Retail Institutions by Ownership Chapter 4 Retail Institutions by Ownership RETAIL MANAGEMENT: A STRATEGIC APPROACH, 10th Edition BERMAN EVANS

Chapter Objectives To show the ways in which retail institutions can be classified To study retailers on the basis of ownership type and examine the characteristics of each To explore the methods used by manufacturers, wholesalers, and retailers to exert influence in the distribution channel

Figure 4-1: A Classification Method for Retail Institutions Ownership II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix

Ownership Forms Independent Chain Franchise Leased department Vertical marketing system Consumer cooperative

Independent Retailers 2.2 million independent U.S. retailers 70% of these are run by owners and their families Account for 35% of total stores and 3% of U.S. store sales Why so many? Ease of entry

Competitive State of Independents Advantages Flexibility in formats, locations, and strategy Control over investment costs and personnel functions, strategies Personal image Consistency and independence Strong entrepreneurial leadership Disadvantages Lack of bargaining power Lack of economies of scale Labor intensive operations Over-dependence on owner Limited long-run planning

Figure 4-2: Useful Online Publications for Small Retailers

Store-Based Retail Strategy Mixes Convenience store Conventional supermarket Food-based superstore Combination store Box store Warehouse store Specialty store Variety store Traditional department store Full-line discount store Off-price chain Factory outlet Membership club Flea market

Chain Retailers Operate multiple outlets under common ownership Engage in some level of centralized or coordinated purchasing and decision making In the U.S., there are roughly 110,000 retail chains operating about 800,000 establishments

Competitive State of Chains Advantages Bargaining power Cost efficiencies Efficiency from computerization, sharing warehouse and other functions Defined management philosophy Considerable efforts in long-run planning Disadvantages Limited flexibility Higher investment costs Complex managerial control Limited independence among personnel

Figure 4-3: The Body Shop

Nonstore-Based Retail Strategy Mixes and Nontraditional Retailing Direct marketing Direct selling Vending machines World Wide Web Other emerging retail formats

Franchising A contractual agreement between a franchisor and a retail franchisee, which allows the franchisee to conduct business under an established name and according to a given pattern of business Franchisee pays an initial fee and a monthly percentage of gross sales in exchange for the exclusive rights to sell goods and services in an area

Franchise Formats Business Format Product/Trademark Franchisee receives assistance: location, quality control, accounting systems, startup practices, management training Common for restaurants, real-estate Product/Trademark Franchisee acquires the identity of a franchisor by agreeing to sell products and/or operate under the franchisor name Franchisee operates autonomously 2/3 of retail franchising sales

Figure 4-5: Business Qualifications Sought by McDonald’s for Potential Franchisees Experience Financial resources Growth capability Strong credit Ideal Franchisee Planning ability Customer and employee focus Ability to manage finances Willingness to complete training Full-time commitment

Figure 4-6: Structural Arrangements in Retail Franchising

Wholesaler-Retailer Structural Arrangements Voluntary: A wholesaler sets up a franchise system and grants franchises to individual retailers Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a wholesaling organization

Figure 4-7: Franchise and Business Opportunities

Competitive State of Franchising Advantages Low capital required Acquire well-known names Operating/ management skills taught Cooperative marketing possible Exclusive rights Less costly per unit Disadvantages Oversaturation could occur Franchisors may overstate potential Locked into contracts Agreements may be cancelled or voided Royalties are based on sales, not profits

From the Franchisor’s Perspective Benefits National or global presence possible Qualifications for franchisee/operations are set and enforced Money obtained at delivery Royalties represent revenue stream Potential Problems Potential for harm to reputation Lack of uniformity may affect customer loyalty Ineffective franchised units may damage resale value, profitability Potential limits to franchisor rules

Leased Departments A leased department is a department in a retail store that is rented to an outside party The proprietor is responsible for all aspects of its business and pays a percentage of sales as rent The department store sets operating restrictions to ensure consistency and coordination

Competitive State of Leased Departments Benefits Provides one-stop shopping to customers Lessees handle management Reduces store costs Provides a stream of revenue Potential Pitfalls Lessees may negate store image Procedures may conflict with department store Problems may be blamed on department store rather than lessee

Figure 4-8a: Vertical Marketing Systems Independent Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Independent Manufacturer Independent Wholesaler Independent Retailer

Figure 4-8b: Vertical Marketing Systems Partially Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Two channel members own all facilities and perform all functions

Figure 4.8c: Vertical Marketing Systems Fully Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: All production and distribution functions are performed by one channel member

Figure 4-9: Sherwin-Williams’ Dual Vertical Marketing System