Retailing MKTG 3346

Retail Competition and Strategy
Professor Edward Fox
Cox School of Business/SMU

Retail Competition Overview
q q q q q Types of Retailers and Retail Formats Strategic Profit Model The Wheel of Retailing Competitive Advantage Competitive Positioning
w Low Price w Convenience w Variety / Assortment w Service

Types of Retailers
q Type of retailer depends on:
w Merchandise  Variety (Breadth)  Assortment (Depth)  Services, rather than merchandise w Service w Pricing

q Infinite Variations q “Survival of the Fittest” - Formats must best satisfy needs of significant segment(s)

Adapted from Levy and Weitz

Types of Retailers SIC System for Classifying Retailers

Types of Retailers Sales by SIC Category

Source: U.S. Department of Commerce, 1998 Census of Retail Trade

Types of Retailers – Merchandise
q Variety (Breadth of Merchandise)
Examples of broad-line retailers: w JCPenney, Sears w Costco, Sam’s Club w Carrefour w Family Dollar, Dollar General

q Assortment (Depth of Merchandise)
Examples of “Category Killers,” or specialty stores: w PetSmart, Petco w Edwin Watts w Bed, Bath and Beyond, Container Store

Types of Retailers – Price
q Discount Stores – lower margins, higher volume
w Wal-Mart, Target, Kmart

q Off-Price Retailers – lower cost merchandise
w TJMaxx, Marshall’s

q Factory Outlets – manufacturer outlet for out-of season
w Burlington Coat Factory, Off-Fifth, Nordstrom Rack w Entire outlet malls

q Warehouse Clubs
w Costco, Sam’s Club w Carrefour

Adapted from Levy and Weitz

Types of Retailers – Service
q Self-Service – Customer is on his/her own
w Food and drug stores (e.g., Kroger, Walgreen’s)

q Limited Service – Available salesperson
w Most department stores, some specialty stores (e.g., JCPenney, Gap, Kohl’s)

q Full Service – Salesperson assists the customer
w Some department stores and specialty stores (e.g., Nordstrom, Nine West), restaurants, etc.

Self Service

Full Service

Retailer Costs Increase with Service!

Retailers of Services
Type of Service
Airlines Automobile maint/repair Automobile rental Banks Child care centers Credit cards Education Entertainment parks Financial services Fitness Health Care Home maintenance

Service Retail Firms
American, Delta, British Airways, Singapore Airways Jiffy Lube, Midas, AAMCO Hertz, Avis, Budget, Alamo Citibank, NCNB, Bank of America Kindercare, Gymboree American Express, VISA, Mastercard University of Florida, Babson College Disney, Universal Studios, Six Flags Merrill Lynch, Dean Witter Jazzercise, Bally’s, Gold’s Gym Humana, HCA Chemlawn, MiniMaid, Roto-Rooter
Adapted from Levy and Weitz

Express package delivery Federal Express, UPS, US Postal Service

Retailers of Services
Type of Service
Hotels and motels Income tax preparation Insurance Internet access/Elec info. Long-distance telephone Movie theaters Real estate Restaurants Truck rentals Weight loss Video rental Vision centers

Service Retail Firms
Hyatt, Sheraton, Marriott, Days Inn H & R Block Allstate, State Farm American On-Line, CompuServe AT&T, MCI, Sprint AMC, Loews/Sony, Universal Century 21, Coldwell Banker TGI Friday’s, Wendy’s, Pizza Hut U-Haul, Ryder Weight Watchers, Jenny Craig Blockbuster Lenscrafter, Pearle
Adapted from Levy and Weitz

Focus on General Merchandise Retailers

Adapted from Levy and Weitz

Focus on General Merchandise Retailers – Department Stores
q Competition from:
w Discount Stores on Price w Category Killers on Assortment and Service

q Possible Competitive Responses
w Lower Costs By Reducing Services w More Sales (by Expansion, Acquisition) w Focus on Strong Categories (e.g., Apparel, Home, Jewelry) w Improve Services w Develop Private Labels, Exclusive Brands

A Decline in Mall Shopping Threatens Mall-Based Department Stores!
Adapted from Levy and Weitz

Focus on General Merchandise Retailers – Discount Stores
Big Three – Wal-mart, Target, Kmart q Competition from Category Killers – Toys ‘R Us, Best Buy, PetSmart q Possible Competitive Responses:
w Continue to Reduce Costs w More Focus on Apparel Because It Offers Higher Margins

… Except Wal-Mart, Which is Focusing on Food!

Adapted from Levy and Weitz

Retail Competition Example MARKET FOR WOMENS APPAREL

Source: Levy and Weitz

Strategic Profit Model Overview

Net profit


Asset turnover

= Return on assets

Net profit x Net sales (crossed out)

Net sales (crossed out) = Net profit Total assets Total assets

Source: Levy and Weitz

Strategic Profit Model Detail
Net Sales

Cost of goods sold Variable expenses

Gross margin

Fixed expenses Inventory Total expenses

Net profit

Net Sales

Net profit margin

Net sales
Total current assets

Return on assets

Accounts receivable

Total assets

Asset turnover

Other current assets

Fixed assets

Source: Levy and Weitz

Strategic Profit Model RETURN ON ASSETS
Return on assets turnover = = Wal-Mart: Tiffany: $ 4,430 $49,996 $ 90 $1,057 Net profit Net sales X Net sales Total assets = Net profit margins X Asset

Net profit Total assets = = 8.86% 8.51%

Source: Levy and Weitz

“Wheel of Retailing”

Retailers Change Over Time in a Predictable Way
Source: Levy and Weitz

Retailing and Competitive Advantage

q Competitive Advantage - An advantage enjoyed by a given retailer relative to others in the market q General sources of competitive advantage: w Overall cost leadership - can offer best value (i.e., lowest
prices) or earn higher margins  Wal-Mart

w Differentiation - unique product or service characteristics
 Abercrombie and Fitch, Papa Johns, Sewell Automotive

w Narrow customer focus (niching) - address wants and (niching
needs of particular customer segment(s)  Container Store, Hallmark
Adapted from Michael Porter

Competitive Positioning

Depends on: q Retailer’s competitive advantage(s) q Needs and wants of target customers q Current perceptions of the retailer

Competitive Positioning – Examples

Value, or Low Price Away from Competitors Against a Competitor

Wide Variety; Deep Assortment

Service; Ease of Shopping Convenience

User Image

Trends in Retail Competition
q Increasing Diversity of Retail Formats
w Category killers w Supercenters w Electronic Retailers

q Blurring of Products/Services Across Formats
w Pharmacy w Food w Soft goods / apparel

q Small Store Formats Make a Comeback
w Dollar store format w Hard discounters in Europe w Wal-Mart’s Neighborhood Market format

q Increasing Concentration within Formats
w Centralization of Decision-Making w Information and Communication Systems

q Retailers Go International
w Wal-Mart expands outside the US w Retailers spread through Europe and Asia

q Multi-Channel Retailing

Trends in Retail – Blurring Formats
Various Formats Now Offer: q Pharmacy q Financial Services, Banking q Video Rental q Prepared Foods

The Service Aisle, or Perimeter Departments, Are Growing!

q Shoppers are much more likely to shop at multiple formats in a given week than to shop at grocery stores alone



0% Grocery Only Grocery + Mass Grocery + Drug Grocery + Club

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

q Category by category, which packaged goods purchases are made in which formats?
Packaged Goods Purchases in Retail Formats for Selected Categories
Sales Ranking 1 2 3 4 5 8 11 12 14 20 25 Description REGULAR SOFT DRINKS READY TO EAT CEREAL LOW CALORIE SOFT DRINKS REFRIGERATED SKIM/LOW-FAT MILK SHELF STABLE BREAD CIGARETTES CARTON TOILET TISSUE DISPOSABLE DIAPER/LINER INTERNAL ANALGESICS TABLET DRY CELL BATTERY PAPER TOWELS % Spending % Spending % Spending % Spending in Grocery in Mass in Drug in Club 88.5% 7.7% 2.0% 1.8% 91.3% 4.7% 0.3% 3.8% 88.9% 8.2% 2.1% 0.7% 90.3% 1.5% 3.9% 4.3% 95.3% 3.5% 0.4% 0.8% 31.0% 52.4% 35.8% 36.9% 25.2% 46.4% 36.2% 35.5% 55.8% 29.1% 47.9% 40.1% 10.4% 3.0% 5.9% 27.4% 20.1% 2.0% 22.4% 9.1% 2.5% 6.6% 6.8% 11.4%

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

Trends in Retail – Consolidation
q Discount Stores
w Wal-Mart, Kmart, Target

q Drug stores
w Walgreens, CVS, Eckerd

q Office Supply Category Killers
w Office Depot, Staples, Office Max

Consolidation increases efficiency and lowers costs
Source: Levy and Weitz

Revenue / Margin % Portfolio CONVENIENCE STORES

Sales Dollar Volume



Hot Bev Fountain Drinks

Gross Margin Percentage

Soft Drinks

Tobacco Low


Ice Sandwiches Other SandFast Candy & -Fresh Food wichesGum Cooked Salty GM Juices Food Auto Frozen Snacks Bottled CookIce HBC Cream ies Pckg’dWater Deli Frozen Deli Svcs Food Groceries Wine/ Liquor Produce Breads & Cakes Eggs Milk Publications

Frozen Bev

Revenue / Margin % Portfolio GENERAL MERCH. DISCOUNT STORES

Sales Dollar Volume


High Stationary/ Greeting Cards Shoes Kitchen/ Hardware/ Men's House- Building Wear wares Supplies Toys Automotive Sporting Goods

Giftware Jewelry & Handbags/ Watches Accessories

Women's Wear

Gross Margin Percentage

Hosiery Paint & Girls’ Wallpaper Boys’ Wear Pet Luggage Wear Supplies Books Infants’ Ware Lawn & Garden Photo CDs & Goods Tapes RTA Furniture Magazines

Consumer Electronics Low

Candy Traffic Appliances


Revenue / Margin % Portfolio GROCERY STORES

Sales Dollar Volume


High Milk

Foils, bags, wraps Yogurt

Spices Pasta

Ice cubes


Ice cream

Teas Rices

Cat litter

Gross Margin Percentage

Cookies Soup

Crackers Spaghetti sauce Tuna

Cooking oils Facial tissue Peanut butter Bleaches

Laundry detergent RTE cereal Low

Toilet tissue

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