Retail Competition and Strategy

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Retailing MKTG 3346
Retail Competition and Strategy
Professor Edward Fox Cox School of Business/SMU
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Retail Competition Overview

• Types of Retailers and Retail Formats
• Strategic Profit Model
• The Wheel of Retailing
• Competitive Advantage
• Competitive Positioning
• Low Price
• Convenience
• Variety / Assortment
• Service

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Types of Retailers

• Type of retailer depends on
• Merchandise
• Variety (Breadth)
• Assortment (Depth)
• Services, rather than merchandise
• Service
• Pricing
• Infinite Variations
• Survival of the Fittest - Formats must best
  satisfy needs of significant segment(s)

Adapted from Levy and Weitz
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Types of Retailers SIC System for Classifying
Retailers
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Types of Retailers Sales by SIC Category
Source U.S. Department of Commerce, 1998 Census
of Retail Trade
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Types of Retailers Merchandise

• Variety (Breadth of Merchandise)
• Examples of broad-line retailers
• JCPenney, Sears
• Costco, Sams Club
• Carrefour
• Family Dollar, Dollar General
• Assortment (Depth of Merchandise)
• Examples of Category Killers, or specialty
  stores
• PetSmart, Petco
• Edwin Watts
• Bed, Bath and Beyond, Container Store

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Types of Retailers Price

• Discount Stores lower margins, higher volume
• Wal-Mart, Target, Kmart
• Off-Price Retailers lower cost merchandise
• TJMaxx, Marshalls
• Factory Outlets manufacturer outlet for out-of
  season
• Burlington Coat Factory, Off-Fifth, Nordstrom
  Rack
• Entire outlet malls
• Warehouse Clubs
• Costco, Sams Club
• Carrefour

Adapted from Levy and Weitz
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Types of Retailers Service

• Self-Service Customer is on his/her own
• Food and drug stores (e.g., Kroger, Walgreens)
• Limited Service Available salesperson
• Most department stores, some specialty stores
  (e.g., JCPenney, Gap, Kohls)
• Full Service Salesperson assists the customer
• Some department stores and specialty stores
  (e.g., Nordstrom, Nine West), restaurants, etc.

Self Service
Full Service
Retailer Costs Increase with Service!
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Retailers of Services
Adapted from Levy and Weitz
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Retailers of Services
Adapted from Levy and Weitz
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Focus on General Merchandise Retailers
Adapted from Levy and Weitz
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Focus on General Merchandise Retailers
Department Stores

• Competition from
• Discount Stores on Price
• Category Killers on Assortment and Service
• Possible Competitive Responses
• Lower Costs By Reducing Services
• More Sales (by Expansion, Acquisition)
• Focus on Strong Categories (e.g., Apparel, Home,
  Jewelry)
• Improve Services
• Develop Private Labels, Exclusive Brands

A Decline in Mall Shopping Threatens Mall-Based
Department Stores!
Adapted from Levy and Weitz
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Focus on General Merchandise Retailers Discount
Stores

• Big Three Wal-mart, Target, Kmart
• Competition from Category Killers Toys R Us,
  Best Buy, PetSmart
• Possible Competitive Responses
• Continue to Reduce Costs
• More Focus on Apparel Because It Offers Higher
  Margins

Except Wal-Mart, Which is Focusing on Food!
Adapted from Levy and Weitz
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Retail Competition ExampleMARKET FOR WOMENS
APPAREL
Source Levy and Weitz
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Strategic Profit Model Overview
Source Levy and Weitz
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Strategic Profit Model Detail
Net Sales
-
Gross margin
Cost of goods sold
-
Net profit
Variable expenses
Net profit margin

Total expenses
Net Sales
Fixed expenses
Return on assets
x
Inventory
Net sales

Asset turnover
Total current assets
Accounts receivable

Total assets

Other current assets
Fixed assets
Source Levy and Weitz
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Strategic Profit ModelRETURN ON ASSETS
Return on assets Net profit margins X
Asset
turnover
Net profit X Net sales
Net sales Total assets
Net profit Total assets
Wal-Mart 4,430 8.86 49,996 Tiffany
90 8.51 1,057
Source Levy and Weitz
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Wheel of Retailing
Retailers Change Over Time in a Predictable Way
Source Levy and Weitz
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Retailing and Competitive Advantage

• Competitive Advantage - An advantage enjoyed by a
  given retailer relative to others in the market
• General sources of competitive advantage
• Overall cost leadership - can offer best value
  (i.e., lowest prices) or earn higher margins
• Wal-Mart
• Differentiation - unique product or service
  characteristics
• Abercrombie and Fitch, Papa Johns, Sewell
  Automotive
• Narrow customer focus (niching) - address wants
  and needs of particular customer segment(s)
• Container Store, Hallmark

Adapted from Michael Porter
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Competitive Positioning

• Depends on
• Retailers competitive advantage(s)
• Needs and wants of target customers
• Current perceptions of the retailer

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Competitive Positioning Examples
Wide Variety Deep Assortment
Value, or Low Price
Away from Competitors
Service Ease of Shopping
Convenience
Against a Competitor
User Image
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Trends in Retail Competition

• Increasing Diversity of Retail Formats
• Category killers
• Supercenters
• Electronic Retailers
• Blurring of Products/Services Across Formats
• Pharmacy
• Food
• Soft goods / apparel
• Small Store Formats Make a Comeback
• Dollar store format
• Hard discounters in Europe
• Wal-Marts Neighborhood Market format
• Increasing Concentration within Formats
• Centralization of Decision-Making
• Information and Communication Systems
• Retailers Go International
• Wal-Mart expands outside the US
• Retailers spread through Europe and Asia
• Multi-Channel Retailing

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Trends in Retail Blurring Formats

• Various Formats Now Offer
• Pharmacy
• Financial Services, Banking
• Video Rental
• Prepared Foods

The Service Aisle, or Perimeter Departments, Are
Growing!
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Retail CompetitionSHOPPING ACROSS RETAIL FORMATS

• Shoppers are much more likely to shop at multiple
  formats in a given week than to shop at grocery
  stores alone

Data Source IRI panel of 589 panelists from Oct
1995 - Oct 1997
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Retail CompetitionSHOPPING ACROSS RETAIL FORMATS

• Category by category, which packaged goods
  purchases are made in which formats?

Packaged Goods Purchases in Retail Formats for
Selected Categories
Data Source IRI panel of 589 panelists from Oct
1995 - Oct 1997
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Trends in Retail Consolidation

• Discount Stores
• Wal-Mart, Kmart, Target
• Drug stores
• Walgreens, CVS, Eckerd
• Office Supply Category Killers
• Office Depot, Staples, Office Max

Consolidation increases efficiency and lowers
costs
Source Levy and Weitz
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Revenue / Margin PortfolioCONVENIENCE STORES
Sales Dollar Volume
High
Low
High
Hot Bev
Frozen Bev
Fountain Drinks
Ice
Other Fast Food
Sandwiches-Fresh
Sand-wiches-Frozen
Candy Gum
Cooked Food
Juices
GM
Salty Snacks
Auto
Gross Margin Percentage
Bottled Water
Cook-ies
Ice Cream
Pckgd Deli
HBC
Frozen Food
Deli Svcs
Soft Drinks
Groceries
Wine/ Liquor
Produce
Breads Cakes
Eggs
Beer
Tobacco
Milk
Publications
Low
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Revenue / Margin PortfolioGENERAL MERCH.
DISCOUNT STORES
High
Sales Dollar Volume
Low
High
Giftware
Stationary/ Greeting Cards
Jewelry Watches
Handbags/ Accessories
Shoes
Women's Wear
Kitchen/ House-wares
Paint Wallpaper
Hardware/ Building Supplies
Hosiery
Men'sWear
Girls Wear
Boys Wear
Gross Margin Percentage
Pet Supplies
Luggage
Toys
Sporting Goods
Books
Automotive
Magazines
Infants Ware
RTA Furniture
Photo Goods
CDs Tapes
Consumer Electronics
Lawn Garden
Candy
Traffic Appliances
Tobacco
Low
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Revenue / Margin PortfolioGROCERY STORES
High
Sales Dollar Volume
Low
High
Ice cubes
Foils, bags, wraps
Spices
Milk
Pasta
Yogurt
Teas
Ice cream
Bread
Cat litter
Gross Margin Percentage
Rices
Crackers
Cookies
Cooking oils
Spaghetti sauce
Soup
Facial tissue
Tuna
Peanut butter
Bleaches
Laundry detergent
Toilet tissue
RTE cereal
Low