Evaluating the Competition in Retailing Chapter 4 Evaluating the Competition in Retailing

Learning Objectives Explain the various models of retail competition Distinguish between various types of retail competition Describe the four theories used to explain the evolution of retail competition 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

The Competitive Marketplace Helps identify primary and secondary competitors Retailers compete for target customers on five major fronts: (Food) The price for the benefits offered Service level Product selection Location or access Customer experience LO 1

More Jeopardy Has a natural equilibrium price point What is pure competition Many buyers and many seller trading over a wide range of prices. No one buyer or seller can impact price What is monopolistic competition

Market Structure Pure competition Occurs when a market has: Homogenous products Many buyers and sellers, having perfect knowledge of the market Ease of entry for both buyers and sellers Each retailer: Faces a horizontal demand curve Must sell its products at the going ‘‘market’’ or equilibrium price It is rare in retailing LO 1

Market Structure Pure monopoly: Occurs when there is only one seller for a product or service Law of diminishing returns or declining marginal utility As the retailer seeks to sell more units, it must lower the selling price LO 1

Market Structure Monopolistic competition Products offered are different, yet viewed as substitutable for each other Sellers recognize that they compete with sellers of these different products Retailers attempt to differentiate themselves with the products or services they offer LO 1

Market Structure Oligopolistic competition Essentially homogeneous products are sold Relatively few sellers or many small firms who follow the lead of the few large firms Any action by one seller is expected to be noticed and reacted to by the other sellers Sellers end up selling at a similar price Is rare in retailing Outshopping: Occurs when a household: Travels outside their community of residence or uses the Internet to shop in another community LO 1

The Demand Side of Retailing Negatively sloping demand curve Consumers will demand a higher quantity as price is lowered The true price (or cost) the customer pays actually includes: The retailer charges Sales tax on the purchase Delivery or transportation cost LO 1

Exhibit 4.1- Demand as a Function of Price

The Demand Side of Retailing Retailers will need to recognize when: A drop in a competitor’s prices is temporary and inconsequential to long-term competition The competitor has set a new permanent pricing standard

Nonprice Decisions Nonprice variables are directed at: Enlarging the retailer’s demand by offering customers benefits beyond the lowest price Price is the easiest variable for competitors to copy LO 1

Nonprice Decisions Using nonprice variables Store positioning: Identifying a well-defined market segment using: Demographic or lifestyle variables and appealing to this segment with a clearly differentiated approach Offering private-label merchandise that has unique features or offers better value than competitors Providing additional benefits for the customer Mastering stock keeping with basic merchandise assortment Becoming a destination store for certain products LO 1

Positioning Best Buy Bass Pro Shop Forever 21 Radio Shack

How to Implement a Store Positioning Program Assess how shoppers and even competitors view the retailer Determine the best position for the retailer Analyze the retailer’s current target customers Factor in current environmental trends Implement the new positioning strategy LO 1

Competitive Actions Overstored Understored Condition in a community where the number of stores in relation to households is so large: That to engage in retailing is usually unprofitable or marginally profitable Understored Condition in a community where the number of stores in relation to households is relatively low: So that engaging in retailing is an attractive economic endeavor LO 1

Competitive Actions Competition is most intense in overstored markets Many retailers are achieving an inadequate return on investment LO 1

Suppliers as Partners and Competitors Retailers must: Develop a loyal group of patrons that encourages the supplier to accommodate their needs Determine how they can be most productive for their suppliers yet still maintain profitability Unique product or promotion by suppliers: Can provide critical competitive advantage to retailers LO 1

Types of Competition Intratype competition Intertype competition Two or more retailers of same type compete directly with each other for the same households Intertype competition Two or more retailers of different type compete directly by: Attempting to sell the same merchandise lines to the same households LO 2

Types of Competition Divertive competition: Retailers intercept or divert customers from competing retailers Can be intertype or intratype (video rentals) Retailers operate very close to their breakeven point Pop-up stores Temporary small scale stores Set up for a relatively short period of time Explicitly intercept shoppers Has escalated due to the Internet LO 2

Evolution of Retail Competition The wheel of retailing The retail accordion Retail life cycle Resource-advantage theory LO 3

Wheel of Retailing Theory New types of retailers: Enter the market as low-status, low-margin, and low-price operators Gradually, enter a trading-up phase and acquire more sophisticated and elaborate facilities thus: Become vulnerable to new types of low-margin retail competitors who progress through the same pattern

Exhibit 4.6 - Wheel of Retailing

The Retail Accordion Describes how retail institutions evolve from: Outlets that offer wide assortments to specialized stores Is vague about the competitive importance of providing wide assortments to customers LO 3

The Retail Life Cycle Introduction Zip cars Bag borrow or steal Growth Simple methods of distribution Savings passed to the customers Low profits despite increasing sales levels Growth Sales and profits explode Towards the end, cost pressure increases Market share reaches maximum levels Profitability begins to decline LO 3

The Retail Life Cycle Maturity - Market share stabilizes and profits decline due to: The shift from a simple and small high growth firm to a large and complex firm with static growth Overexpansion Intense competition LO 3

The Retail Life Cycle Decline Major loss of market share Profits fall Once-promising idea is no longer required LO 3

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

Resource-Advantage Theory Firms gain competitive advantage by: Offering superior value to customers Having lower costs of operating Important lessons for retailers: Superior performance is due to tangible or intangible resources All retailers cannot achieve superior results at the same time A retailer uses unique resources to: Offer greater relative value to the marketplace Operate firms at a lower cost 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 Result of accelerated communication technology and changing consumer lifestyles Prerequisite for the success of e-tailing: Having enough consumers with access to the Internet Paying attention to customer service What are concerns about e-tailing? State Taxes, Food, immediate gratification, bulky shipping, try on, security 3% to 5% (shift in demand not increase demand) LO 4

New Retailing Formats Off-price retailers Sell products at a discount Do not carry certain brands on a continuous basis Carry brands that can be bought at closeout or deep one-time discount prices Merchandise brands and selection could be unpredictable Examples of off-price retailers - Factory outlets, independent carriers, and warehouse clubs LO 4

New Retailing Formats Supercenter Combination of supermarket and discount department store Carries more than 80,000 to 100,000 SKUs LO 4

New Retailing Formats Recycled merchandise retailers Sell used and reconditioned products Examples - Pawn and thrift shops, auction houses, flea markets, and eBay Liquidators - Purchase the inventory of the existing retailer Rentals LO 4

Heightened Global Competition The increase in the rate of change in retailing Greater diversity Creation of new retail formats LO 4

Integration of Technology Technological innovations can be grouped under: Supply chain management - Using new initiatives such as: Direct store delivery (DSD) Collaborative planning, forecasting, and replenishment (CPFR) systems Customer management Customer satisfaction LO 4

Name that Brand

Kenmore Sears Route 66 Kmart Sam’s Choice Walmart Arizona Jean JCPenney Equate Merona Target Stafford Cherokee Target Joe Boxer Kmart Martha Stewart Faconnable Nordstrom Die Hard Sears Canyon River Blues Kirkland Costco

North Face

Increasing use of Private Labels Set the retailer apart from the competition Private-label branding strategies Develop a partnership with: Well-known celebrities, noted experts, and institutional authorities Traditionally higher-end suppliers Reintroduce products that have strong name recognition Brand an entire department or business LO 4