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 Retailers compete for target customers on five major fronts: The price for benefits offered Service level Product selection Location or access Customer experience 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. Each retailer faces a horizontal demand curve and must sell its products at the going ‘‘market’’ or equilibrium price. Is rare in retailing. LO 1

Market Structure Pure monopoly - Occurs when there is only one seller for a product or service. Due to the 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 - 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. Retailers in monopolistic competition attempt to differentiate themselves with the products or services they offer. 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. Oligopolies are likely to end up selling at a similar price since everybody knows what others are doing. In rare cases, retailing is characterized as oligopolistic competition. LO 1

Market Structure Oligopolistic competition is more common at a local level, especially in smaller communities. 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 In a monopolistically competitive market, the retailer will be confronted with a negatively sloping demand curve. Retailers will need to recognize when: a drop in a competitor’s prices is temporary and inconsequential to long-term competition or the competitor has set a new permanent pricing standard that requires them to adjust their profit expectations. LO 1

Nonprice Decisions Competing on price alone is a no-win situation because price is the easiest variable for competitors to copy. Nonprice variables are directed at enlarging the retailer’s demand by offering customers benefits beyond simply the lowest price. LO 1

Positioning Best Buy Bass Pro Shop Forever 21 Radio Shack

Nonprice Decisions Ways of using nonprice variables to achieve a protected niche: 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 do competitors. Providing additional benefits for the customer. Mastering stockkeeping with its basic merchandise assortment. LO 1

Exhibit 4.3 - How to Implement a Store Positioning Program LO 1

Competitive Actions Overstored - 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 A market is in equilibrium in terms of number of retail establishments if the return on investment is high enough to justify keeping capital invested in retailing, but not so high as to invite more competition. Competition is most intense in overstored markets because many retailers are achieving an inadequate return on investment. LO 1

Suppliers as Partners and Competitors A retailer must develop a loyal group of patrons that encourages the supplier to accommodate the needs of its retail partner. As manufacturers evaluate their investments and marketing money for retailers and explore their own direct-to-consumer marketing, retailers must determine how they can be most productive for their suppliers yet still maintain profitability. LO 1

Suppliers as Partners and Competitors When suppliers provide a unique product or promotion, they can be a critical competitive advantage to retailers. LO 1

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. Border vs Barnes and Noble 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. Borders vs Book Kiosk at Safeway LO 2

Types of Competition Divertive competition - Occurs when retailers intercept or divert customers from competing retailers. To comprehend the significance of divertive competition, which can be intertype or intratype competition, most retailers operate very close to their breakeven point. Break-even point - 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 The retail accordion Retail life cycle Resource-advantage theory LO 3

Exhibit 4.5 - Wheel of Retailing

The Retail Accordion It describes how retail institutions evolve from outlets that offer wide assortments to specialized stores and continue repeatedly through the pattern. The accordion theory is vague about the competitive importance of providing wide assortments for various target customer groups. LO 3

Exhibit 4.6 - Retail Institutions in Their Various Stages of the Retail Life Cycle 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. Growth - Sales and profits explode. New retailers enter the market and begin to copy the 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 due to: shift in type of establishment overexpansion competition Decline - A major loss of market share will occur, profits will fall, and the once-promising idea will no longer be needed in the marketplace. LO 3

Resource-Advantage Theory It argues that firms gain competitive advantage by offering superior value to customers and/or having lower costs of operating. It illustrates two important lessons for retailers: Superior performance at any point in time is the result of achieving a competitive advantage in the marketplace as a result of some tangible or intangible entity. 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 The growth of this form of selling is based on accelerated communication technology and changing consumer lifestyles. As the Internet grows, Americans will make increasing use of it as a shopping method. E-tailers must pay attention to customer service. 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 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. The off-price merchandise brands and selection could be wildly unpredictable as manufacturers became better at planning production and inventories. Primary examples of off-price retailers—factory outlets, independent carriers, and warehouse clubs. LO 4

New Retailing Formats Supercenter - A cavernous combination of supermarket and discount department store carrying more than 80,000 to 100,000 SKUs that allows for one-stop shopping. LO 4

New Retailing Formats Recycled merchandise retailers - Establishments that sell used and reconditioned products; examples include pawn and thrift shops, auction houses, flea markets, and eBay. Liquidators - These firms purchase the inventory of the existing retailer and run its ‘‘going-out-of-business’’ sale. Rentals, another form of retailing, has been popular for a limited number of items for decades. LO 4

Heightened Global Competition Increasing rate of change Greater diversity Creation of new retail formats LO 4

Integration of Technology Technological innovations can be grouped under three main areas: Supply chain management using new initiatives such as direct store delivery (DSD) and 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

Cherokee Target

Joe Boxer Kmart

Martha Stewart Kmart

Faconnable Nordstrom

Equate Walmart

Merona Target

Die Hard Sears

Canyon River Blues Sears

Stafford JCPenney

Kirkland Costco

North Face

Increasing use of Private Labels 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 Reintroduce products that have strong name recognition but that have fallen from the retail scene. Brand an entire department or business; not just a product line. LO 4