The wheel of retailing concept

16 Retailing and Wholesaling
LEARNING OBJECTIVES

After reading this chapter you should be able to:

LO 16-1Identify retailers in terms of the utilities they provide.

LO 16-2Explain the alternative ways to classify retail outlets.

LO 16-3Describe the many methods of nonstore retailing.

LO 16-4Classify retailers in terms of the retail positioning matrix, and specify retailing mix actions.

LO 16-5Explain changes in retailing with the wheel of retailing and the retail life cycle concepts.

LO 16-6Describe the types of firms that perform wholesaling activities and their functions.

IF YOU LIKE TO SHOP, YOU WILL LOVE GOOGLE GLASS(ES)!

You’ve shopped in a store. You’ve also shopped online. Now you can enjoy the benefits of both thanks to new technologies such as Google Glass!

Google Glass products resemble a pair of eyeglasses with a small display screen visible to the wearer. Image and voice recognition capabilities identify relevant information to display on the screen. The sound, video, and graphics accessed through the glasses create an augmented reality that overlays the physical, real-world environment being viewed at the same time. When used by shoppers, this technology adds rich content to the shopping experience, improving the purchase decision process. It’s a perfect way to combine the fast, personalized, and customized information consumers enjoy when they shop online with the traditional brick-and-mortar in-store shopping experience!

In addition to the head-worn displays being developed by Google, other companies are developing augmented reality software and apps for smartphones, tablet devices, and 3D projectors. IBM, for example, is developing a mobile app that uses the camera in a smartphone to identify a product and then display information about the product (e.g., price, nutritional value, etc.) based on preferences specified by the consumer. Similarly, a company called Aurasma is developing image and pattern recognition technology to identify real-world objects and then activate interactive animations for consumers to view. Augmented reality technology platforms such as these are being used by Kellogg’s, to provide additional information on 80 million cereal boxes; by Taylor Swift, to support her Wonderstruck fragrance; and by the Rolling Stones, to augment an advertising campaign in 50 cities around the world.

Retailers are excited about the opportunity to enhance the customer experience. IKEA’s new catalog allows consumers to access information, videos, and 3D models through a tablet image recognition app. A Japanese furniture manufacturer is developing an app that allows customers to take a picture of a room in their house and then overlay digital images of furniture items in the photo to simulate the appearance of furniture arrangements before making a purchase. Toshiba offers a similar app that allows customers to see what a television will look like in their home. In addition, clothing retailers are developing augmented reality technology that allows consumers to take pictures of themselves and then superimpose images of clothing in the photo. The convenience of the technology encourages customers to try styles, combinations, and colors they might not take time to actually put on in a brick-and-mortar store.

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Google Glass Video

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Augmented reality has the potential to significantly change the way consumers shop by making the experience faster, more effective, and more enjoyable. According to industry expert Stuart Nugent, “The future of augmented reality lies in offering potential customers much more valuable information about the products they’re viewing.”1

These are just a few examples of the many exciting changes occurring in retailing today. This chapter examines the critical role of retailing in the marketplace and the challenging decisions retailers face as they strive to create value for customers.

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What types of products will consumers buy through catalogs, television, the Internet, or by telephone? In what type of store will consumers look for products they don’t buy directly? How important is the location of the store? Will customers expect services such as alterations, delivery, installation, or repair? What price should be charged for each product? These are difficult and important questions that are an integral part of retailing. In the channel of distribution, retailing is where the customer meets the product. It is through retailing that exchange (a central aspect of marketing) occurs. Retailing includes all activities involved in selling, renting, and providing products and services to ultimate consumers for personal, family, or household use.

THE VALUE OF RETAILING

Retailing is an important marketing activity. Not only do producers and consumers meet through retailing actions, but retailing also creates customer value and has a significant impact on the economy. To consumers, the value of retailing is in the form of utilities provided (see Figure 16–1). Retailing’s economic value is represented by the people employed in retailing as well as by the total amount of money exchanged in retail sales (see Figure 16–2).

LO 16-1Identify retailers in terms of the utilities they provide.

Consumer Utilities Offered by Retailing

The utilities provided by retailers create value for consumers. Time, place, form, and possession utilities are offered by most retailers in varying degrees, but one utility is often emphasized more than others. Look at Figure 16–1 to see how well you can match the retailer with the utility being emphasized in the description.

FIGURE 16–1

Which retailer best provides which utilities?

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FIGURE 16–2

Are you surprised by the relative sales of different types of retailers?

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CarMax Video

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Providing mini banks in supermarkets, as Wells Fargo does, puts the bank’s products and services close to the consumer, providing place utility. By providing financing or leasing and taking used cars as trade-ins, CarMax makes the purchase easier and provides possession utility. Form utility—production or alteration of a product—is offered by Ralph Lauren through its online Create Your Own program, which offers shirts that meet each customer’s specifications. Finding the right sporting equipment during the off-season is the time utility provided by Sports Authority. Many retailers offer a combination of the four basic utilities. Some supermarkets, for example, offer convenient locations (place utility); are open 24 hours a day (time utility); customize purchases in the bakery, deli, and florist (form utility); and allow several payment and credit options (possession utility).

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Carrefour is one of the largest retailers outside the United States.

The Global Economic Impact of Retailing

Retailing is important to the U.S. and global economies. Four of the 40 largest businesses in the United States are retailers (Walmart, Costco, Home Depot, and Target). Walmart’s $469 billion in annual sales in 2012 surpassed the gross domestic product of all but 29 countries for that same year. Walmart, Costco, Home Depot, and Target together have more than 3 million employees—more than the combined populations of Jacksonville, Florida; El Paso, Texas; and Stockton, California.2 Figure 16–2 shows that many types of retailers, including food stores, automobile dealers, and general merchandise outlets, are also significant contributors to the U.S. economy.3

Outside the United States large retailers include Aeon in Japan, Carrefour in France, Metro Group in Germany, and Tesco in Britain.4 In emerging economies such as China and Mexico, a combination of local and global retailers is evolving. Walmart, for example, has more than 6,200 stores outside the United States, including stores in Argentina, Brazil, China, India, Japan, Mexico, and the United Kingdom. Despite the presence of these large retailers, however, most international markets are dominated by local retailers.5

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learning review

16-1.When Ralph Lauren makes shirts to a customer’s exact preferences, what utility is provided?

16-2.Two measures of the impact of retailing in the global economy are _________________ and _________________.

CLASSIFYING RETAIL OUTLETS

For manufacturers, consumers, and the economy, retailing is an important component of marketing that has several variations. Because of the large number of alternative forms of retailing, it is easier to understand the differences among retail institutions by recognizing that outlets can be classified in several ways. First, form of ownership distinguishes retail outlets based on whether independent retailers, corporate chains, or contractual systems own the outlet. Second, level of service is used to describe the degree of service provided to the customer. Three levels of service are provided by self-, limited-, and full-service retailers. Finally, the type of merchandise line describes how many different types of products a store carries and in what assortment. The alternative types of outlets are discussed in greater detail in the following pages. For many consumers today, retail outlets are also evaluated in terms of their environmentally friendly, or green, activities, in addition to their level of service and merchandise line. The Making Responsible Decisions box gives examples of the green activities of several retailers.6

LO 16-2Explain the alternative ways to classify retail outlets.

Form of Ownership

There are three general forms of retail ownership—independent retailer, corporate chain, and contractual systems.

Independent Retailer One of the most common forms of retail ownership is the independent business owned by an individual. Independent retailers account for most of the 1.1 million retail establishments in the United States and include hardware stores, convenience stores, clothing stores, and computer and software stores. In addition, there are 26,700 jewelry stores, 18,500 florists, and 22,100 sporting goods and hobby stores. For the independent retailer, the advantage of this form of ownership is simple: The owner is the boss. For customers, the independent store can offer convenience, personal service, and lifestyle compatibility.7

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Corporate Chain A second form of ownership, the corporate chain, involves multiple outlets under common ownership. Macy’s, Inc., for example, operates 810 Macy’s department stores in 45 states. Macy’s also owns 37 Bloomingdale’s, which compete with other chain stores such as Saks Fifth Avenue and Neiman Marcus.

In a chain operation, centralization in decision making and purchasing is common. Chain stores have advantages in dealing with manufacturers, particularly as the size of the chain grows. A large chain can bargain with a manufacturer to obtain good service or volume discounts on orders. Target’s large volume makes it a strong negotiator with manufacturers of most products. For consumers, the buying power of chains translates into lower prices compared with other types of stores. Consumers also benefit in dealing with chains because there are multiple outlets with similar merchandise and consistent management policies.

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Making Responsible Decisions sustainability
What Color Is Your Retailer? Is It Green?

You might remember when “going green” was an expression used by consumers to describe their purchase and use of environmentally friendly products. Initially, retailers responded by offering products that matched consumers’ new environmental interests. Over time, however, retailers have come to realize that consumers also want to purchase those products from like-minded retailers. Today, many retailers are developing comprehensive and sophisticated business practices that reflect a new focus on social and environmental responsibility.

The U.S. Green Retail Association offers guidance for retailers implementing new practices, and it also provides a third-party certification that recognizes a commitment to “green” values. Some practices are intuitive and simple, such as encouraging the use of reusable shopping bags, installing LED lighting, and using nontoxic cleaning products. Many retailers are even using recyclable materials for credit and gift cards, rather than plastic. Other practices, such as using more economical delivery vehicles to reduce CO2 emissions, using rainwater for landscape maintenance, or finding alternative uses for landfill waste, require a more concerted effort. Very often, however, these environmental initiatives also have financial benefits. When Home Depot switched light displays to CFL and LED light bulbs, painted the roofs of stores white, and installed solar panels, it reduced its energy use by 20 percent.

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Many retailers are also requiring that their suppliers make similar efforts and meet the same standards. When Walmart noticed that some packaging led to waste, it required its toy suppliers to trim one square inch of packaging from their lines and reduce packaging by 3,500 tons. In addition, Walmart is taking these green initiatives overseas. For example, the company is working with the Chinese government to ensure that suppliers from that country comply with Chinese environmental laws and regulations.

Do sustainability practices such as these influence your purchase decisions? The issue is becoming so important that Newsweek now publishes rankings of retailers with the best green practices. Office Depot, Staples, Best Buy, Home Depot, and Walmart were at the top of the most recent list. Are your favorite retailers “green”?

Retailing has become a high-tech business for many large chains. Walmart, for example, has developed a sophisticated inventory management and cost control system that allows rapid price changes for each product in every store. In addition, stores such as Walmart and Target are implementing pioneering new technologies such as radio frequency identification (RFID) tags to improve the quality of information available about products.

Contractual Systems Contractual systems involve independently owned stores that band together to act like a chain. Recall that in Chapter 15, we discussed three kinds of contractual vertical marketing systems: retailer-sponsored cooperatives, wholesaler-sponsored voluntary chains, and franchises (see Figure 15–6). One retailer-sponsored cooperative is Associated Grocers, which consists of neighborhood grocers that all agree with several other independent grocers to buy their goods directly from food manufacturers. In this way, members can take advantage of volume discounts commonly available to chains and also give the impression of being a large chain, which may be viewed more favorably by some consumers. Wholesaler-sponsored voluntary chains such as Independent Grocers Alliance (IGA) try to achieve similar benefits.

In a franchise system, an individual or firm (the franchisee) contracts with a parent company (the franchisor) to set up a business or retail outlet. The franchisor usually assists in selecting the location, setting up the store or facility, advertising, and training personnel. The franchisee usually pays a one-time franchise fee and an annual royalty, usually tied to the franchise’s sales. There are two general types of franchises: business-format franchises, such as McDonald’s, RadioShack, and Subway, and product-distribution franchises, such as a Ford dealership or a Coca-Cola distributor.

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FIGURE 16–3

The top five franchises in the United States vary from hotels to hair salons.

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In business-format franchising, the franchisor provides step-by-step procedures for most aspects of the business and guidelines for the most likely decisions a franchisee will face. In product-distribution franchising, the franchisor provides a few general guidelines and the franchisee is much more independent.

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Subway is a popular business-format franchisor.

Franchising is attractive because it offers an opportunity for people to enter a well-known, established business for which managerial advice is provided. Also, the franchise fee may be less than the cost of setting up an independent business. The International Franchise Association recently reported that there are 757,000 franchised businesses in the United States, which generate $802 billion in annual sales and employ more than 8 million people. Franchising is popular in international markets also: More than half of all U.S. franchisors have operations in other countries. What is one of the fastest-growing franchises? Subway now has 39,447 locations, including 13,549 stores outside the United States.8

Franchise fees paid to the franchisor can range from $15,000 for a Subway franchise to $45,000 for a McDonald’s restaurant franchise. When the fees are combined with other costs such as real estate and equipment, however, the total investment can be much higher. Franchisees also pay an ongoing royalty fee that ranges from 5 percent for a Papa John’s pizza franchise to 30 percent for an H&R Block tax preparation franchise. Figure 16–3 shows the top five franchises, as rated by Entrepreneur magazine, based on factors such as size, financial strength, stability, years in business, and costs. By selling franchises, an organization reduces the cost of expansion but loses some control. A good franchisor, however, will maintain strong control of the outlets in terms of delivery and presentation of merchandise and try to enhance recognition of the franchise name.9

Level of Service

Although most customers have little reason to notice form of ownership differences among retailers, they are typically aware of differences in terms of level of service. In some department stores, such as Loehmann’s, very few services are provided. Some grocery stores, such as the Cub Foods chain, encourage customers to bag their groceries themselves. In contrast, outlets such as Neiman Marcus provide a wide range of customer services, from gift wrapping to wardrobe consultation.

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Redbox provides a service without clerks.

Self-Service Self-service requires that customers perform many functions during the purchase process. Warehouse clubs such as Costco, for example, are usually self-service, with all nonessential customer services eliminated. Many gas stations, supermarkets, and airlines today also have self-service lanes and terminals. Video retailer Redbox has 35,500 kiosks throughout the United States—and operates without a single clerk. New forms of self-service are being developed at convenience stores, fast-food restaurants, and even coffee shops! Shop24 is building self-service, automated convenience stores in 15 countries, including the United States. At Pizza Hut, you can place an order through an iPhone app or on the website. Similarly, there will be more than 2,000 Marley Coffee Automated Cafes in the next two years. In general, the trend is toward retailing experiences that make customers co-creators of the value they receive. Experts estimate that automated sales will reach $1.1 trillion by 2015.10

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Limited Service Limited-service outlets provide some services, such as credit and merchandise return, but not others, such as clothing alterations. General merchandise stores such as Walmart, Kmart, and Target are usually considered limited service outlets. Customers are responsible for most shopping activities, although salespeople are available in departments such as consumer electronics, jewelry, and lawn and garden.

Full Service Full-service retailers, which include most specialty stores and department stores, provide many services to their customers. Neiman Marcus, Nordstrom, and Saks Fifth Avenue, for example, all rely on better service to sell more distinctive, higher-margin goods and to retain their customers. Nordstrom offers a wide variety of services, including on-site alterations and tailoring; free exchanges and easy returns; gift cards; credit cards through Nordstrom Bank; a 7-days-a-week customer service line; a live chat line with beauty, design, and wedding specialists; online shopping with in-store pickup; catalogs; and a four-level loyalty program called Nordstrom Fashion Rewards. Some Nordstrom stores also offer a “Personal Stylist” department, which provides shopping assistants for consumers who need help with style, color, and size selection, as well as a concierge service for assistance with anything else. Nordstrom stores typically have 50 percent more salespeople on the floor than similarly sized stores, and the salespeople are renowned for their professional and personalized attention to customers. Nordstrom also offers e-mail, an RSS (rich site summary) feed, Twitter messages, a blog, a website, and mobile apps to notify customers about fashion trends, new merchandise, and sales. In the next few years, to continue to change its customer service to match its customers’ interests, the company plans to replace cash registers with mobile checkout technology.11

Type of Merchandise Line

Retail outlets also vary by their merchandise lines, the key distinction being the breadth and depth of the items offered to customers (see Figure 16–4). Depth of product line means the store carries a large assortment of each item, such as a shoe store that offers running shoes, dress shoes, and children’s shoes. Breadth of product line refers to the variety of different items a store carries, such as appliances and books.

Depth of Line Stores that carry a considerable assortment (depth) of a related line of items are limited-line stores. Sports Authority sporting goods stores carry considerable depth in sports equipment ranging from weight-lifting accessories to running shoes. Stores that carry tremendous depth in one primary line of merchandise are single-line stores. Victoria’s Secret, a nationwide chain, carries great depth in women’s lingerie. Both limited- and single-line stores are often referred to as specialty outlets.

FIGURE 16–4

Stores vary in terms of the breadth and depth of their merchandise lines.

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Staples is the category killer in office supplies because it dominates the market in that category.

Specialty discount outlets focus on one type of product, such as electronics (Best Buy), office supplies (Staples), or books (Barnes & Noble), at very competitive prices. These outlets are referred to in the trade as category killersbecause they often dominate the market. Best Buy, for example, is the largest consumer electronics retailer with more than 1,400 stores, Staples operates more than 2,000 office supply stores, and Barnes & Noble is the largest book retailer. Interesting trends in this form of retailing include a shift to smaller stores, such as Best Buy Mobile stores, and the use of price matching to compete with online retailers.12

Breadth of Line Stores that carry a broad product line, with limited depth, are referred to as general merchandise stores. For example, large department stores such as Dillard’s, Macy’s, and Neiman Marcus carry a wide range of different types of products but not unusual sizes. The breadth and depth of merchandise lines are important decisions for a retailer. Traditionally, outlets carried related lines of goods. Today, however, scrambled merchandising, offering several unrelated product lines in a single store, is common. For example, the modern drugstore carries food, camera equipment, magazines, paper products, toys, small hardware items, and pharmaceuticals. Supermarkets sell flowers and videos and print photos, in addition to selling groceries.

A form of scrambled merchandising, the hypermarket, has been successful in Europe. Hypermarkets are large stores (often more than 200,000 square feet) based on a simple concept: Offer “everything under one roof,” thus eliminating the need to stop at more than one location. These stores provide variety, quality, and low prices for groceries and general merchandise items. Carrefour, one of the largest retailers in this category, has 1,366 hypermarkets, including 220 in France, 173 in Spain, and 218 in China. The growth of hypermarkets may be slowing in Europe, however, as consumers’ interest in smaller stores and convenient locations has increased. In response, retailers have been cutting prices on food to attract customers and lure them away from competitors. Despite its declining popularity in some parts of the world, the original hypermarket concept is still growing in popularity in many countries; in China, for example, Carrefour, Tesco, and Walmart are expanding the number of stores they operate.13

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Walmart Video

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In the United States, retailers have discovered that shoppers are uncomfortable with the huge size of hypermarkets. In response, they have developed a variation of the hypermarket called the supercenter, which combines a typical merchandise store with a full-size grocery store. Walmart, Kmart, and Target now use this concept at 3,211 Walmart Supercenters, 25 Kmart Supercenters, and more than 250 SuperTarget stores. Due to the increasing popularity of online retailers, however, the large size of these supercenters is no longer a certain advantage; Amazon.com, for example, is able to offer an even larger selection than these huge stores. Also, due to modern supply chain management techniques, smaller retailers are now able to keep shelves stocked without a lot of inventory. As customer interest shifts, retailers are modifying the supercenter concept to accommodate consumers’ interest in smaller, more convenient stores. Walmart, for example, is introducing Walmart Express stores, which will stock only best-selling items, and expanding the number of its grocery stores, Walmart Neighborhood Markets. Figure 16–5 shows the differences between the supercenter and hypermarket concepts.14

FIGURE 16–5

Hypermarkets are popular in Europe, and supercenters are popular in the United States.

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Scrambled merchandising is convenient for consumers because it eliminates the number of stops required in a shopping trip. However, for the retailer this merchandising policy means there is competition between very dissimilar types of retail outlets, or intertype competition. A local bakery may compete with a department store, discount outlet, or even a local gas station. Scrambled merchandising and intertype competition make it more difficult to be a retailer.

learning review

16-3.Centralized decision making and purchasing are an advantage of _______________ ownership.

16-4.What are some examples of new forms of self-service retailers?

16-5.A shop for big men’s clothes carries pants in sizes 40 to 60. Would this be considered a broad or a deep product line?

NONSTORE RETAILING

Most of the retailing examples discussed thus far in the chapter, such as corporate chains, department stores, and limited- and single-line specialty stores, involve store retailing. Many retailing activities today, however, are not limited to sales in a store. Nonstore retailing occurs outside a retail outlet through activities that involve varying levels of customer and retailer involvement. Figure 16–6 shows six forms of nonstore retailing: automatic vending, direct mail and catalogs, television home shopping, online retailing, telemarketing, and direct selling.

LO 16-3Describe the many methods of nonstore retailing.

Automatic Vending

Nonstore retailing includes vending machines, or v-commerce, which make it possible to serve customers when and where stores cannot. Machine maintenance, operating costs, and location leases can add to the cost of the products, so prices in vending machines are often higher than those in stores. About 31 percent of the products sold from vending machines are cold beverages, another 21 percent are candy and snacks, and 5 percent are food. Many new types of products are quickly becoming available in vending machines. Best Buy now uses vending machines to sell mobile phone and computer accessories, digital cameras, flash drives, and other consumer electronics products in airports, hospitals, and businesses. Similarly, HealthyYou Vending manufactures machines designed to distribute healthy drinks, snacks, and entrées in offices, health clubs, hospitals, schools, and colleges. The 5.4 million vending machines currently in use in the United States generate more than $19 billion in annual sales.15

FIGURE 16–6

Many retailing activities do not involve a store. How many forms of nonstore retailing have you used?

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Improved technology is making vending easier to use. Many vending machines now have touchscreens and credit card readers. In addition, some vending machine companies are testing wireless technology to allow consumers to make vending machine purchases using their mobile phones. Wireless technology is also being used by companies to monitor sales; this information is used to schedule trips to restock machines when items are sold out. Another improvement in vending machines is the trend toward “green” machines, which consume less energy by using more efficient compressors, more efficient lighting, and better insulation. Vending machines are popular with consumers; recent consumer satisfaction research indicates that 82 percent of consumers believe purchasing from a vending machine is equal to or superior to a store purchase. For today’s consumers, vending machines represent an extension of brands that are already available in stores, through catalogs, and online.16

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Vending machines offer a variety of products. Which types of products are most common in a vending machine? For the answer, see the text.

Direct Mail and Catalogs

Direct-mail and catalog retailing has been called “the store that comes to the door.” It is attractive for several reasons. First, it can eliminate the cost of a store and clerks. Dell, for example, is one of the largest computer and information technology retailers, and it does not have any stores. Second, direct mail and catalogs improve marketing efficiency through segmentation and targeting, and they create customer value by providing a fast and convenient means of making a purchase. Finally, many catalogs now serve as a tool to encourage consumers to visit a website, a social media page, or even a store. Online retailers such as Zappos, Amazon, and eBay, for example, now offer catalogs. The average U.S. household today receives 24 direct-mail items or catalogs each week. The Direct Marketing Association estimates that direct-mail and catalog retailing creates $642 billion in sales. Direct-mail and catalog retailing is popular outside the United States, also. Furniture retailer IKEA delivered 212 million copies of its catalog in 17 languages to 28 countries last year.17

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IKEA Video

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Specialty catalogs appeal to market niches. They create value by providing a fast and convenient way to shop.

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Several factors have had an impact on direct-mail and catalog retailing in recent years. The influence of large retailers such as IKEA, Crate and Barrel, L.L. Bean, and others has been positive as their marketing activities have increased the number and variety of products consumers purchase through direct mail and catalogs. Higher paper costs and increases in postage rates, the growing interest in do-not-mail legislation, the concern for “green” mailings and catalogs, and the possibility of the U.S. Postal Service reducing delivery to five days, however, have caused direct-mail and catalog retailers to search for ways to provide additional customer value. One approach has been to focus on proven customers rather than prospective customers. Some merchants, such as Williams-Sonoma, reduce mailings to zip codes that have not been profitable. Another successful approach used by many catalog retailers is to send specialty catalogs to market niches identified in their databases. L.L. Bean, for example, has developed an individual catalog for fly-fishing enthusiasts.18

New, creative forms of direct-mail and catalog retailing are also being developed. Sears is investing in social media technologies to make its Wish Book available through smartphones and tablets. In addition, Sears and other retailers are creating digital versions of catalogs, which can be accessed through catalog-aggregating apps such as Google Catalogs. In the future, you will also see merchants using direct mail and catalogs to direct customers to personalized URLs (PURLs), such as www.JohnSmith.offer.com, which are web pages preloaded with information and offerings specific to an individual. To recognize companies that successfully integrate their direct-mail and catalog activities with other marketing activities, Multichannel Merchant magazine evaluates hundreds of entries to select the winners of the Multichannel Merchant Awards in 18 categories. Recent winners might be retailers you already know. They include L.L. Bean, EA Sports (Madden NFL), and Fairytale Brownies.19

Television Home Shopping

Television home shopping is possible when consumers watch a shopping channel on which products are displayed; orders are then placed over the telephone or the Internet. Currently, the three largest programs are QVC, HSN, and ShopNBC. QVC (“quality, value, convenience”) broadcasts live 24 hours each day, 364 days a year, and reaches more than 200 million cable and satellite homes in the United States, United Kingdom, Germany, Japan, and Italy. The company generates sales of $8.3 billion from its 60 million customers by offering more than 1,150 products each week. The television home shopping channels offer apparel, jewelry, cooking, home improvement products, electronics, toys, and even food. Of all these products, the best-selling item ever was a Dell personal computer.20

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Television home shopping programs serve millions of customers each year. See the text to learn how they are attracting new customers.

In the past, television home shopping programs attracted mostly 40- to 60-year-old women. To attract a younger audience, QVC has invited celebrities onto the show. For example, Heidi Klum has been on the show promoting her jewelry collection, and Kim, Khloe, and Kourtney Kardashian have been hosts selling their apparel line. Rapper 50 Cent recently appeared on the show to sell his signature headphones. Broadcasting events such as the Red Carpet Style show at the Four Seasons Hotel in Beverly Hills also helps attract new customers. In addition, QVC supports its television program with retail stores, a website, mobile apps, text alerts, and online chats during programming. Similarly, Home Shopping Network now offers a multiplatform shopping experience. Some experts suggest that television shopping programs are becoming a modem version of door-to-door retailing by combining elements of reality TV programs, talk shows, and infomercials.21

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Marketing inSite

To Score Good Deals, Try Showrooming and Flash Sales!

If you love shopping, particularly for bargains, there are several new shopping techniques available to you. The first is called “showrooming,” which involves going into a retail store to either (1) try on or test products before purchasing them online, or (2) use a mobile device to find the best available price online. Apps such as BuyVia and Price-Check scan barcodes or take pictures and look up comparison prices. Showrooming is estimated to lead to 50 percent of all online sales today!

Another new way to shop is to watch for “flash sales.” Gilt, ideeli, HauteLook, Fab, and NoMoreRack are all examples of shopping sites that send text messages announcing limitedtime offers at very steep discounts. Interested consumers then log on to the website to make a purchase. The sales last for several hours but sometimes sell out in a few minutes!

For some consumers, these new techniques are fun and engaging and make shopping a game. Quick, check your smartphone for price information or the next flash sale now!

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Online Retailing

Online retailing allows consumers to search for, evaluate, and order products through the Internet. For many consumers, the advantages of this form of retailing are the 24-hour access, the ability to comparison shop, in-home privacy, and variety. Early studies of online shoppers indicated that men were initially more likely than women to buy something online. As the number of online households has increased, however, the profile of online shoppers has changed to include all shoppers.

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Shopping “bots” like mysimon.com find the best prices for products specified by consumers. Read the text on the next page to learn more!

Today, traditional and online retailers—“bricks and clicks”—are melding, using experiences from both approaches to create better value and experiences for customers. For example, Walmart (www.walmart.com) offers its Site-to-Store service that allows customers to place an order online and pick it up at a Walmart store or a FedEx location. In addition, Walmart now offers its HomeFree option, which provides free shipping to customers’ homes when they order $45 or more of selected items. The Walmart Mobile app allows shoppers to order products using their smartphones and tablets. Two of the biggest days for online retailing are the Friday after Thanksgiving—Black Friday—and the Monday after Thanksgiving—Cyber Monday—which generated $11.2 billion in total sales and $1.4 billion in online sales, respectively. Online sales account for approximately 5 percent of all retail sales and are expected to reach $327 billion in 2016.22

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Consumers can easily access the Internet in many locations today. How often do you use public Internet access?

Online retail purchases can be the result of several very different approaches. First, consumers can pay dues to become a member of an online discount service such as www.netmarket.com. The service offers thousands of products and hundreds of brand names at very low prices to its subscribers. Another approach to online retailing is to use a shopping “bot” such as www.mysimon.com. This site searches the Internet for a product specified by the consumer and provides a report listing retailers with the best prices. Consumers can also use the Internet to go directly to online malls (www.fashionmall.com), apparel retailers (www.gap.com), bookstores (www.amazon.com), computer manufacturers (www.dell.com), grocery stores (www.peapod.com), music and video stores (www.tower.com), and travel agencies (www.travelocity.com). A final approach to online retailing is the online auction, such as www.ebay.com, where 112 million users “trade practically anything.”23 See the Marketing inSite box for a description of new forms of online and mobile shopping.24

One of the biggest problems online retailers face is that nearly two-thirds of online shoppers make it to “checkout” and then leave the website to compare shipping costs and prices on other sites. Of the shoppers who leave, 70 percent do not return. One way online retailers are addressing this issue is to offer consumers a comparison of competitors’ offerings. At Allbookstores.com, for example, consumers can use a “comparison engine” to compare prices with Amazon.com, Barnesandnoble.com, and as many as 25 other bookstores. Experts suggest that online retailers should think of their websites as dynamic billboards if they are to attract and retain customers, and they should be easy to use, customizable, and facilitate interaction to enhance the online customer experience.25 For example, BMW, Mercedes, and Jaguar encourage website visitors to “build” a vehicle by selecting interior and exterior colors, packages, and options; view the customized virtual car; and then use Facebook, Twitter, or e-mail to share the configuration.

Online retailing is also evolving to include social shopping options, including: intermediaries, such as Groupon and LivingSocial, that match consumers with merchants; marketplaces, such as Google Offer and Storenvy, that provide a self-service advertising site; and aggregators, such as Yipit, that crawl the Web to find deals to list on their own site. Owning a computer isn’t even a necessity for online shoppers; many hotels, bars, libraries, airports, and other public locations offer Internet kiosks. In China, there are 144,000 Internet cafes with over 14 million computers linked to the Internet.26

Telemarketing

Another form of nonstore retailing, called telemarketing, involves using the telephone to interact with and sell directly to consumers. Compared with direct mail, telemarketing is often viewed as a more efficient means of targeting consumers. Insurance companies, brokerage firms, and newspapers have often used this form of retailing as a way to cut costs but still maintain access to their customers. According to the Direct Marketing Association, annual telemarketing sales exceed $332 billion.27

The telemarketing industry has recently gone through dramatic changes as a result of new legislation related to telephone solicitations. Issues such as consumer privacy, industry standards, and ethical guidelines have encouraged discussion among consumers, Congress, the Federal Trade Commission, and businesses. As a result, legislation created the National Do Not Call Registry (www.donotcall.gov) for consumers who do not want to receive telephone calls related to company sales efforts. Currently, there are more than 221 million phone numbers on the registry. Companies that use telemarketing have already adapted by adding compliance software to ensure that numbers on the list are not called.28

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Direct Selling

Direct selling, sometimes called door-to-door retailing, involves direct sales of products and services to consumers through personal interactions and demonstrations in their home or office. A variety of companies, including familiar names such as Avon, Fuller Brush, Mary Kay Cosmetics, and World Book, have created an industry with more than $29 billion in U.S. sales by providing consumers with personalized service and convenience. In the United States, there are more than 15 million direct salespeople working full-time and part-time in a variety of product categories, including wellness, home durables, and personal care.29

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Growth in the direct-selling industry is the result of two trends. First, many direct selling retailers are expanding into markets outside of the United States. Avon, for example, has 6 million sales representatives in 100 countries. More than one-third of Amway’s $11 billion in sales now comes from China. Similarly, other retailers such as Herbalife and Electrolux are rapidly expanding into new markets.30 Direct selling is likely to continue to grow in markets where the lack of effective distribution channels increases the importance of door-to-door convenience and where the lack of consumer knowledge about products and brands increases the need for a person-to-person approach.

The second trend is the growing number of companies that are using direct selling to reach consumers who prefer one-on-one customer service and a social shopping experience rather than online shopping or big discount stores. The Direct Selling Association reports that the number of companies using direct selling is increasing. Pampered Chef, for example, has 60,000 independent sales reps who sell the company’s products at in-home kitchen parties. Interest among potential sales representatives has grown during the recent economic downturn as people seek independence and control of their work activities.31

learning review

16-6.Successful catalog retailers often send ______________ catalogs to ______________ markets identified in their databases.

16-7.How are retailers increasing consumer interest and involvement in online retailing?

16-8.Where are direct selling retail sales growing? Why?

RETAILING STRATEGY

This section describes how a retailer develops and implements a retailing strategy. Research suggests that factors related to market and competitor characteristics may influence strategic choices and that the combination of choices is an important consideration for retailers.32 Figure 16–7 identifies the relationship between strategy, positioning, and the retailing mix.

LO 16-4Classify retailers in terms of the retail positioning matrix, and specify retailing mix actions.

Positioning a Retail Store

The classification alternatives presented in the previous sections help determine one store’s position relative to its competitors. The retail positioning matrix is a matrix developed by the MAC Group, Inc., a management consulting firm.33 This matrix positions retail outlets on two dimensions: breadth of product line and value added. As defined previously, breadth of product line is the range of products sold through each outlet. The second dimension, value added, includes elements such as location (as with 7-Eleven stores), product reliability (as with Holiday Inn or McDonald’s), or prestige (as with Saks Fifth Avenue or Brooks Brothers).

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FIGURE 16–7

Retailing strategy is related to store positioning and the retailing mix. Note the similarity between the retailing mix and the marketing mix.

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The retail positioning matrix in Figure 16–8 shows four possible positions. An organization can be successful in any position, but unique strategies are required within each quadrant. Consider the four retailers shown in the matrix:

1.Bloomingdale’s has high value added and a broad product line. Retailers in this quadrant pay great attention to store design and product lines. Merchandise often has a high margin of profit and is of high quality. The stores in this position typically provide high levels of service.

2.Walmart has low value added and a broad line. Walmart and similar firms typically trade a lower price for increased volume in sales. Retailers in this position focus on price with low service levels and an image of being a place for bargains.

3.Tiffany & Co. has high value added and a narrow line. Retailers of this type typically sell a very restricted range of products that are high in status and quality. Customers are also provided with high levels of service.

4.Payless ShoeSource has low value added and a narrow line. Such retailers are specialty mass merchandisers. Payless ShoeSource, for example, carries athletic shoes at a discount. These outlets appeal to value-conscious consumers. Economies of scale are achieved through centralized advertising, merchandising, buying, and distribution. Stores are usually the same in design, layout, and merchandise; hence they are often referred to as “cookie-cutter” stores.

FIGURE 16–8

Positioning strategies for retailers are based on breadth of product line and value added.

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Retailing Mix

In developing a retailing strategy, managers work with the retailing mix, which includes activities related to managing the store and the merchandise in the store. The retailing mix is similar to the marketing mix and includes retail pricing, store location, retail communication, and merchandise (see Figure 16–7).

Retail Pricing In setting prices for merchandise, retailers must decide on the markup, markdown, and timing for markdowns. As mentioned in Appendix B (following Chapter 14), the markup refers to how much should be added to the cost the retailer paid for a product to reach the final selling price. Retailers decide on the original markup, but by the time the product is sold, they end up with a maintained markup. The original markup is the difference between retailer cost and initial selling price. When products do not sell as quickly as anticipated, their price is reduced. The difference between the final selling price and retailer cost is the maintained markup, which is also called the gross margin.

Discounting a product, or taking a markdown, occurs when the product does not sell at the original price and an adjustment is necessary. Often new models or styles force the price of existing models to be marked down. Discounts may also be used to increase demand for complementary products.34 For example, retailers might take a markdown on the price of cake mix to generate frosting purchases.

The timing of a markdown can be important. Many retailers take a markdown as soon as sales fall off to free up valuable selling space and cash. However, other stores delay markdowns to discourage bargain hunters and maintain an image of quality. There is no clear answer, but retailers must consider how the timing might affect future sales. Research indicates that frequent promotions increase consumers’ ability to remember regular prices.35

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Although most retailers plan markdowns, many retailers use price discounts as part of their regular merchandising policy. Walmart and Home Depot, for example, emphasize consistently low prices and eliminate most markdowns with a strategy often called everyday low pricing (EDLP).36 Because consumers often use price as an indicator of product quality, however, the brand name of the product and the image of the store become important decision factors in these situations.37 Another strategy, everyday fair pricing, is advocated by retailers that may not offer the lowest price but try to create value for customers through service and the total buying experience.38 Consumers often use the prices of benchmark or signpost items, such as a can of Coke, to form an overall impression of a store’s prices.39 In addition, price is the most likely factor to influence consumers’ assessment of merchandise value.40 When store prices are based on rebates, retailers must be careful to avoid negative consumer perceptions if the rebate processing time is long (e.g., six weeks).41

A special issue for retailers trying to keep prices low is shrinkage, or breakage, theft, and fraud by customers and employees. The National Retail Federation estimates that the average retailer loses 1.4 percent of sales to shrinkage each year, totaling approximately $34 billion. Fraudulent returns alone account for close to $9 billion. About 44 percent of retail shrinkage is due to employee theft. Some retailers have noticed an increase in theft and fraud as economic conditions have declined. In general, the issue has increased retailers’ interest in new technical and surveillance techniques designed to detect and reduce shrinkage.42

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At off-price retail stores like TJ. Maxx, prices are low but selection may be unpredictable.

Off-price retailing is a retail pricing practice that is used by retailers such as T.J. Maxx, Burlington Coat Factory, and Ross Stores. Off-price retailing involves selling brand-name merchandise at lower than regular prices. The difference between the off-price retailer and a discount store is that off-price merchandise is bought by the retailer from manufacturers with excess inventory at prices below wholesale prices. The discounter, however, buys at full wholesale prices but takes less of a markup than traditional department stores. Because of this difference in the way merchandise is purchased by the retailer, selection at an off-price retailer is unpredictable, and searching for bargains has become a popular activity for many consumers. “It’s more like a sport than it is like ordinary shopping,” says Christopher Boring of Columbus, Ohio’s Retail Planning Associates.43 Savings to the consumer at off-price retailers are reportedly as high as 70 percent off the prices of a traditional department store.

There are several variations of off-price retailing. One is the warehouse club. These large stores (100,000 to 140,000 square feet) are rather stark outlets that typically lack elaborate displays, customer service, or home delivery. Warehouse clubs require an annual membership fee (ranging from $30 to $100) for the privilege of shopping there. While a typical Walmart stocks 30,000 to 60,000 items, warehouse clubs carry 4,000 to 8,000 items and usually stock just one brand of appliance or food product. Service is minimal, and customers usually pay by cash or check. Customers are attracted by the ultra-low prices and surprise deals on selected merchandise, although several of the clubs have recently started to add ancillary services such as optical shops and pharmacies to differentiate themselves from competitors. The major warehouse clubs in the United States include Walmart’s Sam’s Club, BJ’s Wholesale Club, and Costco’s Warehouse Club. Sales of these off-price retailers have grown to approximately $390 billion annually.44

A second variation is the outlet store. Factory outlets, such as Van Heusen Factory Store, Bass Shoe Outlet, and Gap Factory Store, offer products for 25 to 75 percent off the suggested retail price. Manufacturers use the stores to clear excess merchandise and to reach consumers who focus on value shopping. Retail outlets such as Nordstrom Rack and Off 5th (an outlet for Saks Fifth Avenue) allow retailers to sell excess merchandise and still maintain an image of offering merchandise at full price in their primary store. Increasingly, retailers are offering merchandise made expressly for the outlet division. The recessionary economic climate has increased demand for this type of off-price retailing, and many retailers have responded by opening more outlet stores. For example, Bloomingdale’s recently opened its first outlets. According to Michael Gould, Bloomingdale’s CEO, “Outlets deliver a compelling combination of fashion, quality, and value.”45

A third variation of off-price retailing is offered by single-price, or extreme value, retailers such as Family Dollar, Dollar General, and Dollar Tree. These stores average about 6,000 square feet in size and attract customers who want value and a “corner store” environment rather than a large supercenter experience. Some experts predict extraordinary growth of these types of retailers. Dollar General, for example, already has 10,000 stores in 40 states and plans to open more.46

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Off 5th provides an outlet for excess merchandise from Saks Fifth Avenue.

Store Location A second aspect of the retailing mix involves choosing a location and deciding how many stores to operate. Department stores, which started downtown in most cities, have followed customers to the suburbs, and in recent years more stores have been opened in large regional malls. Most stores today are near several others in one of five settings: the central business district, the regional center, the community shopping center, the strip mall, or the power center.

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The central business district is the oldest retail setting, the community’s downtown area. Until the regional outflow to suburbs, it was the major shopping area, but the suburban population has grown at the expense of the downtown shopping area. Consumers often view central business district shopping as less convenient because of lack of parking, higher crime rates, and exposure to the weather. Many cities such as Louisville, Denver, and San Antonio have implemented plans to revitalize shopping in central business districts by attracting new offices, entertainment, and residents to downtown locations.

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Regional shopping centers consist of 50 to 150 stores that typically attract customers who live or work within a 5- to 10-mile range. These large shopping areas often contain two or three anchor stores, which are well-known national or regional stores such as Sears, Saks Fifth Avenue, and Bloomingdale’s. The largest variation of a regional center in North America is the West Edmonton Mall in Alberta, Canada. This shopping center is a conglomerate of more than 800 stores, the world’s largest indoor amusement park, more than 100 restaurants, a movie complex, and two hotels, all of which attract 30 million visitors each year.47

A more limited approach to retail location is the community shopping center, which typically has one primary store (usually a department store branch) and often about 20 to 40 smaller outlets. Generally, these centers serve a population of consumers who are within a 10- to 20-minute drive.

Not every suburban store is located in a shopping mall. Many neighborhoods have clusters of stores, referred to as a strip mall, to serve people who are within a 5- to 10-minute drive. Gas station, hardware, laundry, grocery, and pharmacy outlets are commonly found in a strip mall. Unlike the larger shopping centers, the composition of these stores is usually unplanned. A variation of the strip mall is called the power center, which is a huge shopping strip with multiple anchor (or national) stores such as Home Depot, Best Buy, or jcpenney. Power centers combine the convenience of location provided by strip malls with the power of national stores. These large strip malls often have two to five anchor stores and contain a supermarket, which brings the shopper to the power center on a weekly basis.48

Retail Communication A retailer’s communication activities can play an important role in positioning a store and creating its image. While the typical elements of communication and promotion are discussed in Chapter 18 on advertising, sales promotion, and public relations, Chapter 19 on social media, and Chapter 20 on personal selling, the message communicated by the many other elements of the retailing mix is also important.

Deciding on the image of a retail outlet is an important retailing mix factor that has been widely recognized and studied since the late 1950s. Pierre Martineau described image as “the way in which the store is defined in the shopper’s mind,” partly by its functional qualities and partly by an aura of psychological attributes.49 In this definition, functional refers to mix elements such as price ranges, store layouts, and breadth and depth of merchandise lines. The psychological attributes are the intangibles such as a sense of belonging, excitement, style, or warmth. Image has been found to include impressions of the corporation that operates the store, the category or type of store, the product categories in the store, the brands in each category, merchandise and service quality, and the marketing activities of the store.50

Closely related to the concept of image is the store’s atmosphere, or ambience. Many retailers believe that sales are affected by layout, color, lighting, music, scent,51 and other elements of the retail environment. This concept leads many retailers to use shopper marketing—the use of displays, coupons, product samples, and other brand communications to influence shopping behavior in a store. Shopper marketing can also influence behavior in an online shopping environment and when shoppers use smartphone apps to identify shopping needs or make purchase decisions.52 In creating the right image and atmosphere, a retail store tries to attract a target audience and fortify beliefs about the store, its products, and the shopping experience in the store. While store image perceptions can exist independently of shopping experiences, consumers’ shopping experiences influence their perceptions of a store.53 In addition, the physical surroundings of the retail environment influence a store’s employees.54

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Using Marketing Dashboards
Why Apple Stores May Be the Best in the United States!

How effective is my retail format compared to other stores? How are my stores performing this year compared to last year? Information related to these questions is often displayed in a marketing dashboard using two measures: (1) sales per square foot and (2) same-store sales growth.

Your Challenge You have been assigned to evaluate the Apple Store retail format. The store’s simple, inviting, and open atmosphere has been the topic of discussion among many retailers. Apple, however, is relatively new to the retailing business, and many experts have been skeptical of the format. To allow an assessment of Apple Stores, use sales per square foot as an indicator of how effectively retail space is used to generate revenue and same-store sales growth to compare the increase in sales of stores that have been open for the same period of time. The calculations for these two indicators are:

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Same-stone sales growth

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Your Findings You decide to collect sales information for Target, Neiman Marcus, Best Buy, Tiffany, and Apple Stores to allow comparisons with other successful retailers. The information you collect allows the calculation of sales per square foot and same-store growth for each store. The results are then easy to compare in the graphs below.

Your Action The results of your investigation indicate that Apple Stores’ sales per square foot are higher than any of the comparison stores at $5,647. In addition, Apple’s same-store growth rate of 41.9 percent is higher than all of the other retailers. You conclude that the elements of Apple’s format are very effective and even indicate that Apple may currently be the best retailer in the United States.

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Merchandise The final element of the retailing mix is the merchandise offering. Managing the breadth and depth of the product line requires retail buyers who are familiar with both the needs of the target market and the alternative products available from the many manufacturers that might be interested in having a product available in the store. A popular approach to managing the assortment of merchandise today is called category management. This approach assigns a manager the responsibility for selecting all products that consumers in a market segment might view as substitutes for each other, with the objective of maximizing sales and profits in the category. For example, a category manager might be responsible for shoes in a department store or paper products in a grocery store. As such, he or she would consider trade deals, order costs, and the between-brand effects of price range changes to determine brand assortment, order quantities, and prices.55

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Retailers have a variety of marketing metrics that can be used to assess the effectiveness of a store or retail format. First, there are measures related to customers such as the number of transactions per customer, the average transaction size per customer, the number of customers per day or per hour, and the average length of a store visit. Second, there are measures related to the stores and the products such as level of inventory, number of returns, inventory turnover, inventory carrying cost, and average number of items per transaction. Finally, there are financial measures, such as gross margin, sales per employee, return on sales, and markdown percentage.56 The two most popular measures for retailers are sales per square foot and same-store sales growth. The Using Marketing Dashboards box on the previous page describes the calculation of these measures for Apple Stores.57

learning review

16-9.What are the two dimensions of the retail positioning matrix?

16-10.How does original markup differ from maintained markup?

16-11.A huge shopping strip mall with multiple anchor stores is a ______________ center.

THE CHANGING NATURE OF RETAILING

Retailing is the most dynamic aspect of a channel of distribution. New types of retailers are always entering the market, searching for a new position that will attract customers. The reason for this continual change is explained by two concepts: the wheel of retailing and the retail life cycle.

LO 16-5Explain changes in retailing with the wheel of retailing and the retail life cycle concepts.

The Wheel of Retailing

The wheel of retailing describes how new forms of retail outlets enter the market.58 Usually they enter as low-status, low-margin stores such as a drive-in hamburger stand with no indoor seating and a limited menu (Figure 16–9, box 1). Gradually these outlets add fixtures and more embellishments to their stores (in-store seating, plants, and chicken sandwiches as well as hamburgers) to increase the attractiveness for customers. With these additions, prices and status rise (box 2). As time passes, these outlets add still more services and their prices and status increase even further (box 3). These retail outlets now face some new form of retail outlet that again appears as a low-status, low-margin operator (box 4), and the wheel of retailing turns as the cycle starts to repeat itself.

When Ray Kroc bought McDonald’s in 1955, it opened shortly before lunch and closed just after dinner, and it offered a limited menu for the two meals without any inside seating for customers. Over time, the wheel of retailing has led to new products and services. In 1975, McDonald’s introduced the Egg McMuffin and turned breakfast into a fast-food meal. Today, McDonald’s offers an extensive menu, including oatmeal and premium coffee, and it provides seating and services such as wireless Internet connections and kid-friendly PlayPlaces. For the future, McDonald’s is testing new food products, including a double-sausage McMuffin, a barbecued pork sandwich, and Spicy Chicken McBites, and new formats, such as in-car touchscreen ordering and table service!59

QR 16-5

Checkers Video

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These changes are leaving room for new forms of outlets such as Checkers Drive-In Restaurants. The Checkers chain opened fast-food stores that offered only basics—burgers, fries, and cola, a drive-thru window, and no inside seating—and now has more than 800stores. The wheel is turning for other outlets, too—Boston Market has added pickup, delivery, and full-service catering to its original restaurant format, and it also provides Boston Market meal solutions through supermarket delis and Boston Market frozen meals in the frozen food sections of groceries. For still others, the wheel has come full circle. Taco Bell is now opening small, limited-offering outlets in gas stations, discount stores, or “wherever a burrito and a mouth might possibly intersect.”60

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FIGURE 16–9

The wheel of retailing describes how retail outlets change over time. Read the text to find out the position of McDonald’s and Checkers on the wheel of retailing.

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Outlets such as Checkers enter the wheel of retailing as low-status, low-margin stores.

The wheel of retailing is also evident in retail outlets outside the restaurant industry. Discount stores were a major new retailing form in the 1960s and priced their products below those of department stores. As prices in discount stores rose in the 1980s, they found themselves overpriced compared with a new form of retail outlet—the warehouse club. Today, off-price retailers and factory outlets are offering prices even lower than warehouse clubs.

The Retail Life Cycle

The process of growth and decline that retail outlets, like products, experience is described by the retail life cycle.61 Figure 16–10 on the next page shows the stages of the retail life cycle and where various forms of retail outlets are currently positioned along its spectrum. Early growth is the stage of emergence of a retail outlet, with a sharp departure from existing competition. Market share rises gradually, although profits may be low because of start-up costs. In the next stage, accelerated development, both market share and profit achieve their greatest growth rates. Usually multiple outlets are established as companies focus on the distribution element of the retailing mix. In this stage, some later competitors may enter. Wendy’s, for example, appeared on the hamburger chain scene almost 20 years after McDonald’s had begun operation. The key goal for the retailer in this stage is to establish a dominant position in the fight for market share.

The battle for market share is usually fought before the maturity stage, and some competitors drop out of the market. In the war among hamburger chains, Jack in the Box, Gino’s Hamburgers, and Burger Chef used to be more dominant outlets. In the maturity stage, new retail forms enter the market (such as Fatburger and In-N-Out Burger in the hamburger chain industry), stores try to maintain their market share, and price discounting occurs.

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FIGURE 16–10

The retail life cycle describes stages of growth and decline for retail outlets.

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The challenge facing retailers is to delay entering the decline stage, in which market share and profit fall rapidly. Specialty apparel retailers, such as the Gap, Limited, Benetton, and Ann Taylor, have noticed a decline in market share after years of growth. To prevent further decline, these retailers will need to find ways of discouraging their customers from moving to low-margin, mass-volume outlets or high-price, high-service boutiques.62

FUTURE CHANGES IN RETAILING

Two exciting trends in retailing—the growth of multichannel retailing and the increasing focus on customer experience management—are likely to lead to many changes for retailers and consumers in the future.

Multichannel Retailing

The retailing formats described previously in this chapter represent an exciting menu of choices for creating customer value in the marketplace. Each format allows retailers to offer unique benefits and meet the particular needs of various customer groups. While each format has many successful applications, retailers in the future are likely to combine many of the formats to offer a broader spectrum of benefits and experiences and to appeal to different segments of consumers.63 These multichannel retailers will utilize and integrate a combination of traditional store formats and nonstore formats such as catalogs, television, home shopping, and online retailing.64 Barnes & Noble, for example, created Barnesandnoble.com to compete with Amazon.com. Similarly, Office Depot has integrated its store, catalog, and Internet operations.

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Marketing Matters customer value
The Multichannel Marketing Multiplier

Multichannel marketing is the blending of different communication and delivery channels that are mutually reinforcing in attracting, retaining, and building relationships with consumers who shop and buy in the traditional marketplace and marketspace. Industry analysts refer to the complementary role of different communication and delivery channels as an influence effect.

Retailers that integrate and leverage their stores, catalogs, and websites have seen a sizable lift in yearly sales recorded from individual customers. Eddie Bauer is a good example. Customers who shop only one of its channels spend $100 to $200 per year. Those who shop in two channels spend $300 to $500 annually. Customers who shop all three channels—store, catalog, and website—spend $800 to $1,000 per year. Moreover, multichannel customers have been found to be three times as profitable as single-channel customers.

jcpenney has seen similar results. The company is a leading multichannel retailer and reports that a jcpenney customer who shops in all three channels—store, catalog, and website—spends four to eight times as much as a customer who shops in only one channel, as shown in the chart.

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Multiple retail channels have often been viewed as alternatives that might cannibalize each other. When the channels are integrated, however, they can offer many opportunities to interact with and create value for a consumer. The various channels become a series of touch points. For example, a consumer might use a mobile app to scan a QR (quick response) code from a catalog, place an order online, pick up the product from the nearest store, call customer service for installation, and provide feedback on the retailer’s social media page. In this way, the channels become complementary. Experts suggest this integration of various retail channels may lead to a new term—omnichannel retailing.

Multichannel retailers also benefit from the synergy of sharing information among the different channel operations. Online retailers have recognized that the Internet often serves as a source of information and a transactional tool rather than a relationship-building medium, and they are working to find ways to complement traditional customer interactions.65 The benefits of multichannel marketing are also apparent in the spending behavior of consumers, as described in the Marketing Matters box.66

Managing the Customer Experience

Department stores are changing to create social retailing experiences. While many of those changes appeal to women and address the way women like to shop, retailers are also paying more attention to men and their shopping behavior. Men have typically been viewed as infrequent “mission shoppers” who go to a store only as a means of obtaining a product as efficiently as possible. Today’s male shoppers, however, are changing their shopping behaviors. According to recent research, 84 percent of men now purchase their own clothes, compared with 65 percent just a few years ago; and 31 percent of grocery shopping is done by men.

To appeal to men, many department stores are creating stand-alone men’s sections that combine clothes, accessories, and gadgets in one place. These new sections use “masculine” interior designs with simple colors, stainless-steel fixtures, and dark wood floors, and they often offer a dedicated lounge area with leather couches and possibly amenities such as a bar or a shoeshine station. Meanwhile, grocery stores are trying gender-neutral packaging and displays, while some chains such as Target and Walmart are considering launching “man aisles.”

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All of these changes are intended to create a better experience for male shoppers. As Jack Hruska, executive vice president at Bloomingdale’s, explains, “We hope to make men feel more comfortable and at home by giving them a place to unwind while they are shopping.”67

learning review

16-12.Using the wheel of retailing, describe the characteristics of a new retail form that has just entered the market.

16-13.Market share is usually fought out before the stage of the ______________ retail life cycle.

16-14.What is an influence effect?

WHOLESALING

Many retailers depend on intermediaries that engage in wholesaling activities—selling products and services for the purposes of resale or business use. There are several types of intermediaries, including wholesalers and agents (described briefly in Chapter 15), as well as manufacturers’ sales offices, which are important to understand as part of the retailing process.

LO 16-6Describe the types of firms that perform wholesaling activities and their functions.

Merchant Wholesalers

Merchant wholesalers are independently owned firms that take title to the merchandise they handle. They go by various names, including industrial distributor. Most firms engaged in wholesaling activities are merchant wholesalers.

Merchant wholesalers are classified as either full-service or limited-service wholesalers, depending on the number of functions performed. Two major types of full-service wholesalers exist. General merchandise (or full-line) wholesalers carry a broad assortment of merchandise and perform all channel functions. This type of wholesaler is most prevalent in the hardware, drug, and clothing industries. However, these wholesalers do not maintain much depth of assortment within specific product lines. Specialty merchandise (or limited-line) wholesalers offer a relatively narrow range of products but have an extensive assortment within the product lines carried. They perform all channel functions and are found in the health foods, automotive parts, and seafood industries.

Four major types of limited-service wholesalers exist. Rack jobbers furnish the racks or shelves that display merchandise in retail stores, perform all channel functions, and sell on consignment to retailers, which means they retain the title to the products displayed and bill retailers only for the merchandise sold. Familiar products such as hosiery, toys, housewares, and health and beauty items are sold by rack jobbers. Cash and carry wholesalers take title to merchandise but sell only to buyers who call on them, pay cash for merchandise, and furnish their own transportation for merchandise. They carry a limited product assortment and do not make deliveries, extend credit, or supply market information. This type of wholesaler is common in electric supplies, office supplies, hardware products, and groceries.

Drop shippers, or desk jobbers, are wholesalers that own the merchandise they sell but do not physically handle, stock, or deliver it. They simply solicit orders from retailers and other wholesalers and have the merchandise shipped directly from a producer to a buyer. Drop shippers are used for bulky products such as coal, lumber, and chemicals, which are sold in extremely large quantities. Truck jobbers are small wholesalers that have a small warehouse from which they stock their trucks for distribution to retailers. They usually handle limited assortments of fast-moving or perishable items that are sold for cash directly from trucks in their original packages. Truck jobbers handle products such as bakery items, dairy products, and meat.

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Agents and Brokers

Unlike merchant wholesalers, agents and brokers do not take title to merchandise and typically perform fewer channel functions. They make their profit from commissions or fees paid for their services, whereas merchant wholesalers make their profit from the sale of the merchandise they own.

Manufacturer’s agents and selling agents are the two major types of agents used by producers. Manufacturer’s agents, or manufacturer’s representatives, work for several producers and carry noncompetitive, complementary merchandise in an exclusive territory. Manufacturer’s agents act as a producer’s sales arm in a territory and are principally responsible for the transactional channel functions, primarily selling. They are used extensively in the automotive supply, footwear, and fabricated steel industries. The Manufacturers’ Agents National Association (MANA) facilitates the process of matching manufacturer’s representatives with logical products and companies.

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By comparison, selling agents represent a single producer and are responsible for the entire marketing function of that producer. They design promotional plans, set prices, determine distribution policies, and make recommendations on product strategy. Selling agents are used by small producers in the textile, apparel, food, and home furnishing industries.

Brokers are independent firms or individuals whose principal function is to bring buyers and sellers together to make sales. Brokers, unlike agents, usually have no continuous relationship with the buyer or seller but negotiate a contract between two parties and then move on to another task. Brokers are used extensively by producers of seasonal products (such as fruits and vegetables) and in the real estate industry.

A unique broker that acts in many ways like a manufacturer’s agent is a food broker, representing buyers and sellers in the grocery industry. Food brokers differ from conventional brokers because they act on behalf of producers on a permanent basis and receive a commission for their services. For example, Nabisco uses food brokers to sell its candies, margarine, and Planters peanuts, but it sells its line of cookies and crackers directly to retail stores.

Manufacturer’s Branches and Offices

Unlike merchant wholesalers, agents, and brokers, manufacturer’s branches and sales offices are wholly owned extensions of the producer that perform wholesaling activities. Producers assume wholesaling functions when there are no intermediaries to perform these activities, customers are few in number and geographically concentrated, or orders are large or require significant attention. A manufacturer’s branch office carries a producer’s inventory and performs the functions of a full-service wholesaler. A manufacturer’s sales office does not carry inventory, typically performs only a sales function, and serves as an alternative to agents and brokers.

learning review

16-15.What is the difference between merchant wholesalers and agents?

16-16.Under what circumstances do producers assume wholesaling functions?

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LEARNING OBJECTIVES REVIEW

LO 16-1Identify retailers in terms of the utilities they provide.

Retailers provide time, place, form, and possession utilities. Time utility is provided by stores with convenient time-of-day (e.g., open 24 hours) or time-of-year (e.g., seasonal sports equipment available all year) availability. Place utility is provided by the number and location of the stores. Possession utility is provided by making a purchase possible (e.g., financing) or easier (e.g., delivery). Form utility is provided by producing or altering a product to meet the customer’s specifications (e.g., custom-made shirts).

LO 16-2Explain the alternative ways to classify retail outlets.

Retail outlets can be classified by their form of ownership, level of service, and type of merchandise line. The forms of ownership include independent retailers, corporate chains, and contractual systems that include retailer-sponsored cooperatives, wholesaler-sponsored voluntary chains, and franchises. The levels of service include self-service, limited-service, and full-service outlets. Stores classified by their merchandise line include stores with depth, such as sporting goods specialty stores, and stores with breadth, such as large department stores.

LO 16-3Describe the many methods of nonstore retailing.

Nonstore retailing includes automatic vending, direct mail and catalogs, television home shopping, online retailing, telemarketing, and direct selling. The methods of nonstore retailing vary by the level of involvement of the retailer and the level of involvement of the customer. Vending, for example, has low involvement, whereas both the consumer and the retailer have high involvement in direct selling.

LO 16-4Classify retailers in terms of the retail positioning matrix, and specify retailing mix actions.

The retail positioning matrix positions retail outlets on two dimensions: breadth of product line and value added. There are four possible positions in the matrix—broad product line/low value added (Walmart), narrow product line/low value added (Payless ShoeSource), broad product line/high value added (Bloomingdale’s), and narrow product line/high value added (Tiffany & Co.). Retailing mix actions are used to manage a retail store and the merchandise in a store. The mix variables include pricing, store location, communication activities, and merchandise. Two common forms of assessment for retailers are sales per square foot and same-store growth.

LO 16-5Explain changes in retailing with the wheel of retailing and the retail life cycle concepts.

The wheel of retailing concept explains how retail outlets typically enter the market as low-status, low-margin stores. Over time, stores gradually add new products and services, increasing their prices, status, and margins, and leaving an opening for new low-status, low-margin stores. The retail life cycle describes the process of growth and decline for retail outlets through four stages: early growth, accelerated development, maturity, and decline.

LO 16-6Describe the types of firms that perform wholesaling activities and their functions.

There are three types of firms that perform wholesaling functions. First, merchant wholesalers are independently owned and take title to merchandise. They include general merchandise wholesalers, specialty merchandise wholesalers, rack jobbers, cash and carry wholesalers, drop shippers, and truck jobbers. Merchant wholesalers can perform a variety of channel functions. Second, agents and brokers do not take title to merchandise and primarily perform marketing functions. Finally, manufacturer’s branches, which may carry inventory, and sales offices, which perform sales functions, are wholly owned by the producer.

FOCUSING ON KEY TERMS

breadth of product line

brokers

category management

central business district

community shopping center

depth of product line

form of ownership

hypermarket

intertype competition

level of service

manufacturer’s agents

merchandise line

merchant wholesalers

multichannel retailers

off-price retailing

power center

regional shopping centers

retail life cycle

retail positioning matrix

retailing

retailing mix

scrambled merchandising

shopper marketing

strip mall

telemarketing

wheel of retailing

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APPLYING MARKETING KNOWLEDGE

1Discuss the impact of the growing number of dual-income households on (a) nonstore retailing and (b) the retail mix.

2How does value added affect a store’s competitive position?

3In retail pricing, retailers often have a maintained markup. Explain how this maintained markup differs from original markup and why it is so important.

4What are the similarities and differences between the product and retail life cycles?

5How would you classify Walmart in terms of its position on the wheel of retailing versus that of an off-price retailer?

6Develop a chart to highlight the role of each of the four main elements of the retailing mix across the four stages of the retail life cycle.

7Refer to Figure 16–8 and review the position of Payless ShoeSource on the retail positioning matrix. What strategies should Payless ShoeSource follow to move itself into the same position as Tiffany & Co.?

8Breadth and depth are two important components in distinguishing among types of retailers. Discuss the breadth and depth implications of the following retailers discussed in this chapter: (a) Nordstrom, (b) Walmart, (c) L.L. Bean, and (d) Best Buy.

9According to the wheel of retailing and the retail life cycle, what will happen to factory outlet stores?

10The text discusses the development of online retailing in the United States. How does the development of this retailing form agree with the implications of the retail life cycle?

11Comment on this statement: “The only distinction among merchant wholesalers and agents and brokers is that merchant wholesalers take title to the products they sell.”

BUILDING YOUR MARKETING PLAN

Does your marketing plan involve using retailers? If the answer is “no,” read no further and do not include a retailing element in your plan. If the answer is “yes”:

1Use Figure 16–8 to develop your retailing strategy by (a) selecting a position in the retail positioning matrix and (b) specifying the details of the retailing mix.

2Develop a positioning statement describing the breadth of the product line (broad versus narrow) and value added (low versus high).

3Describe an appropriate combination of retail pricing, store location, retail communication, and merchandise assortment.

4Confirm that the wholesalers needed to support your retailing strategy are consistent with the channels and intermediaries you selected in Chapter 15.

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VIDEO CASE 16

Mall of America®: Shopping and a Whole Lot More

QR 16-6

Mall of America Video Case

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“If you build it, they will come” not only worked in the movie Field of Dreams but also applies—big time—to Mall of America®.

Located in a suburb of Minneapolis, Mall of America (www.mallofamerica.com) is the largest completely enclosed retail and family-entertainment complex in the United States. “We’re more than a mall, we’re a destination,” explains Maureen Cahill, executive vice president at Mall of America. More than 100,000 people each day—40 million visitors each year—visit the one-stop complex offering retail shopping, guest services, convenience, a huge variety of entertainment, and fun for all. “Guest services” include everything from high school classrooms to a wedding chapel.

THE CONCEPT AND CHALLENGE

The idea for Mall of America came from the West Edmonton Mall in Alberta, Canada. The Ghermezian Brothers, who developed that mall, sought to create a unique mall that would attract not only local families but also tourists from the Upper Midwest, the nation, and even from abroad.

The two challenges for Mall of America: How can it (1) attract and keep the large number of retail establishments needed to (2) continue to attract even more millions of visitors than today? A big part of the answer is in Mall of America’s positioning—“A place for fun!”

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THE STAGGERING SIZE AND OFFERINGS

Opened August 1992 amid tremendous worldwide publicity, Mall of America faced skeptics who had their doubts because of its size, its unique retail-entertainment mix, and the nationwide recession. Despite these concerns, the mall opened with more than 80 percent of its space leased and attracted more than 1 million visitors its first week.

Mall of America is 4.2 million square feet, the equivalent of 88 football fields. This makes it three to four times the size of most other regional malls. It includes four anchor department stores: Nordstrom, Macy’s, Bloomingdale’s, and Sears. It also includes more than 520 specialty stores, from Armani Exchange to DSW (Designer Shoe Warehouse). Approximately 36 percent of Mall of America’s space is devoted to anchors and 64 percent to specialty stores. This makes the space allocation the reverse of most regional malls.

The retail-entertainment mix of Mall of America is incredibly diverse. For example, there are more than 165 apparel and accessory stores, 14 jewelry stores, and 26 shoe stores. Two food courts with 27 restaurants, plus more than 20 other restaurants scattered throughout the building, meet most food preferences of visitors. Another surprise: Mall of America is home to many “concept stores,” where retailers introduce a new type of store or design. In addition, it has an entrepreneurial program for people with an innovative retail idea and limited resources. They can open a kiosk, wall unit, or small store for a specified time period or as a temporary seasonal tenant.

Unique features of Mall of America include:

•Nickelodeon Universe®, a seven-acre theme park with more than 30 attractions and rides, including a roller coaster, Ferris wheel, and games in a glass-enclosed, skylighted area with more than 400 trees.

•Sea Life® Minnesota aquarium, where visitors are surrounded by sharks, stingrays, and sea turtles; can adventure among fish native to the north woods; and can discover what lurks at the bottom of the Mississippi River.

•Entertainment choices that include a 14-screen theater, A.C.E.S. Flight Simulation, the Amazing Mirror Maze, and Moose Mountain Adventure Golf.

•The House of Comedy, featuring comedians from Last Comic Standing, Saturday Night Live, and Just for Laughs.

As a host to corporate events and private parties, Mall of America has a rotunda that opens to all four floors, facilitating presentations, demonstrations, and exhibits. Organizations such as PepsiCo, Visa USA, and Ford have used the facilities to gain shopper awareness. Mall of America is a rectangle with the anchor department stores at the corners and an amusement park in the skylighted central area, making it easy for shoppers to understand and navigate. It has 12,550 free parking ramp spaces on-site and another 7,000 spaces nearby during peak times.

THE MARKET

The Minneapolis–St. Paul metropolitan area is a market with more than 3 million people. A total of 30 million people live within a day’s drive of Mall of America. A survey of its shoppers showed that 32 percent of the shoppers travel 150 miles or more and account for more than 50 percent of the sales revenues. Located three miles from the Minneapolis/St. Paul International Airport, Mall of America has a light-rail service from the airport and downtown Minneapolis available.

Tourism accounts for 4 out of 10 visits to Mall of America. About 6 percent of visitors come from outside the United States. Some come just to see and experience Mall of America, while others take advantage of the cost savings available on goods (Japan) or taxes (Canada and states with sales taxes on clothing).