1. Evaluating the Competition in Retailing
Chapter 4
Evaluating the Competition in Retailing

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Exhibit 4.1- Demand as a Function of Price

12. 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

13. 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

14. 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

15. Positioning
Best Buy
Bass Pro Shop
Forever 21
Radio Shack

16. 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

17. 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

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

19. 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

20. 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

21. 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

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

23. 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

24. Exhibit 4.6 - Wheel of Retailing

25. 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

26. 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

27. 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

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

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

30. 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

31. Future Changes in Retail Competition
Nonstore retailing
New retailing formats
Heightened global competition
Integration of technology
Increasing use of private labels
LO 4

32. 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

33. 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

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

35. 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

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

37. 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

38. Name that Brand

39. 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

40. North Face

41. 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