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Classification

Classification. Organization to track competition. NAICS Codes: 44-45 Retail Trade. 441: Motor Vehicle and Parts Dealers 442: Furniture and Home Furnishing Stores 443: Electronic and Appliance Stores 444: Building Material and Garden Equipment and Supplies Dealers

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Classification

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  1. Classification Organization to track competition

  2. NAICS Codes: 44-45 Retail Trade 441: Motor Vehicle and Parts Dealers 442: Furniture and Home Furnishing Stores 443: Electronic and Appliance Stores 444: Building Material and Garden Equipment and Supplies Dealers 445: Food and Beverage Stores 446: Health and Personal Care Stores 447: Gasoline Stations 448: Clothing and Clothing Accessories Stores 451: Sporting Goods, Hobby, Book, and Musical Stores 452: General Merchandise Stores 453: Miscellaneous Store Retailers 454: Nonstore Retailers

  3. Concentration Ratios • Dominance of retail chains • Shows an decreasing number of establishments… • Within a small number of firms… • Accounting for an increasing proportion of sales in a number of important categories.

  4. The proportion of an industry's assets owned/within a specified number of the largest firms. • In retailing, these resources can be the amount of sales, amount of payroll, number of outlets, or number of employees. • Presented in the Census of Retail Trade for the: • 4 largest firms • 8 largest firms • 20 largest firms • 50 largest firms Concentration Ratios

  5. Vertical Integration in Retailing • Wholesaling functions • Transporting, operating a fleet of distribution vehicles. • Warehousing, no longer using contractual warehouses, building distribution centers. • Manufacturing • Managing the production of private labels • Employing in-house clothing designers, as opposed to “brand managers”

  6. Price Price Retail demand Retail demand Retailer M.R.= Supplier demand Retailer M.R.= Supplier demand Supplier M.R. Quantity Quantity

  7. Avoiding the Successive Markup • Leads to lower retail prices… • And higher quantity sales • Higher retailer gross margins • Caution: Analysis focuses only on gross margins. Fixed costs of providing the functions still must be covered with volume.

  8. Types of Vertical Arrangements • Corporate Systems • Wholesaler Sponsored Voluntary Chains • Retail Sponsored Cooperatives • Franchise Systems

  9. Corporate Channel • Markets vs. hierarchies, make or buy, vertical integration • Retailer becomes a wholesaler, develops distribution centers and transportation system. • Supplier forward integrates into retailing, such as franchisors operating company owned outlets. • Avoids the successive markup problem • lower retail prices • higher volumes • higher profits

  10. For vertical integration to compete effectively • Must operate both sides of “channel” at an efficient scale: retail and wholesale • “Unbalanced throughput” • Inefficiencies emerge • Overcome “dulled incentives” for the “not for profit” side of operation.

  11. Contractual: Cooperative • Coalition at one level in the channel (retailers) pool resources to own and operate the supplying function (wholesaling). • This cooperative level is operated at "not-for-profit" or provides "dividends" to members based on volume. • Avoids the successive markup problem. • Frequently criticized for not being able to manage costs effectively. • Examples: • Affiliated Grocers, Topco • Farmland Industries

  12. Contractual: Franchising • Specified retail format, proven successful with an established trademark. • Lump sum, nonrefundable fee. • Payment of a royalty as a proportion of net sales revenues. • Payment of an advertising royalty (percent of revenues, to be spent by franchisor). • Specified territories, multi-unit operations more prevalent.

  13. Wholesaler sponsored voluntary chains • Independent Grocers Alliance, i.e., IGA Food Stores, Fleming • Ace Hardware • Independently owned stores • Wholesaler coordinates pricing, specials, private labels, and supplier relations. • Efficiently managed supply.

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