Chapter 4 Evaluating the Competition in Retailing Retailing, 6 th Edition. Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives 1.Explain the various models of retail competition. 2.Distinguish between various types of retail competition. 3.Describe the four theories used to explain the evolution of retail competition. 4.Describe the changes that could effect retail competition.

Models of Retail Competition The Competitive Marketplace Market Structure The Demand Side of Retailing Nonprice Decisions Competitive Actions Suppliers as Partners and Competitors LO 1

Models of Retail Competition High-profit retailers want to develop strategic plans that provide a differential advantage that competitors can overcome only with a substantial investment of time and money. LO 1

The Competitive Marketplace Retailers compete on 5 major fronts: The price for benefits offered Service level Product selection Location or access: the overall convenience of the retailer Customer experience LO 1

The Competitive Marketplace Retailers that study and respond to the local retail competition will be more profitable when they understand how and when to adapt to national trends, which don’t always affect every market in the same way. LO 1

Market Structure Pure Competition: Occurs when a market has homogenous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers. LO 1

Market Structure Pure Monopoly: Occurs when there is only one seller for a product or service. LO 1

Market Structure Monopolistic Competition: Occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products. LO 1

Market Structure Oligopolistic Competition: Occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers. LO 1

Market Structure Outshopping: Occurs when individuals in one community travel usually to a larger community to shop. LO 1

Demand as a Function of Price Exhibit 4.1LO 1

The Relationship of Price Versus Nonprice Actions and Demand Curve Price Quantity Price Quantity Pricing Actions move the consumer up and down the current demand curve Non-price Actions seek to shift the demand curve to the right and make it more inelastic LO 1

Nonprice Decisions Retailers that are able to remove themselves from price competition by differentiating themselves in some other way will achieve higher profits than those that fail to do this. LO 1

Nonprice Decisions Store Positioning: Is when a retailer identifies a well-defined market segment using demographic or lifestyle variables and appeals to this segment with a clearly differentiated approach. LO 1

Nonprice Decisions The retailer can offer private label merchandise that has unique features or offers better value than competitors. The retailer could provide other benefits to the customer. LO 1

Some Private Labels of Major Retailers Exhibit 4.2LO 1

Nonprice Decisions The retailer could master stockkeeping with its basic merchandise assortment. LO 1

Nonprice Decisions A variation is to become a “destination” store for certain products. LO 1

Competitive Actions Competitive activity can be examined by the number of retail establishments of a given type per thousand households. LO 1

Competitive Actions Overstored: Is a condition in a community where the number of stores in relation to households is so large that to engage in retailing is usually unprofitable or marginally profitable. LO 1

Competitive Actions Understored: Is a condition in a community where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor. LO 1

Suppliers as Partners and Competitors A retailer’s suppliers should be considered both partners and competitors for the customer’s dollar. LO 1

Types of Competition Intratype and Intertype Competition Divertive Competition LO 2

Types of Competition Intratype Competition: Occurs when two or more retailers of the same type, as defined by NAICS codes in the Census of Retail Trade, compete directly with each other for the same households. LO 2

Types of Competition Intertype Competition: Occurs when two or more retailers of a different type, as defined by NAICS codes in the Census of Retail Trade, compete directly by attempting to sell the same merchandise lines to the same households. LO 2

Intratype and Intertype Competition Intratype competition for books. LO 2

Intratype and Intertype Competition Intertype competition for video rentals. LO 2

Intratype and Intertype Competition Intratype Competition Intertype Competition Albertson’s Supermarket Safeway Supermarket McDonald’s Supermarkets offering Home Meal Replacements (HMR) compete with fast-food restaurants LO 2

Types of Competition Divertive Competition: Occurs when retailers intercept or divert customers from competing retailers. LO 2

Types of Competition Break-even Point: Is where total revenues equal total expenses and the retailer is making neither a profit nor a loss. LO 2

Evolution of Retail Competition The Wheel of Retailing Retail Life Cycle Resource-Advantage Theory LO 3

Evolution of Retail Competition The Wheel of Retailing Theory: Describes how new types of retailers enter the market as low-status, low-margin, low-price operators; however, as they meet with success, these new retailers gradually acquire more sophisticated and elaborate facilities, and thus become vulnerable to new types of low-margin retail competitors who progress through the same pattern. LO 3

Wheel of Retailing Exhibit 4.3LO 3

The Retail Accordion Retail Accordion: Describes how retail institutions evolve from outlets that offer wide assortments to specialized stores and continue repeatedly through the pattern. LO 3

The Retail Accordion Wide Assortment Narrow Assortment Time LO 3

The Retail Life Cycle Retail Life Cycle: Describes four distinct stages that a retail institution progresses through: Introduction Growth Maturity Decline LO 3

The Retail Life Cycle Introduction: Begins with an aggressive, bold entrepreneur who is willing and able to develop a different approach to retailing of certain products. During this stage profits are low, despite increasing sales levels. LO 3

The Retail Life Cycle Growth: Sales and profits explode. New retailers enter the market and begin to copy the retailers idea. Late in this stage both market share and profitability approach their maximum levels. LO 3

The Retail Life Cycle Maturity: Market share stabilizes and profits decline. Shift in type of establishment Overexpansion Competition LO 3

The Retail Life Cycle Decline: The once promising idea is no longer needed in the marketplace. As a result, market share and profits fall. LO 3

Retail Institutions in the Various Stages of the Retail Life Cycle Exhibit 4.4LO 3

Resource-Advantage Theory Resource-advantage theory Is based on the idea that all firms seek superior performance in an ever-changing environment. LO 3

Resource-Advantage Theory Superior performance at any point in time is a result of achieving a competitive advantage in the market place as a result of some tangible or intangible entity (“resource”). All retailers cannot achieve superior results at the same time. LO 3

Future Changes in Retail Competition Nonstore Retailing New Retailing Formats Heightened Global Competition Integration of Technology Increasing Use of Private Labels LO 4

Nonstore Retailing Direct Selling: Engaging in the sale of a consumer product or service on a person-to-person basis away from a fixed retail location. LO 4

Nonstore Retailing Examples of Direct Selling: The Pampered Chef Ltd. Avon Products Inc. Mary Kay Inc. Regal Ware Inc. Herbalife International LO 4

Nonstore Retailing Direct Marketers: Those who sell products by catalog, mail order, and the internet. LO 4

The Top 10 Direct-to-Consumer Catalog Retailers Exhibit 4.5LO 4

Nonstore Retailing E-Tailing: The general belief that electronic, interactive, at-home shopping is definitely the place to be. LO 4

Nonstore Retailing E-Tailing: Gen Xers and Baby Boomers tend to view the internet as a supplement to their daily lives. Gen Y folks are able to exist in both electronic and traditional worlds at once. LO 4

Nonstore Retailing Bricks & Click Approach: An approach that involves a tangible retail store that also offers its merchandise on the internet. LO 4

Nonstore Retailing Online Only Approach: An online only approach is when the retailer only offers merchandise or services via the internet and not through a tangible store. LO 4

New Retailing Formats Off-Price Retailers: Sell products at a discount but do not carry certain brands on a continuous basis. They carry those brands they can buy from manufacturers at closeout or deep one-time discount prices. LO 4

New Retailing Formats Hypermarkets: Are one and a half times the size of a supercenter. LO 4

New Retail Formats Supercenters: Combine a discount store and grocery store and carry 80,000 to 100,000 products in order to offer one-stop shopping. LO 4

New Retail Formats Recycled Merchandise Retailers: Are establishments that sell used and reconditioned products. LO 4

New Retail Formats Liquidators: Liquidates leftover merchandise when an established retailer shuts down or downsizes. LO 4

Heightened Global Competition Increasing Rate of Change Greater Diversity Creation of New Retail Formats LO 4

Integration Of Technology Supply Chain Management Customer Management Customer Satisfaction LO 4

Increasing Use of Private Labels Helps in protecting retailer niche Sets retailer apart from competition Get customers in the store LO 4

Arizona Jeans Co. JCPenney has built significant store loyalty through the introduction and development of the private label brand Arizona Jeans Co. LO 4

Increasing Use of Private Labels Private Label Branding Strategies: Develop a partnership with well-known celebrities, noted experts, and institutional authorities. Develop a partnership with traditionally higher- end suppliers to bring an exclusive variation on their highly regarded brand name to the market. LO 4

Increasing Use of Private Labels Private Label Branding Strategies: Reintroduce products with strong name recognition that have fallen from the retail scene. Brand an entire department or business; not just a product line. LO 4

Additional Slides

Market Structure Pure Competition Pure Monopoly Monopolistic Competition Oligopolistic Competition Retail Competition LO 1

Future Changes in Retail Competition Nonstore Retailing New Retailing Formats Integration of Technology Private Label Use Heightened Global Competition LO 4

Nonstore Retailing E-tailing Direct Marketing Direct Selling LO 4

New Retailing Formats Liquidators Recycled Merchandise Retailers Supercenters LO 4

Heightened Global Competition Creation of New Retail Formats Greater Diversity Increased Rate of Change LO 4

Integration of Technology Customer Satisfaction Customer Management Supply Chain Management LO 4