Chapter 4 Evaluating the Competition in Retailing

1. Chapter 4 Evaluating the Competition in Retailing

2. Models of Retail Competition • The competitive marketplace • Market structure • The demand side of retailing • Nonprice decisions • Competitive actions • Suppliers as partners and competitors

3. The Competitive Marketplace • Retailers compete for target customers on five major fronts: • The price for benefits offered • Service level • Product selection • Location or access • Customer experience LO 1

4. MarketStructure • Economists use four different economic terms to describe the competitive environment in the retailing industry: • Pure Competition – is rare in retailing and occurs when a market has homogeneous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers. • Pure Monopoly – occurs when there is only one seller for a product or service. • Monopolistic Competition – occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products. • Oligopolistic Competition – occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers. LO 1

5. Market Structure • Monopolistic competition • Retailers in monopolistic competition attempt to differentiate themselves with the products or services they offer. • Oligopolistic competition - • Oligopolies are likely to end up selling at a similar price since everybody knows what others are doing. • In rare cases, retailing is characterized as oligopolistic competition. • Oligopolistic competition is more common at a local level, especially in smaller communities. • Outshopping- Occurs when a household travels outside their community of residence or uses the Internet to shop in another community. LO 1

6. The Demand Side of Retailing • In a monopolistically competitive market, the retailer will be confronted with a negatively sloping demand curve. • caused by ―the law of diminishing returns LO 1

7. Nonprice Decisions • Price is the easiest variable for competitors to copy. • Ways of using nonprice variables to achieve a protected niche: • Store positioning - Identifying a well-defined market segment using demographic or lifestyle variables and appealing to this segment with a clearly differentiated approach. • Offering private-label merchandise that has unique features or offers better value than do competitors. • Providing additional benefits for the customer. • Mastering stockkeeping with its basic merchandise assortment. LO 1

8. Competitive Actions • Overstored- Condition in a community where the number of stores in relation to households is so large that to engage in retailing is usually unprofitable or marginally profitable. • Understored - Condition in a community where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor. • Competition is most intense in overstored markets because many retailers are achieving an inadequate return on investment LO 1

9. Suppliers as Partners and Competitors • Suppliers as competitors – Suppliers compete for gross margins throughout the supply chain. The retailer must develop a loyal group of patrons that encourages the supplier to accommodate the needs of its retail partner. • Suppliers as customers– Suppliers can be a critical competitive advantage to retailers when they provide a unique product or promotion. LO 1

10. Types of Competition • Intratype competition - two or more retailers of the same type compete directly with each other for the same households. The most common type of retail competition. • Intertype competition - two or more retailers of a different type compete directly by attempting to sell the same merchandise lines to the same households. • Divertive competition - retailers intercept or divert customers from competing retailers. Can be either in the form of intertype or intratype . Most retailers operate very close to their breakeven point. • Break-even point - Total revenues equal total expenses and the retailer is making neither a profit nor a loss. LO 2

11. Exhibit 4.6 - Retail Institutions in Their Various Stages of the Retail Life Cycle LO 3

12. The Retail Life Cycle • Introduction - Begins with an aggressive, bold entrepreneur who is willing and able to develop a different approach to retailing of certain products. During this stage profits are low, despite increasing sales levels. • Growth - Sales and profits explode. New retailers enter the market and begin to copy the idea. Late in this stage, both market share and profitability approach their maximum levels. • Maturity - Market share stabilizes and profits decline due to: • shift in type of establishment • overexpansion • competition • Decline - A major loss of market share will occur, profits will fall, and the once-promising idea will no longer be needed in the marketplace. LO 3

13. Future Changes in Retail Competition • Nonstoreretailing (e-tailing, direct selling, catalog sales) • New retailing formats • Heightened global competition • Integration of technology • Increasing use of private labels LO 4

14. New Retailing Formats • Off-price retailers - Sell products at a discount but do not carry certain brands on a continuous basis. They carry those brands they can buy from manufacturers at closeout or deep one-time discount prices. Primary examples of off-price retailers—factory outlets and warehouse clubs. • Supercenter - A cavernous combination of supermarket and discount department store carrying more than 80,000 to 100,000 SKUs that allows for one-stop shopping. • Recycled merchandise retailers - Establishments that sell used and reconditioned products; examples include pawn and thrift shops, auction houses, flea markets, and eBay. • Liquidators - These firms purchase the inventory of the existing retailer and run its ‘‘going-out-of-business’’ sale. • Rentals, another form of retailing, has been popular for a limited number of items for decades LO 4

15. Heightened Global Competition • Increasing rate of change • Greater diversity • Creation of new retail formats LO 4

16. Integration of Technology • Technological innovations can be grouped under three main areas: • Supply chain management using new initiatives such as direct store delivery (DSD) and collaborative planning, forecasting, and replenishment (CPFR) systems. • Customer management • Customer satisfaction LO 4

17. Increasing use of Private Labels • Develop a partnership with well-known celebrities, noted experts, and institutional authorities. • Develop a partnership with traditionally higher-end suppliers to bring an exclusive variation on their highly regarded brand name to the market. • Reintroduce products that have strong name recognition but that have fallen from the retail scene. • Brand an entire department or business; not just a product line. LO 4