Franchisors Perspective


Benefits national or global presence possible qualifications for franchisee/operations are set and enforced money obtained at delivery royalties represent revenue stream
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Potential Problems potential for harm to reputation lack of uniformity may affect customer loyalty ineffective franchised units may damage resale value, profitability potential limits to franchisor rules

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4. Leased Departments
A leased department is a department in a retail store that is rented to an outside party
The proprietor is responsible for all aspects of its

business and pays a percentage of sales as rent The department store sets operating restrictions to ensure consistency and coordination Examples ?

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Competitive State of Leased Departments for the store


Benefits provides one-stop shopping to customers lessees handle management, Display and reordering Regular store personnel dont have to be involved reduces store costs provides a stream of revenue
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Potential Pitfalls lessees may negate store image procedures may conflict with department store problems may be blamed on department store rather than lessee

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Competitive State of Leased Departments for the lessee


Benefits Stores have steady customers-generate immediate sales Some costs are reduced through shared facilities Image is enhanced by popular stores Potential Pitfalls Inflexibility in the time they open and close the store Goods and service lines are usually restricted If successful, stores may raise rent or not renew leases In store location may not generate the sales expected
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5. Vertical marketing system


A vertical marketing system (VMS) is one in which the main members of a distribution channel, producer, wholesaler, and retailer work together as a unified group in order to meet consumer needs.

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5. Vertical marketing system


In conventional marketing systems, producers, wholesalers, and retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits comes at the expense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are forming vertical marketing systems.

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6. Consumer Cooperatives
Retail firm owned by customer members
EXAMPLES: Koperasi polis

How/why started?

Advantages/Disadvantages

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www.skm.gov.my
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Malaysian Cooperatives
up to 31 December 2010. The total number
of registered co-operatives has increased from 7,215 in 2009 to 8,146 in 2010, an increase of 14.3 per cent with membership of 6.6 million.

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Figure 4-1: A Classification Method for Retail Institutions


I Ownership

II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix


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Retailer Strategy Mix


A strategy mix is the firms particular
combination of: store location operating procedures goods/services offered pricing tactics store atmosphere customer services promotional methods
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Destination Retailer
A destination store is a retail operation that consumers find attractive for particular reasons and are therefore willing to make a special trip solely for the purpose of shopping at that location. Typically, destination stores are unique in certain respects in order to entice shoppers to come to them, even if the distance or location is not convenient.

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Earning Destination Retailer Status


Must be price-oriented and cost

efficient Must be upscale Must be convenient Should offer a dominant assortment Should offer superior customer service Must be innovative or exclusive
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3 key concepts in planning retail strategy mixes


Wheel of retailing 2. Scrambled merchandising 3. Retail life cycle
1.

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Video Wheel of retailing

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Wheel of retailing
A better known theory of retailing wheel of

retailing proposed by Maclcomb McNair says,


1. New retailers often enter the market place with low prices, margins, and status. The low prices are usually the result of some innovative costcutting procedures and soon attract competitors. 2. With the passage of time, these businesses strive to broaden their customer base and increase sales. Their operations and facilities increase and become more expensive.
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Wheel of retailing-contd..
They may move to better up market locations, start carrying higher quality products or add services and ultimately emerge as a high cost price service retailer. 4. By this time newer competitors as low price, low margin, low status emerge and these competitors too follow the same evolutionary process. 5. The wheel keeps on turning and department stories, supermarkets, and mass merchandise went through this cycles.
3.
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Figure 5-1: The Wheel of Retailing

Lessons of the Wheel of Retailing


Do not lose sight of your prime customers price

consciousness Beware of the dangers in upgrading target markets Old segment gets sticker shock and new segment does not accept retailers revised positioning Do not create opening for new cost-conscious retailer to emerge Employ customer benefit costing to weigh the cost and benefits of specific service upgrades Use unbundled pricing to separately charge for select services such as delivery, installation etc.
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Figure 5-2: Retail Strategy Alternatives

Scrambled Merchandising
Scrambled merchandising occurs when a retailer adds goods and services that may be unrelated to each other and to the firms

original business
Scrambled Merchandising increases the intertype competition which is competition between the retailers who sell similar particular merchandise while using different formats, such as discount and department stores.
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Figure 5-3: Scrambled Merchandising by a Shoe Store

Retail Life Cycle Retail institutions pass through


identifiable life stages introduction growth maturity decline

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Figure 5-4: The Retail Life Cycle

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How Retail Institutions Are Evolving


Mergers, diversification, and

downsizing Cost-containment and valuedriven retailing

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Mergers, Diversification, and Downsizing


Mergers: combinations of separately owned firms (e.g., Bank of America and Commerce Bank) Diversification: retailers become active in businesses outside their normal operations (e.g., Yum! Brands)
Downsizing: unprofitable stores are closed or divisions are sold off (e.g., Kmart)

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Methods for Cost Containment


Standardizing procedures, store layouts, store

size, and product offerings Using secondary locations Placing stores in smaller communities Using inexpensive construction materials Using plainer fixtures and displays Buying refurbished equipment Joining cooperative buying and advertising Creatively financing inventories
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Table 5-1: Store-Based Retail Strategy Mixes


Food-Oriented
Convenience store Conventional

General Merchandise
Specialty store Traditional department Full-line discount store Variety store Off-price chain Factory outlet Membership club Flea market
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supermarket Food-based superstore Combination store Box (limited-line) store Warehouse store

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Retailer Strategy Mix


A strategy mix is the firms particular
combination of: store location operating procedures goods/services offered pricing tactics store atmosphere customer services promotional methods
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Convenience Store Strategy Mix


Location: Neighborhood Prices: Average to Above average
Atmosphere and Services: Average

Merchandise: Medium width and low depth of assortment; average quality

Promotion: Moderate

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Conventional Supermarket Strategy Mix


Location: Neighborhood Merchandise: Extensive width and depth of assortment; average quality; manufacturer, private, & generic brands
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Prices: Competitive
Atmosphere and Services: Average Promotion: Heavy use of newspapers, flyers, and coupons
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Food-Based Superstore Strategy Mix


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

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Figure 5-7: Supermarkets Have Come a Long Way

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Combination Store Strategy Mix


Location:
Community shopping center or isolated site

Prices: Competitive
Atmosphere and Services: Average Promotion: Heavy use of newspapers, flyers
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Merchandise: Full assortment plus health and beauty aids and general merchandise

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Box store
Is a retail store that sells a limited assortment of basic grocery items, often, as at a warehouse, displayed in their original cartons in order to lower costs and prices.

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Box Store Strategy Mix


Location: Neighborhood Prices: Very low
Atmosphere and Services: Low

Merchandise: Low width and depth of assortment; few perishables; few national brands

Promotion: Little or none

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Warehouse Store Strategy Mix


Location: Secondary site, often in industrial area
Merchandise: Moderate width and low depth of assortment; emphasis on manufacturer brands bought at discount

Prices: Very low


Atmosphere and Services: Low

Promotion: Little or none

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Specialty store
A store that concentrates on selling one good or service line such as young women's apparel
It usually carries a narrow but deep assortment of the chosen category and tailors the strategy to the given market segment Apparel, personal care , auto supply, home furnishings, electronic books etc

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Specialty Store Strategy Mix


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

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Category killer
A large retail chain store that is dominant in

its product category. This type of store generally offers an extensive selection of merchandise at prices so low that smaller stores cannot compete. Also known as Big Box store

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Traditional Department Store Strategy Mix


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

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Full-Line Discount Store Strategy Mix


Location: Business district, shopping center or isolated store Prices: Competitive
Atmosphere/Services: Slightly below average to average Promotion: Heavy on newspapers; price-oriented; selling
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Merchandise: Extensive width and depth of assortment; average to good quality

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Variety Store Strategy Mix


Location: Business district, shopping center or isolated store
Merchandise: Good width and some depth of assortment; below-average to average quality

Prices: Average Atmosphere/Services: Below average

Promotion: Use of newspapers

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Off price stores


Retail stores offering merchandise at prices less than

other retail stores. They acquire out-of-season products and distressed merchandise from other retailers, including bankruptcies, and from manufacturers having production overruns. Off-price stores can threaten retailers carrying name-brand merchandise at full retail prices.

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Off-Price Chain Strategy Mix


Location: Business district, shopping center or isolated store
Merchandise: Moderate width and poor depth of assortment; average to good quality; low continuity

Prices: Low Atmosphere/Services: Below average


Promotion: Use of newspapers; brands not advertised; limited selling
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Factory Outlet Strategy Mix


Location: Out of the way site or discount mall Prices: Very Low Atmosphere/Services: Very low

Merchandise: Moderate width and poor depth of assortment; low continuity

Promotion: Little

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Membership Club Strategy Mix


Location: Isolated store or secondary site Prices: Very Low Atmosphere/Services: Very low
Promotion: Little; some direct mail
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Merchandise: Moderate width and poor depth of assortment; low continuity

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Flea Market Strategy Mix


Location: Isolated store Prices: Very Low Atmosphere/Services: Very low

Merchandise: Extensive width and poor depth of assortment; low continuity; variable quality

Promotion: Limited

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Thank You

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