Retailing

MKTG 3346

Retail Competition and

Strategy
Professor Edward Fox
Cox School of Business/SMU
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
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

Types of Retailers
SIC System for Classifying Retailers
Types of Retailers
Sales by SIC Category

Source: U.S. Department of Commerce, 1998 Census of Retail Trade

Types of Retailers – Merchandise

● Variety (Breadth of Merchandise)

Examples of broad-line retailers:
▼ JCPenney, Sears
▼ Costco, Sam’s 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
Types of Retailers – Price

● Discount Stores – lower margins, higher volume

▼ Wal-Mart, Target, Kmart
● Off-Price Retailers – lower cost merchandise
▼ TJMaxx, Marshall’s
● Factory Outlets – manufacturer outlet for out-of season
▼ Burlington Coat Factory, Off-Fifth, Nordstrom Rack
▼ Entire outlet malls
● Warehouse Clubs
▼ Costco, Sam’s Club
▼ Carrefour

Adapted from Levy and Weitz

 Types of Retailers – Service

● Self-Service – Customer is on his/her own

▼ Food and drug stores (e.g., Kroger, Walgreen’s)
● Limited Service – Available salesperson
▼ Most department stores, some specialty stores (e.g., JCPenney,
Gap, Kohl’s)
● 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!

Retailers of Services
Type of Service Service Retail Firms

Airlines American, Delta, British Airways, Singapore Airways

Automobile maint/repair Jiffy Lube, Midas, AAMCO
Automobile rental Hertz, Avis, Budget, Alamo
Banks Citibank, NCNB, Bank of America
Child care centers Kindercare, Gymboree
Credit cards American Express, VISA, Mastercard
Education University of Florida, Babson College
Entertainment parks Disney, Universal Studios, Six Flags
Express package delivery Federal Express, UPS, US Postal Service
Financial services Merrill Lynch, Dean Witter
Fitness Jazzercise, Bally’s, Gold’s Gym
Health Care Humana, HCA
Home maintenance Chemlawn, MiniMaid, Roto-Rooter

Adapted from Levy and Weitz

Retailers of Services
Type of Service Service Retail Firms

Hotels and motels Hyatt, Sheraton, Marriott, Days Inn

Income tax preparation H & R Block
Insurance Allstate, State Farm
Internet access/Elec info. American On-Line, CompuServe
Long-distance telephone AT&T, MCI, Sprint
Movie theaters AMC, Loews/Sony, Universal
Real estate Century 21, Coldwell Banker
Restaurants TGI Friday’s, Wendy’s, Pizza Hut
Truck rentals U-Haul, Ryder
Weight loss Weight Watchers, Jenny Craig
Video rental Blockbuster
Vision centers Lenscrafter, Pearle

Adapted from Levy and Weitz

Focus on General Merchandise Retailers

Adapted from Levy and Weitz

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
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

Retail Competition Example
MARKET FOR WOMENS APPAREL

Source: Levy and Weitz

Strategic Profit Model Overview

Net profit x Asset turnover = Return on assets

Net profit x Net sales (crossed out) = Net profit
Net sales (crossed out) Total assets Total assets

Source: Levy and Weitz

Strategic Profit Model Detail
Net Sales
- Gross
margin
Cost of
goods sold
- Net profit
Variable
expenses ÷ Net profit
+ Total margin
expenses Net Sales
Fixed
expenses
Return on
x
assets
Inventory
+ Net sales
Asset
Accounts Total current
assets ÷ turnover
receivable
+ + Total assets
Other current Fixed assets
assets

Source: Levy and Weitz

Strategic Profit Model
RETURN 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

“Wheel of Retailing”

Retailers Change Over Time in a Predictable Way

Source: Levy and Weitz
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)
(niching - address wants and
needs of particular customer segment(s)
 Container Store, Hallmark

Adapted from
Michael Porter
Competitive Positioning

Depends on:
● Retailer’s competitive advantage(s)
● Needs and wants of target customers
● Current perceptions of the retailer
Competitive Positioning – Examples

Value, or Low Wide Variety;

Price Deep Assortment

Away from G Service; Ease

H
Competitors C
of Shopping
A
D
E
B
Against a F
Convenience
Competitor

User Image
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-Mart’s 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
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!
Retail Competition
SHOPPING ACROSS RETAIL FORMATS

● Shoppers are much more likely to shop at multiple formats

in a given week than to shop at grocery stores alone

40%

20%

0%
Grocery Only Grocery + Mass Grocery + Drug Grocery + Club

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
Retail Competition
SHOPPING ACROSS RETAIL FORMATS
● Category by category, which packaged goods
purchases are made in which formats?
Packaged Goods Purchases in Retail Formats for Selected Categories
Sales % Spending % Spending % Spending % Spending
Ranking Description in Grocery in Mass in Drug in Club
1 REGULAR SOFT DRINKS 88.5% 7.7% 2.0% 1.8%
2 READY TO EAT CEREAL 91.3% 4.7% 0.3% 3.8%
3 LOW CALORIE SOFT DRINKS 88.9% 8.2% 2.1% 0.7%
4 REFRIGERATED SKIM/LOW-FAT MILK 90.3% 1.5% 3.9% 4.3%
5 SHELF STABLE BREAD 95.3% 3.5% 0.4% 0.8%

8 CIGARETTES CARTON 31.0% 36.2% 10.4% 22.4%

11 TOILET TISSUE 52.4% 35.5% 3.0% 9.1%
12 DISPOSABLE DIAPER/LINER 35.8% 55.8% 5.9% 2.5%
14 INTERNAL ANALGESICS TABLET 36.9% 29.1% 27.4% 6.6%
20 DRY CELL BATTERY 25.2% 47.9% 20.1% 6.8%
25 PAPER TOWELS 46.4% 40.1% 2.0% 11.4%

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
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
Revenue / Margin % Portfolio
CONVENIENCE STORES
High Sales Dollar Volume Low

High Hot Bev

Frozen
Fountain Bev
Ice
Drinks
Sandwiches Other Sand-
Candy & -Fresh Fast
Gum Food wiches-
Cooked
Salty GM Juices Food Auto Frozen
Gross Snacks Cook- Bottled
Margin Ice
HBC Cream ies Pckg’dWater
Percentage Deli Frozen
Soft Drinks Deli Svcs
Groceries Food
Wine/
LiquorProduce
Breads &
Cakes
Tobacco Beer Milk Publications Eggs
Low
Revenue / Margin % Portfolio
GENERAL MERCH. DISCOUNT STORES
High Sales Dollar Volume Low

High Giftware
Stationary/
Greeting Jewelry & Handbags/
Women's Cards Shoes Watches Accessories

Wear Kitchen/ Hardware/ Hosiery Paint &

Men's House- Building Girls’ Wallpaper
Wear wares Supplies Boys’ Wear
Wear Pet Luggage
Gross Supplies
Margin Toys Sporting
Percentage Books
Automotive Goods Magazines
Infants’ RTA
Ware Furniture
Photo CDs &
Consumer Goods Tapes
Electronics Lawn &
Garden Candy
Traffic
Low Appliances Tobacco
Revenue / Margin % Portfolio
GROCERY STORES
High Sales Dollar Volume Low

High Ice
Foils, bags, cubes
Milk wraps Spices

Yogurt Pasta
Bread Ice cream Teas Cat litter

Gross Rices
Margin Crackers
Cookies Cooking oils
Percentage
Soup Spaghetti sauce
Facial tissue
Tuna
Peanut butter
Bleaches
Laundry detergent
RTE cereal Toilet tissue
Low