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Any organization selling to final consumers—whether it is a manufacturer, wholesaler, or retailer—is doing retailing. It doesn’t matter how the goods or services are sold (in person, by mail, by telephone, by vending machine, or online) or where (in a store, on the street, or in the consumer’s home). Retailing is a fast-moving, challenging industry.

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Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail organizations.

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Consumers today can shop for goods and services at store retailers, nonstore retailers, and retail organizations. Perhaps the best-known type of store retailer is the department store. The most important types of major store retailers are summarized in Table 18.1.

Specialty store: Narrow product line.

Department store: Several product lines.

Supermarket: Large, low-cost, low-margin, high-volume, self-service store designed to meet total needs for food and household products.

Convenience store: Small store in residential area, often open 24/7, limited line of high-turnover convenience products plus takeout.

Drug store: Prescription and pharmacies, health and beauty aids, other personal care, small durable, miscellaneous items.

Discount store: Standard or specialty merchandise; low-price, low-margin, high-volume stores.

Extreme value or hard-discount store: A more restricted merchandise mix than discount stores but at even lower prices.

Off-price retailer: Leftover goods, overruns, irregular merchandise sold at less than retail.

Superstore: Huge selling space, routinely purchased food and household items, plus services (laundry, shoe repair, dry cleaning, check cashing).

Catalog showroom: Broad selection of high-markup, fast-moving, brand-name goods sold by catalog at a discount. Customers pick up merchandise at the store.

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Retailers also meet widely different consumer preferences for service levels and specific services. Specifically, they position themselves as offering one of four levels of service:

1. Self-service—Self-service is the cornerstone of all discount operations. Many customers are willing to carry out their own “locate-compare-select” process to save money.

2. Self-selection—Customers find their own goods, though they can ask for assistance.

3. Limited service—These retailers carry more shopping goods and services such as credit and merchandise-return privileges. Customers need more information and assistance.

4. Full service—Salespeople are ready to assist in every phase of the “locate-compare-select” process. Customers who like to be waited on prefer this type of store. The high staffing cost and many services, along with the higher proportion of specialty goods and slower-moving items, result in high-cost retailing.

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Nonstore retailing has been growing much faster than store retailing, especially given e-commerce and m-commerce.

1. Direct marketing has roots in direct-mail and catalog marketing (Lands’ End, L.L.Bean); it includes telemarketing (1-800-FLOWERS), television direct-response marketing (HSN, QVC), and online shopping (Amazon.com, Autobytel.com).

2. Direct selling, also called multilevel selling and network marketing, is a multibillion-dollar industry, with companies selling door to door or through at-home sales parties.

3. Automatic vending offers a variety of merchandise, including impulse goods such as soft drinks, coffee, candy, newspapers, magazines, and other products such as hosiery, cosmetics, hot food, and paperbacks.

4. Buying service is a storeless retailer serving a specific clientele—usually employees of large organizations—who are entitled to buy from a list of retailers that have agreed to give discounts in return for membership.

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Although many retail stores are independently owned, an increasing number are part of a corporate retailing organization. These organizations achieve economies of scale, greater purchasing power, wider brand recognition, and better-trained employees than independent stores can usually gain alone. The major types of corporate retailing—corporate chain stores, voluntary chains, retailer and consumer cooperatives, franchises, and merchandising conglomerates—are described in Table 18.2.

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In a franchising system, individual franchisees are a tightly knit group of enterprises whose systematic operations are planned, directed, and controlled by the operation’s innovator, called a franchisor. Franchising benefits both parties. Franchisors gain the motivation and hard work of employees who are entrepreneurs rather than “hired hands,” the franchisees’ familiarity with local communities and conditions, and the enormous purchasing power of being a franchisor. Franchisees benefit from buying into a business with a well-known and accepted brand name.

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The retail marketing environment is dramatically different today from what it was just a decade or so ago. The retail market is very dynamic, and a number of new types of competitors and competition have emerged in recent years. Here are five important developments (see Table 18.3 for a summary).

New Retail Forms and Combinations. To better satisfy customers’ need for convenience, a variety of new retail forms have emerged.

Growth of Giant Retailers. Through their superior information systems, logistical systems, and buying power, giant retailers such as Walmart are able to deliver good service and immense volumes of product to masses of consumers at appealing prices.

Growth of Intertype Competition. One consequence of the growth of the supercenters is that department stores can’t worry just about other department stores—discount chains such as Walmart and Tesco are expanding into product areas such as clothing, health, beauty, and electrical appliances.

Emergence of Fast Retailing. An important trend in fashion retailing in particular, but with broader implications, is the emergence of fast retailing. Here retailers develop completely different supply chain and distribution systems to allow them to offer consumers constantly changing product choices.

Decline of Middle-Market Retailers. We can characterize the retail market today as hourglass or dog-bone shaped: Growth seems to be centered at the top (with luxury offerings from retailers such as Tiffany and Neiman Marcus) and at the bottom (with discount pricing from retailers such as Walmart and Dollar General). As discount retailers improve their quality and image, consumers have been willing to trade down.

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Technology is profoundly affecting the way retailers conduct virtually every facet of their business. Almost all now use technology to produce forecasts, control inventory costs, and order from suppliers, reducing the need to discount and run sales to clear out languishing products. Technology is also directly affecting the consumer shopping experience inside the store.

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With this new retail environment as a backdrop, we now examine retailers’ marketing decisions in some key areas:

target market, channels, product assortment, procurement, prices, services, store atmosphere, store activities and experiences, communications, and location.

Target Market Until it defines and profiles the target market, the retailer cannot make consistent decisions about product assortment, store decor, advertising messages and media, price, and service levels. To better hit their targets, retailers are slicing the market into ever-finer segments and introducing new lines of stores to exploit niche markets with more relevant offerings.

Channels Based on a target market analysis and other considerations we reviewed in Chapter 17, retailers must decide which channels to employ to reach their customers. Increasingly, the answer is multiple channels.

Product Assortment The retailer’s product assortment must match the target market’s shopping expectations in breadth and depth. A restaurant can offer a narrow and shallow assortment (small lunch counters), a narrow and deep assortment (delicatessen), a broad and shallow assortment (cafeteria), or a broad and deep assortment (large restaurant). Destination categories may play a particularly important role because they have the greatest impact on where households choose to shop and how they view a particular retailer.

Procurement After deciding on the product-assortment strategy, the retailer must establish merchandise sources, policies, and practices. In the corporate headquarters of a supermarket chain, specialist buyers (sometimes called merchandise managers) are responsible for developing brand assortments and listening to presentations from their suppliers’ salespeople. Stores are using direct product profitability (DPP) to measure a product’s handling costs (receiving, moving to storage, paperwork, selecting, checking, loading, and space cost) from the time it reaches the warehouse until a customer buys it in the retail store.

Prices Prices are a key positioning factor and must be set in relationship to the target market, product-and-service assortment mix, and competition.

Services Another differentiator is unerringly reliable customer service, whether face to face, across phone lines, or via online chat.

Store Atmosphere Every store has a look and a physical layout that makes it hard or easy to move around (see “Marketing Memo: Helping Stores to Sell”).

Store Ac tivities and Experiences The growth of e-commerce has forced traditional brick-and-mortar retailers to respond. In addition to their natural advantages, such as products that shoppers can actually see, touch, and test; real-life customer service; and no delivery lag time for most purchases, stores also provide a shopping experience as a strong differentiator.

Communications Retailers use a wide range of communication tools to generate traffic and purchases. Retailers are also using interactive and social media to pass on information and create communities around their brands.

Location The three keys to retail success are often said to be “location, location, and location.” Department store chains, oil companies, and fast-food franchisers exercise great care in selecting regions of the country in which to open outlets, then particular cities, and then particular sites.

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The real challenge begins after defining the store’s product assortment, when the retailer must develop a product differentiation strategy. Here are some possibilities:

Feature exclusive national brands not available at competing retailers. Saks might get exclusive rights to carry the dresses of a well-known international designer.

Feature mostly private-label merchandise. Benetton and Gap design most of the clothes carried in their stores. Many supermarket and drug chains carry private-label merchandise.

Feature blockbuster distinctive-merchandise events. Bloomingdale’s ran a month-long celebration for the Barbie doll’s 50th anniversary.

Feature surprise or ever-changing merchandise. Off-price apparel retailer TJ Maxx offers surprise assortments of distress merchandise (goods the owner must sell immediately because it needs cash), overstocks, and closeouts sourced from more than 16,000 vendors and priced 20 percent to 60 percent below department and specialty store regular prices online and at its 1000-plus stores.

Feature the latest or newest merchandise first. Zara excels in and profits from being first to market with appealing new looks and designs.

Offer merchandise-customizing services. Harrods of London will make custom-tailored suits, shirts, and ties for customers in addition to ready-made menswear.

Offer a highly targeted assortment. Lane Bryant carries goods for the larger woman. Brookstone offers unusual

tools and gadgets for the person who wants to shop in a “toy store for grown-ups.”

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Prepurchase services include accepting telephone and mail orders, advertising, window and interior display, fitting rooms, shopping hours, fashion shows, and trade-ins.

Postpurchase services include shipping and delivery, gift wrapping, adjustments and returns, alterations and tailoring, installations, and engraving.

Ancillary services include general information, check cashing, parking, restaurants, repairs, interior decorating, credit, rest rooms, and baby-attendant service.

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Retailers can place their stores in the following locations:

• Central business districts. The oldest and most heavily trafficked city areas, often known as “downtown”

• Regional shopping centers. Large suburban malls containing 40 to 200 stores, typically featuring one or two nationally known anchor stores, such as Macy’s or Lord & Taylor or a combination of big-box stores such as PETCO, Payless Shoes, or Bed Bath & Beyond, and a great number of smaller stores, many under franchise operation.

• Community shopping centers. Smaller malls with one anchor store and 20 to 40 smaller stores

• Shopping strips. A cluster of stores, usually in one long building, serving a neighborhood’s needs for groceries, hardware, laundry, shoe repair, and dry cleaning

• A location within a larger store. Smaller concession spaces taken by well-known retailers like McDonald’s, Starbucks, Nathan’s, and Dunkin’ Donuts within larger stores, airports, or schools or “store-within- a-store” specialty retailers located within a department store such as with Gucci within Neiman Marcus

• Stand-alone stores. Some retailers such as Kohl’s and JCPenney are avoiding malls and shopping centers in favor of freestanding storefronts so they are not connected directly to other retail stores.

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The stakes in private-label marketing are high. A one-percentage-point shift from national brands to private labels in food and beverages is estimated to add $5.5 billion in revenue for supermarket chains. Private labels are rapidly gaining ground in a way that has many manufacturers of name brands running scared. Recessions increase private-label sales, and once some consumers switch to a private label, they don’t always go back.

These brands can be more profitable. Intermediaries may be able to use manufacturers with excess capacity that will produce private-label goods at low cost. Retailers also develop exclusive store brands to differentiate themselves from competitors. Many price-sensitive consumers prefer store brands in certain categories. These preferences give retailers increased bargaining power with marketers of national brands. We should distinguish private-label or store brands from generics. Generics are unbranded, plainly packaged, less expensive versions of common products such as spaghetti, paper towels, and canned peaches.

In the battle between manufacturers’ and private labels, retailers have increasing market power. Because shelf space is scarce, many supermarkets charge a slotting fee for accepting a new brand to cover the cost of listing and stocking it. Retailers are building better quality into their store brands and emphasizing attractive, innovative packaging. Supermarket retailers are adding premium store-brand items.

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It excludes manufacturers and farmers because they are engaged primarily in production, and it excludes retailers. Wholesalers (also called distributors) differ from retailers in a number of ways. First, wholesalers pay less attention to promotion, atmosphere, and location because they are dealing with business customers rather than final consumers. Second, wholesale transactions are usually larger than retail transactions, and wholesalers usually cover a larger trade area than retailers. Third, wholesalers and retailers are subject to different legal regulations and taxes.

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The major types of wholesalers are described in Table 18.4.

Merchant wholesalers: Independently owned businesses that take title to the merchandise they handle. They are full-service and limited-service jobbers, distributors, and mill supply houses.

Full-service wholesalers: Carry stock, maintain a sales force, offer credit, make deliveries, provide management assistance. Wholesale merchants sell primarily to retailers.

Limited-service wholesalers: Cash and carry wholesalers sell a limited line of fast-moving goods to small retailers for cash. Truck wholesalers sell and deliver a limited line of semiperishable goods to supermarkets, grocery stores, hospitals, restaurants, and hotels. Drop shippers serve bulk industries such as coal, lumber, and heavy equipment.

They assume title and risk from the time an order is accepted to its delivery. Rack jobbers serve grocery retailers in nonfood items. Delivery people set up displays, price goods, and keep inventory records; they retain title to goods and bill retailers only for goods sold to the end of the year. Producers’ cooperatives assemble farm produce to sell in local markets. Mail-order wholesalers send catalogs to retail, industrial, and institutional customers; orders are filled and sent by mail, rail, plane, or truck.

Brokers and agents: Facilitate buying and selling, on commission of 2 percent to 6 percent of the selling price; limited functions; generally specialize by product line or customer type. Brokers bring buyers and sellers together and assist in negotiation; they are paid by the party hiring them—food brokers, real estate brokers, insurance brokers. Agents represent buyers or sellers on a more permanent basis. Most manufacturers’ agents are small businesses with a few skilled salespeople: Selling agents have contractual authority to sell a manufacturer’s entire output; purchasing agents make purchases for buyers and often receive, inspect, warehouse, and ship merchandise; commission merchants take physical possession of products and negotiate sales.

Manufacturers’ and retailers’ branches and offices: Wholesaling operations conducted by sellers or buyers themselves rather than through independent wholesalers. Separate branches and offices are dedicated to sales or purchasing. Many retailers set up purchasing offices in major market centers.

Specialized wholesalers: Agricultural assemblers (buy the agricultural output of many farms), petroleum bulk plants and terminals (consolidate the output of many wells), and auction companies (auction cars, equipment, etc., to dealers and other businesses).

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In general, wholesalers can more efficiently perform one or more of the following functions:

• Selling and promoting. Wholesalers’ sales forces help manufacturers reach many small business customers at a relatively low cost. They have more contacts, and buyers often trust them more than they trust a distant manufacturer.

• Buying and assortment building. Wholesalers are able to select items and build the assortments their customers

need, saving them considerable work.

• Bulk breaking. Wholesalers achieve savings for their customers by buying large carload lots and breaking the

bulk into smaller units.

• Warehousing. Wholesalers hold inventories, thereby reducing inventory costs and risks to suppliers and customers.

• Transportation. Wholesalers can often provide quicker delivery to buyers because they are closer to the buyers.

• Financing. Wholesalers finance customers by granting credit and finance suppliers by ordering early and paying bills on time.

• Risk bearing. Wholesalers absorb some risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence.

• Market information. Wholesalers supply information to suppliers and customers regarding competitors’ activities,

new products, price developments, and so on.

• Management services and counseling. Wholesalers often help retailers improve their operations by training sales clerks, helping with store layouts and displays, and setting up accounting and inventory-control systems. They may help industrial customers by offering training and technical services.

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Physical distribution has now been expanded into the broader concept of supply chain management (SCM). Supply chain management starts before physical distribution and includes strategically procuring the right inputs (raw materials, components, and capital equipment), converting them efficiently into finished products, and dispatching them to the final destinations.

Market logistics includes planning the infrastructure to meet demand, then implementing and controlling the physical flows of materials and final goods from points of origin to points of use to meet customer requirements at a profit.

The market logistics task calls for integrated logistics systems (ILS), which include materials management, material flow systems, and physical distribution, aided by information technology (IT).

Market logistics encompass several activities. The first is sales forecasting, on the basis of which the company schedules distribution, production, and inventory levels. Production plans indicate the materials the purchasing department must order. These materials arrive through inbound transportation, enter the receiving area, and are

stored in raw-material inventory. Raw materials are converted into finished goods. Finished-goods inventory is the link between customer orders and manufacturing activity. Customers’ orders draw down the finished-goods inventory level, and manufacturing activity builds it up. Finished goods flow off the assembly line and pass

through packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing, and delivery and service.

Many experts call market logistics “the last frontier for cost economies,” and firms are determined to wring every unnecessary cost out of the system.

Many firms are embracing lean manufacturing, originally pioneered by Japanese firms such as Toyota, to produce goods with minimal waste of time, materials, and money.

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Order Processing Most companies today are trying to shorten the order-to-payment cycle—that is, the time between an order’s receipt, delivery, and payment.

Warehousing Every company must store finished goods until they are sold because production and consumption cycles rarely match. More stocking locations mean goods can be delivered to customers more quickly, but warehousing and inventory costs are higher.

Inventory Salespeople would like their companies to carry enough stock to fill all customer orders immediately. However, this is not cost effective. Inventory cost increases at an accelerating rate as the customer-service level approaches 100 percent. Management needs to know how much sales and profits would increase as a result of carrying larger inventories and promising faster order fulfillment times and then make a decision.

Transportation Transportation choices affect product pricing, on-time delivery performance, and the condition of the goods when they arrive, all of which affect customer satisfaction.

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As inventory draws down, management must know at what stock level to place a new order. This stock level is called the order (or reorder) point. An order point of 20 means reordering when the stock falls to 20 units. The order point should balance the risks of stock-out against the costs of overstock. The other decision is how much to order. The larger the quantity ordered, the less frequently an order needs to be placed.

The company needs to balance order-processing costs and inventory-carrying costs. Order-processing costs for a manufacturer consist of setup costs and running costs (operating costs when production is running) for the item. If setup costs are low, the manufacturer can produce the item often, and the average cost per item is stable and equal to the running costs. If setup costs are high, however, the manufacturer can reduce the average cost per unit by producing a long run and carrying more inventory.

Order-processing costs must be compared with inventory-carrying costs, which include storage charges, cost of capital, taxes and insurance, and depreciation and obsolescence. Carrying costs might run as high as 30 percent of inventory value and are higher the larger the average stock carried. This means marketing managers who want to carry larger inventories need to show that incremental gross profits will exceed incremental carrying costs.

We can determine the optimal order quantity by observing how order-processing costs and inventory-carrying costs add up at different order levels. Figure 18.1 shows that the order-processing cost per unit decreases as the number of units ordered increases because the order costs are spread over more units. Inventory-carrying charges per unit increase with the number of units ordered because each unit remains longer in inventory. We sum the two cost curves vertically into a total-cost curve and project the lowest point of the total-cost curve on the horizontal axis to find the optimal order quantity Q*.

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Shippers are increasingly combining two or more transportation modes, thanks to containerization. Containerization consists of putting the goods in boxes or trailers that are easy to transfer between two transportation modes. Piggyback describes the use of rail and trucks; fishyback, water and trucks; trainship, water and rail; and airtruck, air and trucks. Each coordinated mode offers specific advantages. For example, piggyback is cheaper than trucking alone yet provides flexibility and convenience.

Shippers can choose private, contract, or common carriers. If the shipper owns its own truck or air fleet, it becomes a private carrier. A contract carrier is an independent organization selling transportation services to others on a contract basis. A common carrier provides services between predetermined points on a scheduled basis and is available to all shippers at standard rates. Some contract carriers are investing and innovating to create strong value propositions.

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