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Retail Competition and Strategy

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  1. Retailing MKTG 6211 Retail Competition and Strategy Professor Edward Fox Cox School of Business/SMU

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

  3. Types of Retailers • Type of retailer depends on: • Merchandise • Variety (Breadth) • Assortment (Depth) • Services, rather than merchandise • Service • Pricing • Infinite Variations • “Survival of the Fittest” - Formats must best satisfy needs of significant segment(s) Adapted from Levy and Weitz

  4. Types of Retailers SIC System for Classifying Retailers

  5. Types of Retailers Sales by SIC Category Source: U.S. Department of Commerce, 1998 Census of Retail Trade

  6. Types of Retailers – Merchandise • Variety (Breadth of Merchandise) Examples of broad-line retailers: • Macy’s, Bloomingdales • JCPenney, Sears • Costco, Sam’s Club • Carrefour • Family Dollar, Dollar General • Assortment (Depth of Merchandise) Examples of “Category Killers,” or specialty stores: • PetSmart, Petco • Edwin Watts, Golfsmith • Bed, Bath and Beyond, Linens ‘N Things, Container Store • Sports Authority, Dick’s Sporting Goods, Academy Sports

  7. Types of Retailers – Price • Discount Stores – lower margins, higher volume • Wal-Mart, Target, Meijer • Off-Price Retailers – lower cost merchandise • TJMaxx, Marshall’s, Ross • Factory Outlets – manufacturer outlet for out-of season • Burlington Coat Factory, Off-Fifth, Nordstrom Rack • Entire outlet malls • Warehouse Clubs • Costco, Sam’s Club • Hypermarket • Carrefour Adapted from Levy and Weitz

  8. Types of Retailers – Service • Self-Service – Customer is on his/her own • Food and drug stores (e.g., Kroger, Walgreen’s), some specialty stores (e.g., Office Depot, Barnes & Noble) • Limited Service – Available salesperson • Most department stores (e.g., Macy’s, JCPenney, Neiman Marcus), some specialty stores (e.g., JCPenney, Gap, Kohl’s) • Full Service – Salesperson assists the customer • Some specialty stores (e.g., Zales, Nine West), restaurants Self Service Full Service Retailer Costs Increase with Service!

  9. Retailers of Services Type of ServiceService 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 Adapted from Levy and Weitz

  10. Retailers of Services Type of Service Service Retail Firms Hotels and motels Hyatt, Sheraton, Marriott, Days Inn Income tax preparation H & R Block Insurance Allstate, State Farm Internet access/Elec info. American On-Line, CompuServe Long-distance telephone AT&T, MCI, Sprint Movie theaters AMC, Loews/Sony, Universal Real estate Century 21, Coldwell Banker Restaurants TGI Friday’s, Wendy’s, Pizza Hut Truck rentals U-Haul, Ryder Weight loss Weight Watchers, Jenny Craig Video rental Blockbuster Vision centers Lenscrafter, Pearle Adapted from Levy and Weitz

  11. Focus on General Merchandise Retailers Adapted from Levy and Weitz

  12. Focus on General Merchandise Retailers – Department Stores • Competition from: • Discount Stores on Price • Category Killers on Assortment and Service • Possible Competitive Responses • Lower Costs By Reducing Services • More Sales (by Expansion, Acquisition) • Focus on Strong Categories (e.g., Apparel, Home, Jewelry) • Improve Services • Develop Private Labels, Exclusive Brands A Decline in Mall Shopping Threatens Mall-Based Department Stores! Adapted from Levy and Weitz

  13. Focus on General Merchandise Retailers – Discount Stores Big Three Two – Wal-mart, Target, Kmart • Competition from Category Killers – KB Toys, Best Buy, PetSmart • Possible Competitive Responses: • Continue to Reduce Costs • Add Additional Variety (e.g., Banking, Pharmacy, Health Care) • More Focus on Apparel Because It Offers Higher Margins … Except Wal-Mart, Which is Focusing on Food! Adapted from Levy and Weitz

  14. Strategic Profit Model Overview Net profit x Asset turnover = Return on assets Net profit x Net sales (crossed out) = Net profit Net sales (crossed out) Total assets Total assets Source: Levy and Weitz

  15. Strategic Profit Model Detail Net Sales - Gross margin Cost of goods sold - Net profit Variable expenses Net profit margin + Total expenses Net Sales Fixed expenses Return on assets x Inventory Net sales + Asset turnover Total current assets Accounts receivable + Total assets + Other current assets Fixed assets Source: Levy and Weitz

  16. Strategic Profit ModelRETURN ON ASSETS Return on assets = Net profit margins X Asset turnover = Net profit X Net sales Net sales Total assets = Net profit Total assets Wal-Mart: $ 4,430 = 8.86% $49,996 Tiffany: $ 90 = 8.51% $1,057 Source: Levy and Weitz

  17. Revenue / Margin % PortfolioGENERAL MERCH. DISCOUNT STORES Sales Dollar Volume High Low High Giftware Stationary/ Greeting Cards Jewelry & Watches Handbags/ Accessories Shoes Women's Wear Kitchen/ House-wares Hardware/ Building Supplies Paint & Wallpaper Hosiery Men'sWear Girls’ Wear Boys’ Wear Gross Margin Percentage Pet Supplies Luggage Toys Sporting Goods Books Automotive Magazines Infants’ Ware RTA Furniture Photo Goods CDs & Tapes Consumer Electronics Lawn & Garden Candy Traffic Appliances Tobacco Low

  18. Revenue / Margin % PortfolioGROCERY STORES Sales Dollar Volume High Low High Ice cubes Foils, bags, wraps Spices Milk Pasta Yogurt Teas Ice cream Bread Cat litter Gross Margin Percentage Rices Crackers Cookies Cooking oils Spaghetti sauce Soup Facial tissue Tuna Peanut butter Bleaches Laundry detergent Toilet tissue RTE cereal Low

  19. Revenue / Margin % PortfolioCONVENIENCE STORES Sales Dollar Volume High Low High Hot Bev Frozen Bev Fountain Drinks Ice Other Fast Food Sandwiches-Fresh Sand-wiches-Frozen Candy & Gum Cooked Food Salty Snacks GM Juices Auto Gross Margin Percentage Bottled Water Cook-ies Ice Cream Pckg’d Deli HBC Frozen Food Deli Svcs Soft Drinks Groceries Wine/ Liquor Produce Breads & Cakes Eggs Tobacco Beer Milk Publications Low

  20. “Wheel of Retailing” Retailers Change Over Time in a Predictable Way Source: Levy and Weitz

  21. Retailing and Competitive Advantage • Competitive Advantage - An advantage enjoyed by a given retailer relative to others in the market • General sources of competitive advantage: • Overall cost leadership - can offer best value (i.e., lowest prices) or earn higher margins • Wal-Mart • Differentiation - unique product or service characteristics • Abercrombie and Fitch, Papa Johns, Sewell Automotive • Narrow customer focus (niching) - address wants and needs of particular customer segment(s) • Container Store, Hallmark Adapted from Michael Porter

  22. Competitive Positioning Depends on: • Retailer’s competitive advantage(s) • Needs and wants of target customers • Current perceptions of the retailer

  23. Competitive Positioning – Examples G H C A D E B F Wide Variety; Deep Assortment Value, or Low Price Away from Competitors Service; Ease of Shopping Convenience Against a Competitor User Image

  24. Retail Competition ExampleMARKET FOR WOMENS APPAREL Source: Levy and Weitz

  25. Trends in Retail Competition • Increasing Diversity of Retail Formats • Category killers • Supercenters • Internet Retail • Blurring of Products/Services Across Formats • Pharmacy • Food • Soft goods / apparel • Small Store Formats Make a Comeback • Dollar store format • Hard discounters in Europe • Wal-Mart’s Neighborhood Market format • Increasing Concentration within Formats • Centralization of Decision-Making • Information and Communication Systems • Retailers Go International • Wal-Mart expands outside the US • Retailers spread through Europe and Asia • Multi-Channel Retailing

  26. Trends in Retail – Blurring Formats Various Formats Now Offer: • Pharmacy • Financial Services, Banking • Video Rental • Prepared Foods • Health Care? The Service Aisle, or Perimeter Departments, Are Growing!

  27. Retail CompetitionSHOPPING ACROSS RETAIL FORMATS • Shoppers are much more likely to shop at multiple formats in a given week than to shop at grocery stores alone Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

  28. Retail CompetitionSHOPPING ACROSS RETAIL FORMATS • Category by category, which packaged goods purchases are made in which formats? Packaged Goods Purchases in Retail Formats for Selected Categories Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

  29. Trends in Retail – Consolidation • Discount Stores • Wal-Mart, Target, Kmart • Drug stores • Walgreens, CVS, Eckerd • Office Supply Category Killers • Office Depot, Staples, Office Max Consolidation increases efficiency and lowers costs Source: Levy and Weitz