The Wheel of retailing concept

Marketing management articles The Wheel of retailing concept

The Wheel of retailing concept

By Hitesh Bhasin December 2, 2016

The changing environment from all points of view such as political, economic, social,
technological, legislative and environmental has affected most of the sectors in the current
societies. Retail sector is one of the most dynamic sectors only because the external factors
affect retailing a lot.
Other than the external factors, other changes have occurred in terms of customer demands,
new technologies, intense competition etc. All these changes have led to creation of new
opportunities even as they are shaking up the existing businesses. The internet and web
technologies have itself created a myriad of opportunities for web based business model of
retailing. Thus, it is not a surprise that a new and novel retail chain pops up, thrives for a
small period of time, and then is taken over by a larger retail chain. This is the basic concept
behind Wheel of retailing.
The wheel of retailing concept was introduced by McNair from Harvard University and it is
considered to be more an observation than a theory. No matter from which point of view we
look at this concept, the idea itself intends to describe how the retail institutions transform
during their evolutionary life cycles.
Step 1 of the Wheel of retailing Establishing and penetrating in the market
The theory pays attention to the new retailers which often enter the market place with low
prices as well as low profit margins and sometimes low status. The low prices are usually the
result of some innovative cost-cutting procedures. Sooner than later, these innovative cost-
cutting procedures will most probably attract competitors if the entry barriers are not high
enough.
Example When book stores like Barnes and nobles started, they started by a unique model
of bringing all the books under one roof with amazing discounts. This was the first stage for
them in the wheel of retailing.
Step 2 of the Wheel of retailing Expanding in the market
During the time and while they gain more experience of the market, these retailer businesses
strive to enlarge their customer base with the purpose of increasing sales, gaining a higher
profit margin as well as acquiring a significant market share. They can attempt to increase
their customer base through different mechanisms, most of the times by attempting to target a
different segment of customers. Since these retailers initially enter the market with low
prices, their main target is represented by low income population.
Example Barnes and nobles then started expanding the market with more and more stores
so that they increased their sale, their brand value and ultimately, their margins started
increasing as well.

Step 3 of the Wheel of retailing Stabilized business model attracting margins.

In this stage of the Wheel of retailing, the company is already in an established position and
hence the rates are enough to get a decent margin. Because of the margin it is getting, the
company keeps expanding moderately and increases its reach to attract as well as retain more
customers. This is the most profitable stage for any retailing organization. However, when
there is more demand than supply, it always opens up a niche. And generally, at this stage
itself, other competitors start preparing or analyzing the market and think on how to penetrate
this market.

Example Once Barnes and nobles established itself strongly, the margins grew and it
created more and more showrooms. The result was that a lot of small shops closed down and
most people flocked in Barnes and nobles. The margins were high and the going was good.

Stage 4 of Wheel of retailing The entry by another retail competitor who challenges,
and then brings down the original.

By adding higher qualitative products to the market or by providing additional services, or by

simply moving to a better market location the retail businesses then target another segment.
Therefore, their operations and facilities increase and become more expensive, as they might
require extra labor, extra expertise, extra warehouse, etc. Ultimately, these retail businesses
might emerge as a high cost price service retailer.
This is done in order to recover its fixed costs quickly and have an early breakeven so that it
can start generating some profit. Overall, in this stage, the cost is high for the original retailer.
And hence its prices are higher. Therefore, this presents an opportunity for another retailer
who can then enter in the market again in stage 1, with an objective to penetrate the market.
New retail businesses then enter in the market and attempt to follow the same steps as the
previous one before.

Example When Barnes and nobles established itself strongly, people still had to visit the
store. Thus, Amazon entered the market with its own unique retail offering. People could now
browse books and order them from their home and get it home delivered. Thus, the overall
sales of Barnes and nobles dropped overnight and only the really brand loyal customers still
visited the store. Due a unique insight, another retail chain was introduced in the picture.

Based on this, the wheel of retailing concept is seen as a cycle and an evolutionary theory and
it represents one of the theories of structural change in retailing. As the theory involves the
beginning represented by one state and return to the same state after some time in the future,
the theory is perceived as being cyclical.

Challenges in the Wheel of retailing concept

There are a few limitations concerning this theory in terms of focusing only on margins and
prices, when there are also other variables affect the evaluation of the retail sector such as
environmental changes and competition. Moreover, the discussed theory cannot apply to all
retail businesses as there are also businesses such as boutiques, vending machines and
convenience stores which are being operated with a high margin basis from the entry phase.

Theories of Retail Development

Specialty Stores, malls & Other Formats:

As the needs the consumers grew and changed, one saw the emergence of commodity
specialized mass merchandisers in the 1970s. The seventies were also witness to the use of
technology entering retail sector with the introduction of the barcode. Specialty chains
developed in the 80s as did the large shopping malls.

Shopping malls, a late 20th century development were created to provide for the consumers
need in single, self contained shopping area. Although they were first created for the
convenience of suburban populations, they are now found in many main city thoroughfares. A
large branch of a well known retail chain usually serves as a malls retail flagship, which is
the primary attraction for customers. In Asian countries, many malls house swimming pools,
arcades and amusement parks. Hong Kongs City Plaza shopping mall includes one of the
territorys two ice rinks.

The rise of the Web:

The world of retail changed yet again, when in 1995, Amazon.com opened its doors to a
worldwide market on the web. With the growth of the worldwide web, both retailers and
consumers can find suppliers and products from anywhere in the world.

Thus, the evolution of retail formats worldwide has been largely influenced by a constantly
hanging social and economic landscape. One of the main reasons for new formats emerging is
the consumer himself. Todays consumer when compared to the consumer of the earliest
generation is definitely more demanding and is focused on what he wants. Consumer demand
is the prime reason for the emergence of various formats.

The retailer on the other hand, has been influenced by factors like the availability of real
estate and the increase in its prices. He is faced with the challenge of adding on new services
and the need for differentiation. This has led to specialization and the emergence of
specialists. Supply chain complexities and the increasing pressure on margins have also
forced retailers to look at new formats.

Retail development can be looked at from the theoretical perspective. No single theory can be
universally applicable or acceptable. The application of each theory varies from market to
market, depending on the level of maturity and the socio-economic conditions in that market.

The theories developed to explain the process of retail development revolve around the
importance of competitive pressure, the investments in organizational capabilities and the
creation of a sustainable competitive advantage .this requires the implementation of strategic
panning by retail organizations. Growth in retail is a result of understanding market signals
and responding to the opportunities that arise in a dynamic manner. Theories of retail of retail
development can broadly be classified as:

1) Environmental where a change in retail is attributed to the change in the environment in

which the retailers operate.
2) Cyclical where change follows a pattern ad phases can have definite identifiable
attributes associated with them.
3) Conflictual the competition or conflict between two opposite type of retailers leads to a
new format being developed.

Environmental Theory:

Darwins theory of natural selection has been popularized by the phrase survival of the fittest.
Retail institutions are economic entities and retailers confront an environment, which is made
up of customers, competitors and changing technology. This environment can alter the
profitability of a single retail store as well as of clusters and centers. The environment that a
retailer competes in is sufficiently robust to squash any retail form that does not adjust.

Thus, the birth, success or decline of different forms of retail enterprise is many a time
attributed to the business environment. For example the decline of department stores in the
western markets is attributed to the general inability of those retailers to react quickly and
positively to environmental change. Those retail institutions which are keenly aware of their
operating environment and which react without delay, again from the changes.

Thus, following the Darwinian approach of survival of the fittest, those retailers that
successfully adapt technological, economic, demographic and legal changes are the ones that
are most likely to grow and prosper. The ability to adapt to change, successfully, is at the core
of this theory.

Cyclical and Conflict Theory

The most well known theory of retail evolution is The Wheel of Retailing theory. This theory
helps us understand retail changes. This theory suggests that retail innovators often first
appear as low price operators with a low cost structure and low profit margin requirements,
offering some real advantages such as specific merchandise which enables them to take
customers away from more established competitors.

As they prosper, they develop their business, offering a greater range or acquiring more
expensive facilities, but this can mean that they lose the focus that was so important when
they entered the market. Such trading up occurs as the retailer becomes established in his own
right. This in turn, leaves room for others to enter and repeat the process. They then become
vulnerable to new discounters and lower cost structures that take their place along the wheel.
Scrambled merchandising occurs as the retailer adds goods and services that are unrelated to
each other and the firms original business to increase overall sales and profit margins. This is
termed as the wheel of retailing .This is depicted in,
The Wheel of Retailing

Vulnerability phase >>

Mature retailer
Top Heavy Conservative Declining ROI >>

Entry Phase >>

Innovative retailer:
Low status and price
Minimum service
Poor facilities
Limited product offering

Traditional retailers:

Elaborate facilities
Higher rent
More locations
Higher prices
Extended product offerings

The theory of the wheel of retailing can be understood by taking the example of department
stores, which started as low cost competitors to the small retailers; they developed and
prospered; then they were severely undercut by supermarkets and discount warehouses.

This theory does not explain the development of retail in all markets. In less developed
markets, introduction may not necessarily occur at a low price here introduction may occur
at a high price.

Hollander was a key observer of retail evolution and he used the analogy of an orchestra
comprised exclusively of accordion players to describe the dynamically shifting retail
structure.

This so called accordion effect describes how general stores moved to specialize, but the
widened their range of merchandise again as new classes of products were added. Hollander
suggested that the players either have open accordions representing general retailers with
broad product ranges or closed accordions thus indicating a narrowing of the range, focusing
on specific merchandise. He suggested that at any point in time, one type of retailer would
outnumber the other, but that the situation would continually change through the arrival and
departure of different stores. This analogy illustrates the complexity of the retail scene, and
the way different attitudes to successful retailing will come in and go out of fashion at
different times. The Accordion theory and the Wheel of retailing are known as the cyclical
theories.

Conflict Theory:

Conflict always exists between operators of similar formats or within braid retail categories.
It is believed that retail innovation does not necessarily reduce the number of formats
available to the consumer, but leads to the development of more formats. Retailing thus
evolves through a dialectic process, i.e. the blending of two opposites to create a new format.
This can be applied to developments in retailing as follows:

1) Thesis: Individual retailers as corner shops across the country

2) Antithesis: A position opposed to the thesis develops over a period of time. These are the
department stores. The antithesis is a challenge to the thesis.
3) Synthesis: There is a blending of the thesis and antithesis. The result is a position between
the thesis and antithesis. Supermarkets and hypermarkets thrive. This synthesis becomes the
thesis for the next round of evolution.

Theory of retail Conflict:

Discount store (Antithesis) >> Discount department store

Department store (Thesis) >> Discount department store

Concept of Life Cycle in Retail

The concept of product life cycle is also applicable to retail organizations. This is because
retail organizations pass through identifiable stages of innovation, development, maturity and
decline. This is what is commonly termed as the retail life cycle.

Attributes and strategies change as institutions mature. The Retail Life Cycle is a theory
about the change through time of the retailing outlets. It is claimed that the retail institutions
show an s-shaped development through their economic life. The s-shaped development curve
has been classified into four main phases:

Innovation:
A new organization is born, it improves the convenience or creates other advantages to the
final customers that differ sharply from those offered by other retailers. This is the stage of
innovation, where the organization has a few competitors. Since it is a new concept, the rate
of growth is fairly rapid and the management fine tunes its strategy through experimentation.
Levels of profitability are moderate and this stage can last up to five years depending on the
organization.

Accelerated Growth:

The retail organization faces rapid increases in sales. As the organization moves to stage two
of growth, which is the stage of development, a few competitors emerge. Since the company
has been in the market for a while, it is now in a position to pre-empt the market by
establishing a position of leadership. Since growth is imperative, the investment level is also
high, as is the profitability. Investment is largely in systems and processes. This stage can last
from five to eight years. However, towards the end of this phase, cost pressures tend to
appear.

Maturity:

The organization still grows but competitive pressures are felt acutely from newer forms of
retailing that tend to arise. Thus, the growth rate tends to decrease. Gradually as markets,
become more competitive and direct competition increases, the rate of growth slows down
and profits also start declining. This is the time when the retail organization needs to rethink
its strategy and reposition itself in the market. A change may occur not only in the format but
also in the merchandise mix offered.

Decline:

The retail organization looses its competitive edge and there is a decline. In this stage, the
organization needs to decide if it is still going to continue in the market. The rate of growth is
negative, profitability declines further and overheads are high.

The retail business in India has only recently seen the emergence of organized, corporate
activity. Traditionally, most of the retail business in India has been small owner managed
business. It is difficult to put down a retail organization, which has passed through all the four
stages of the retail life cycle.

In the private sector, till a few years ago, most cities in India had a few independent retailers.
For example, Mumbai had stores like Akbarallys., Premsons, Amarsons and Benzer. Then
Shoppers Stop opened its first outlet in Mumbai in 1991.The store initially offered apparel,
imitation jewelry cosmetics and perfumes and home fashions. It also had a customer loyalty
program in place, which many stores at that time did not offer.

The store enjoyed an enviable position for a while. However, with the change in customer
expectations and increased competition in the form of other department stores like Globus,
Eastside, Lifestyle, etc and the rise of specialty stores, the company has been forced to
rethink its product offering. It now not only stocks apparel, jewelry, cosmetics etc that it
earlier stocked but has also acquired the book store chain Crosswords.

Cross words counters have been added to many of the existing stores. The store in Andheri
(Mumbai) also houses Planet M, music retail chain and a small coffee shop. In May 2008, the
company embarked upon a major exercise in terms of repositioning of the store, which
involved among other things, a change in the logo. It is necessary to keep in mind that a
retailer need not always move from maturity to decline. By reworking the marketing strategy
or by changing the product or service offering, a retailer may succeed in moving back to the
growth phase after reaching a stage of maturity with a certain format and a certain mix of
products.