Retailing MKTG 6211

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: Macys, Bloomingdales 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, Golfsmith Bed, Bath and Beyond, Linens N Things, Container Store Sports Authority, Dicks Sporting Goods, Academy Sports

Types of Retailers Price

Discount Stores lower margins, higher volume
Wal-Mart, Target, Meijer

Off-Price Retailers lower cost merchandise

TJMaxx, Marshalls, Ross

Factory Outlets manufacturer outlet for out-of season

Burlington Coat Factory, Off-Fifth, Nordstrom Rack Entire outlet malls

Warehouse Clubs
Costco, Sams Club

Hypermarket
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, Walgreens), some specialty stores (e.g., Office Depot, Barnes & Noble)

Limited Service Available salesperson

Most department stores (e.g., Macys, JCPenney, Neiman Marcus), some specialty stores (e.g., JCPenney, Gap, Kohls)

Full Service Salesperson assists the customer

Some specialty stores (e.g., Zales, Nine West), restaurants

Self Service

Full Service

Retailer Costs Increase with Service!

Retailers of Services
Type of Service
Airlines
Automobile maint/repair Automobile rental Banks Child care centers Credit cards Education Entertainment parks Financial services Fitness Health Care Home maintenance

Service Retail Firms

American, Delta, British Airways, Singapore Airways
Jiffy Lube, Midas, AAMCO Hertz, Avis, Budget, Alamo Citibank, NCNB, Bank of America Kindercare, Gymboree American Express, VISA, Mastercard University of Florida, Babson College Disney, Universal Studios, Six Flags Merrill Lynch, Dean Witter Jazzercise, Ballys, Golds Gym Humana, HCA Chemlawn, MiniMaid, Roto-Rooter
Adapted from Levy and Weitz

Express package delivery Federal Express, UPS, US Postal Service

Retailers of Services
Type of Service
Hotels and motels Income tax preparation Insurance Internet access/Elec info. Long-distance telephone Movie theaters Real estate Restaurants Truck rentals Weight loss Video rental Vision centers

Service Retail Firms

Hyatt, Sheraton, Marriott, Days Inn H & R Block Allstate, State Farm American On-Line, CompuServe AT&T, MCI, Sprint AMC, Loews/Sony, Universal Century 21, Coldwell Banker TGI Fridays, Wendys, Pizza Hut U-Haul, Ryder Weight Watchers, Jenny Craig Blockbuster 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 Two Wal-mart, Target, Kmart Competition from Category Killers KB Toys, Best Buy, PetSmart Possible Competitive Responses:
Continue to Reduce Costs Add Additional Variety (e.g., Banking, Pharmacy, Health Care) More Focus on Apparel Because It Offers Higher Margins

Except Wal-Mart, Which is Focusing on Food!

Adapted from Levy and Weitz

Strategic Profit Model Overview

Net profit

Asset turnover

= Return on assets

Net profit x Net sales (crossed out)

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

Source: Levy and Weitz

Strategic Profit Model Detail

Net Sales

Cost of goods sold Variable expenses

Gross margin

+
Fixed expenses Inventory Total expenses

Net profit

Net Sales

Net profit margin

x +
Accounts receivable
Total current assets

Return on assets

Net sales

Total assets

Asset turnover

+
Other current assets

+
Fixed assets

Source: Levy and Weitz

Strategic Profit Model RETURN ON ASSETS

Return on assets = Net profit margins X Asset turnover

=
=

Net profit Net sales

Net sales Total assets

Net profit Total assets = 8.86%

Wal-Mart:

$ 4,430 $49,996

Tiffany:

$ 90 $1,057

8.51%

Source: Levy and Weitz

Revenue / Margin % Portfolio GENERAL MERCH. DISCOUNT STORES

High

Sales Dollar Volume

Low

High Stationary/ Greeting Cards Shoes Kitchen/ Hardware/ Men's House- Building Wear wares Supplies Toys Automotive Sporting Goods

Giftware Jewelry & Handbags/ Watches Accessories

Women's Wear

Gross Margin Percentage

Hosiery Paint & Girls Wallpaper Boys Wear Pet Luggage Wear Supplies

Books
Infants Ware Lawn & Garden Photo CDs & Goods Tapes RTA Furniture

Magazines

Consumer Electronics
Low

Candy Traffic Appliances

Tobacco

Revenue / Margin % Portfolio GROCERY STORES

High

Sales Dollar Volume

Low

High

Milk

Foils, bags, wraps Yogurt

Ice cubes
Spices Pasta

Bread

Ice cream

Teas Rices

Cat litter

Gross Margin Percentage

Cookies Soup

Crackers Spaghetti sauce Tuna

Cooking oils Facial tissue Peanut butter Bleaches

Laundry detergent RTE cereal Low

Toilet tissue

Revenue / Margin % Portfolio CONVENIENCE STORES

High

Sales Dollar Volume

Low

High

Hot Bev Ice Sandwiches Other SandFast Candy & -Fresh Food wichesGum Cooked Salty GM Juices Food Auto Frozen Snacks Bottled CookIce HBC Cream ies PckgdWater Deli Frozen Deli Svcs Food Groceries Wine/ Liquor Produce Breads & Cakes Eggs Milk Publications Fountain Drinks Frozen Bev

Gross Margin Percentage

Soft Drinks

Tobacco Low

Beer

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) - address wants and

needs of particular customer segment(s) Container Store, Hallmark
Adapted from Michael Porter

Competitive Positioning

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

Competitive Positioning Examples

Value, or Low Price Away from Competitors Against a Competitor

E

Wide Variety; Deep Assortment Service; Ease of Shopping

D B F

G H

C
A

Convenience

User Image

Retail Competition Example MARKET FOR WOMENS APPAREL

Source: Levy and Weitz

Trends in Retail Competition

Increasing Diversity of Retail Formats
Category killers Supercenters Internet Retail

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

Trends in Retail Blurring Formats

Various Formats Now Offer: Pharmacy Financial Services, Banking Video Rental Prepared Foods Health Care?

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 Ranking 1 2 3 4 5 8 11 12 14 20 25 Description REGULAR SOFT DRINKS READY TO EAT CEREAL LOW CALORIE SOFT DRINKS REFRIGERATED SKIM/LOW-FAT MILK SHELF STABLE BREAD CIGARETTES CARTON TOILET TISSUE DISPOSABLE DIAPER/LINER INTERNAL ANALGESICS TABLET DRY CELL BATTERY PAPER TOWELS % Spending % Spending % Spending % Spending in Grocery in Mass in Drug in Club 88.5% 7.7% 2.0% 1.8% 91.3% 4.7% 0.3% 3.8% 88.9% 8.2% 2.1% 0.7% 90.3% 1.5% 3.9% 4.3% 95.3% 3.5% 0.4% 0.8% 31.0% 52.4% 35.8% 36.9% 25.2% 46.4% 36.2% 35.5% 55.8% 29.1% 47.9% 40.1% 10.4% 3.0% 5.9% 27.4% 20.1% 2.0% 22.4% 9.1% 2.5% 6.6% 6.8% 11.4%

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

Trends in Retail Consolidation

Discount Stores
Wal-Mart, Target, Kmart

Drug stores
Walgreens, CVS, Eckerd

Office Supply Category Killers

Office Depot, Staples, Office Max

Consolidation increases efficiency and lowers costs

Source: Levy and Weitz