Retail Marketing Case Study Week 2 Case Study

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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

L O 1

The Competitive Marketplace

Helps identify primary and secondary competitors

Retailers compete for target customers on five major fronts:

The price for the benefits offered

Service level

Product selection

Location or access

Customer experience

L O 1

Market Structure (1 of 5)

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

L O 1

Market Structure (2 of 5)

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

L O 1

Market Structure (3 of 5)

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

L O 1

Market Structure (4 of 5)

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

L O 1

Market Structure (5 of 5)

Sellers end up selling at a similar price

Is rare in retailing

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

L O 1

The Demand Side of Retailing (1 of 2)

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

L O 1

Exhibit 4.1- Demand as a Function of Price

L O 1

The Demand Side of Retailing (2 of 2)

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

L O 1

Nonprice Decisions (1 of 2)

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

L O 1

Nonprice Decisions (2 of 2)

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

L O 1

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

L O 1

Competitive Actions (1 of 2)

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

L O 1

Exhibit 4.5- Economics of Overstoring

Source: U.S. Census Bureau, "E-Stats, 2009 E-commerce Multi-sector Report," May 2011. For more information: http://www.census.gov/eos/www/ebusiness614.htm http://www.census.gov/econ/estats/ Internet release date 9/30/2011; Data after 2009 is projections by authors.

L O 1

Competitive Actions (2 of 2)

Competition is most intense in overstored markets

Many retailers are achieving an inadequate return on investment

L O 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

L O 1

Types of Competition (1 of 2)

Intratype 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

L O 2

Types of Competition (2 of 2)

Divertive competition: Retailers intercept or divert customers from competing retailers

Can be intertype or intratype

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

L O 2

Evolution of Retail Competition

The wheel of retailing

The retail accordion

Retail life cycle

Resource-advantage theory

L O 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

L O 3

Exhibit 4.6 - Wheel of Retailing

L O 3

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

L O 3

The Retail Life Cycle (1 of 3)

Introduction

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

L O 3

The Retail Life Cycle (2 of 3)

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

L O 3

The Retail Life Cycle (3 of 3)

Decline

Major loss of market share

Profits fall

Once-promising idea is no longer required

L O 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

L O 3

Future Changes in Retail Competition

Nonstore retailing

New retailing formats

Heightened global competition

Integration of technology

Increasing use of private labels

L O 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

L O 4

New Retailing Formats (1 of 3)

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

L O 4

New Retailing Formats (2 of 3)

Supercenter

Combination of supermarket and discount department store

Carries more than 80,000 to 100,000 S K Us

L O 4

New Retailing Formats (3 of 3)

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

L O 4

Heightened Global Competition

The increase in the rate of change in retailing

Greater diversity

Creation of new retail formats

L O 4

Integration of Technology

Technological innovations can be grouped under:

Supply chain management - Using new initiatives such as:

Direct store delivery (D S D)

Collaborative planning, forecasting, and replenishment (C P F R) systems

Customer management

Customer satisfaction

L O 4

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

L O 4

Retail Marketing Case Study Week 2 Case Study

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