CHAPTER 2: TYPES OF RETAILERS

ANNOTATED OUTLINE INSTRUCTOR NOTES

I. Retailer Characteristics
Ask students to compare the four elements of the
 The 1.5 million U.S. store-based retailers retail mix -- the type of merchandise sold, the
range from street vendors selling hot dogs to variety and assortment of merchandise sold, the
large corporations. level of service provided to customers, and price --
of two women's specialty stores in a local mall.
 The most basic characteristic of a retailer is Now compare the retail mixes of one of the
its retail mix--the elements used to satisfy its specialty stores and the local discount store (e.g.,
customers' needs. Wal-Mart). Use this comparison to illustrate how
the competition between the two specialty stores is
 The retail industry is always evolving. As stronger than the competition between the
consumer needs and competition within the specialty store and the discount store.
industry change, new retail formats are
created to respond to those changes.

 Four elements of the retail mix that are

particularly useful for classifying retailers
are: (1) the type of merchandise sold, (2) the
variety and assortment of merchandise sold, PPT 2-4, 2-5, and 2-6 illustrate classification of
(3) the level of customer service, and (4) the retailers by merchandise offering and by variety
price of the merchandise. and assortment.

See PPT 2-7 for a classification of retailers

A. Type of Merchandise
according to NAICS codes.
 The US Bureau of the Census uses a
classification scheme to collect data on
business activity in the US. It classifies all Use the NAICS discussion to explore categories
retail firms into a hierarchical set of six-digit students may not have considered under the
North American Industry Classification classification (motor vehicles and parts, for
System (NAICS) codes. Developed jointly instance).
by the U.S., Canada and Mexico, NAICS
provides comparable statistics about
business activity in North America.

 The first two digits of NAICS denote the

sector. The third digit denotes the sub sector.
The fourth digit represents the industry group.
The fifth digit provides a further breakdown,
while the last digit, not always used, may
differ between the U.S., Canada and Mexico.

 While a retailer's principal competitors may

be other retailers with the same NAICS code,
there are many exceptions. The degree to
which retailers compete isn't simply based on
the similarity of their merchandise. The
variety and assortment of the merchandise

1
 they offer and the services they provide must
also be considered.
See PPT 2-4, 2-5
B. Variety and Assortment.
Ask students to give examples of local retailers with
 Variety is the number of different low variety and high assortment, with high variety
merchandise categories a retailer offers. and low assortment.
Assortment is the number of different
items in a merchandise category. Each
different item of merchandise is called a What benefits does high variety offer to customers?
SKU (stock keeping unit). What is the benefit of high assortment?
Ask student to give an example of an SKU.
 Variety is often referred to as the breadth of
merchandise and assortment is referred to
as the depth of merchandise.
Discuss the different customer service policies of a
C. Services Offered
national specialty store like Victoria’s Secret and
their local department store or an Internet
 Retailers also differ in the services they offer
retailer. Discuss the type of customer that would
customers. Customers expect retailers to
shop in each store. How are they different and
provide some services--accepting personal
what type of services would they expect?
checks, providing parking, and being open
long and convenient hours.
Customers like wide variety, deep assortments,
D. Prices and the Cost of Offering Breadth
and a lot of service, though some customers
and Depth
appreciate having the retailer edit the assortment
of Merchandise and Services
for them.
Ask students why all retailers don’t have this type
 When a retailer offers many SKUs, inventory
of offering? (Can’t be everything, have constraints
investment increases because the retailer must
of money and size of store.)
have back-up stock for each SKU.

 Similarly, services attract customers to the Why don't discount stores offer more
retailer, but they are also costly. services? (They appeal to a target segment
that does not want to pay the cost for more
 A critical retail decision involves the trade-off service options.)
between costs and benefits of maintaining
additional inventory or providing additional
services.

 To make a profit, retailers that offer broader

and deeper assortments and services need to
charge higher prices.
 See PPT 2-8, 2-9, 2-10
II. Food Retailers
Ask students to compare food retailers on variety,
 Twenty years ago, consumers purchased food assortment, service, and price.
primarily at conventional supermarkets. Now
conventional supermarkets account for only
61 percent of food sales. PPT 2-10 summarizes various elements of different
types of food retailers.
 Discount stores, supercenters, conveniences
stores and warehouse clubs are significantly
changing consumers' food purchasing
patterns because they too sell food. At the
same time, traditional food retailers carry
many nonfood items.

 The world's largest food retailer is Wal-Mart

with supermarket-type sales of more than
$100 billion.
Ask students to consider the retail mixes of the
A. Supermarkets
major supermarkets in the area surrounding
campus. Which compete on price? On
 A conventional supermarket is a self-
merchandise? On service? A combination?
service food store offering groceries, meat,
produce, and limited non-food items.

 A limited assortment supermarket (also PPT 2-11 describes the Save-A-Lot retail strategy.
called an extreme value food retailer) only
stocks about 1, 250 SKUs. The two largest
US examples of these stores are Save-A-Lot
and ALDI.

 Limited assortment supermarkets are

designed to maximize efficiency and reduce
costs through limited assortment and service
offerings. These cost savings and efficiencies
allow the stores to charge significantly lower
prices than conventional supermarkets.
Ask students about why they would continue to
1. Trends in Food Retailing
shop at conventional supermarkets. Alternatively,
why would they shop for food at supercenters,
 Today, conventional supermarkets are under
discount stores or convenience stores? What types
tremendous competitive pressure.
of needs are fulfilled by conventional
Supercenters are attracting customers with
supermarkets that can’t be filled through other
their broader assortments and general
food retailing formats? Based on these
merchandise at attractive prices. Discount
discussions, will conventional supermarkets be
chains and even dollar stores are increasing
driven out of business by competing formats?
the amount of shelf space they devote to
consumables.

 Low cost competitors are especially See PPT 2-12, 2-13, 2-14, 2-15 for coverage of
challenging for conventional supermarkets Trends.
because of their superior operating
 efficiencies. In response, some conventional
supermarket chains have implemented
efficient customer response (ECR)
programs to reduce excess inventory, through
just-in-time inventory management and better
assortment planning.

 To compete successfully with intrusions by

other types of retailers, conventional
supermarkets have taken steps to
differentiate their offerings, such as
emphasizing their “power perimeters”
(areas around the outside walls with fresh
perishables such as dairy, produce, florist,
deli and bakery departments).

 Conventional supermarkets are also offering

more natural, organic, low-fat, low-sugar, and
low-salt products for their increasing health
conscious consumers and those with specific
dietary needs.

 Through adjustments to the traditional

merchandise mix, conventional
supermarkets have begun to specifically
target more ethnic shoppers.

 Increased emphasis on private label brands

and enhancements to the shopping experience
are other techniques conventional
supermarkets are using to remain ahead of the
competition in the food retailing sector.

B. Supercenters
The supercenter is one of the fastest growing retail
 Supercenters are the fastest growing retail formats. Why is the supercenter more attractive
category. At 150,000 to 220,000 square foot than a hypermarket in the U.S., but not in Europe?
these stores offer a wide variety of food and What are benefits to consumers shopping in
non-food merchandise. The largest supercenters versus conventional supermarkets?
supercenters are Wal-Mart supercenters, What are the disadvantages?
Meijer, Kmart and Fred Meyer.

 By offering broad assortments of grocery and Where do students fall on the debate over the
general merchandise under one roof, proliferation of supersize stores? Have any of their
supercenters provide a one-stop shopping hometowns faced a battle over the building of a
experience. Wal-Mart or other supercenter? Ask students why
they believe feelings run so deep on this particular
 However, since supercenters are very large, retailing issue.
some customers find them inconvenient
because it can take a long time to find the
items they want.
 Hypermarkets are also large (100,000 to
300,000 square feet) combination food and
general merchandise retailers. They typically
stock less SKUs than supercenters.

 Popular in both Europe and South America,

hypermarkets are not common in the United
States. Located in large, warehouse-type
structures with large parking facilities,
hypermarkets typically carry a larger
selection of food items than supercenters with
a focus on perishables.

 Supercenters place greater emphasis on

general merchandise and dry grocery items
such as breakfast cereals and canned goods.

 Although supercenters and hypermarkets are

the fastest growing categories in global
retailing today, these retailers do face
challenges in finding and acquiring
appropriate land for building, along with
backlash against these supersize stores,
particularly in the U.S.
Ask students to give local examples of warehouse
C. Warehouse Club
clubs. What is the target market for warehouse
clubs? (Consumers with larger families and
 A Warehouse club is a retailer that offers a
small businesses.)
limited assortment of food and general
merchandise with little service at low prices
to ultimate consumers and small
businesses.

 Stores are large (about 100,000 square feet)

and located in low rent districts.

 Warehouse clubs reduce prices by using low- Are warehouse clubs wholesalers or
cost locations and store designs. They reduce retailers? (When they sell to small businesses
inventory holding costs by carrying a limited they are wholesalers.)
assortment of fast-selling items.

 Most warehouse clubs have two types of

members: wholesale members who own
small-businesses and individual members
who purchase for their own use. Typically
members must pay an annual fee of $35 or
$45.
 Ask students to give examples of local convenience
D. Convenience Stores
stores. Why do customers go to convenience
stores? What do they like/dislike about them? In
 Convenience stores provide a limited variety
general, what is so "convenient" about
and assortment of merchandise at a
convenience stores?
convenient location in a 2,000-to-3,000-
square-foot store with a speedy checkout.
They are a modern version of the
neighborhood mom-and-pop grocery/general
store.

 Convenience stores enable consumers to

make purchases quickly without having to
search through a large store and wait in long
checkout lines.

 Convenience stores only offer a limited

assortment and variety; they charge higher
prices than supermarkets.

 Convenience stores are facing increasing

competition from other formats, especially
from supercenters and supermarket chains
who have added gasoline to their merchandise
offerings.

 In response to these competitive threats,

convenience stores are taking steps to
decrease their dependency on gasoline sales
by tailoring their merchandise assortments to
local markets and making their stores even
more convenient to shop.
 See PPT 2-16, 2-17
III. General Merchandise Retailers
PPT 2-17 compares the various types of general
 The major types of general merchandise merchandise retailers along several
retailers are department stores, full-line characteristics.
discount stores, specialty stores, category
specialists, home improvement centers,
off- price retailers, and extreme value
retailers.
See PPT 2-18, 2-19, 2-20
A. Department Stores
Ask students to give examples of local department
 Department stores are retailers that carry stores. Why do customers go to department stores?
a broad variety and deep assortment, offer What do they like/dislike about them?
some customer services, and are organized
into separate departments for displaying
merchandise.

 Department store chains are very diverse.

There are those that carry relatively
inexpensive products and compete closely Ask students to give local examples of specialty
with discount stores, including Sears and stores. What is the difference between specialty
Kohl’s; traditional departments stores like stores and department and discount stores? Where
Macy’s selling modestly priced merchandise do students buy business suits, dresses, jeans,
with moderate customer service; and chains computers, electronics? Why do they go to that type
that sell very expensive, exclusive of store? Why do some people shop at department,
merchandise that compete with high-end discount and specialty stores?
specialty store chains, such as Neiman
Marcus, Polo/Ralph Lauren, and Saks Fifth
Avenue.

 The largest department store chains in the

U.S. are Macy’s, Sears, JCPenney, and
Kohl’s.

 Each department within the store has a

specific selling space allocated to it, a POS
terminal to transact and record sales, and
salespeople to assist customers.

 The major departments are women’s, men’s,

and children’s clothing and accessories; home
furnishings and furniture; and kitchenware
and small appliances.

 Today many customers question the benefits

of shopping at department stores due to: (1)
lack of convenient locations, (2) decreases in
customer service and (3) relatively high
prices.

 In response to declining market share and

customer indifference, department stores
are
 aggressively working to differentiate their
merchandise offerings and to strengthen their
images. One approach to this differentiation
is through pursuing exclusive contracts with
popular national brands. Another approach is
the development of department stores’ own
private label brands, such as Macy’s INC and
Tools of the Trade.
See PPT 2-21
B. Full-Line Discount Stores
Discuss the target markets of the three largest
 A full-line discount store is a retailer that general merchandise discount store chains. (Wal-
offers a broad variety of merchandise, limited Mart, Target and Kmart). How will the category
service, and low prices. They offer both specialists (Toys R Us) affect the retail strategy of
private and national brands, but these brands general merchandise discount stores? What about
are typically less fashion-oriented than brands Internet only retailers? Are discount stores going
in department stores. to succeed in the “clicks” environment?

 The big three full-line discount store chains In general, what are the factors that contribute to
are Wal-Mart, Target and Kmart . the success of discount stores despite increasing
competition from other formats?
 The most significant trend in this sector is
Wal-Mart’s conversion of discount stores to
supercenters as a result of increased
competition faced by the full-line discount
stores, as well as the significant operating
efficiencies realized by supercenters.
See PPT 2-22
C. Specialty Stores
Ask students to give examples of local specialty
 A specialty store concentrates on a limited stores. Why do customers go to specialty stores?
number of complementary merchandise What do they like/dislike about them?
categories and provides a high level of
service in a relatively small store.
Specialty stores tailor their retail strategy toward
 In recent years, specialty apparel has been a very specific market segment. One specialty
one of the weakest, slowest-growing retailer, Hot Topics, focuses on selling licensed,
categories in store-based retailing. One music- inspired apparel to teenagers in mall-based
reason is an aging population: older people stores. Ask students what retail strategy elements
typically don't spend as much money on must be in place for a retailer like Hot Topics to
clothing as teenagers. remain successful.

See PPT 2-23

D. Drugstores
Ask students if they have shopped online for
 Drugstores are specialty stores that drugstore products. What has been their
concentrate on health and personal grooming experience? Do they think the Internet is a viable
merchandise. Pharmaceuticals often channel for drugstore merchandise?
represent 50 percent of drugstore sales and an
even greater percentage of their profits.

 Drug stores, particularly the national chains,

 are experiencing sustained sales growth
because the aging population requires more
prescription drugs.

 Prescription pharmaceutical margins are

shrinking due to governmental health care
policies and HMOs.

 In response, drug store chains are building

larger stand-alone stores offering a wider
assortment of merchandise, more
frequently purchased food items, and drive-
through windows for picking up
prescriptions. Also, drugstore retailers are
encouraging pharmacists to take the time to
provide personalized service.
See PPT 2-24
E. Category Specialist
Ask students to give local examples of category
 A category specialist is a discount store that specialists. How are they similar to specialty
offers a narrow variety but deep assortment of stores? Discuss the differences and similarities
merchandise. These retailers are basically with discount stores.
discount specialty stores.

 Most category specialists use a self-service

approach, but some specialists in
consumer durables offer assistance to
customers.

 By offering a complete assortment in a

category at low prices, category specialists
can "kill" a category of merchandise for other
retailers and thus are frequently called
category killers.

 Because category specialists dominate a Ask students to describe an experience at a home

category of merchandise, they can use their improvement center such as Home Depot in terms
buying power to negotiate low prices, and of merchandise, atmosphere and salesperson
assured supply when items are scarce. service.PPTs 2-25 and 2-26 illustrate the category
specialist strategies of Home Depot and Lowe’s.
 One of the largest and most successful types
of category specialist is the home
improvement center. A home improvement
center is a category specialist offering
equipment and material used by do-it-
yourselfers and contractors to make home
improvements.

 While merchandise in home-improvement

centers is displayed in a warehouse
atmosphere, salespeople are available to assist
customers in selecting merchandise and to tell
 them how to use it.

 Competition between specialists in each

category is very intense as firms expand into
the regions originally dominated by another
firm. Direct competition focuses on price,
resulting in reduced profits because the
competitors have difficulty differentiating
themselves on other elements of the retail
mix.

 In response to this increasing competitive

intensity, the category killers continue to
concentrate on reducing costs by increasing
operating efficiency and acquiring smaller
chains to gain scale economies.
See PPT 2-27 for a summary of issues facing
F. Extreme Value Retailers
extreme value retailers.
 Extreme value retailers, such as Family Ask students to name the extreme value retailers in
Dollar Stores and Dollar General, are small, the local marketplace. How many have shopped at
full-line discount stores that offer a limited one of them? For what types of merchandise? What
merchandise assortment at very low prices. is the primary appeal of these retailers?

 By offering limited assortments and operating

in low-rent locations, extreme value retailers
are able to reduce costs and maintain very
low prices.

 Once considered low-status retailers catering

to low-income consumers, extreme value
retailers have broadened their appeal to
higher-income consumers by offering
exciting bargains and unique merchandise.
Ask students to give examples of local off-price
G. Off-Price Retailers
retailers. What do consumers like about off-price
retailers? What don't they like?
 Off-price retailers offer an inconsistent
assortment of brand name, fashion-oriented
soft goods at low prices.

 Off price retailers can sell brand name and

even designer-label merchandise at low
prices due to their unique buying and
merchandising practices. Most merchandise
is bought opportunistically from
manufacturers or other retailers with excess
inventory at the end of the season..

 Typically, merchandise is purchased at one-

fifth to one-fourth of the original wholesale
price. Off-price retailers can buy at low
 prices because they don't ask suppliers for
advertising allowances, return privileges,
markdown adjustments, or delayed payments.

 Due to this pattern of opportunistic buying,

customers can't be confident that the same
type of merchandise will be in stock each Ask students which type of off-price retailer offers
time they visit the store. consumers truly the best value? Why?

 Close-out retailers are off-price retailers that

sell a broad, but inconsistent assortment of
general merchandise as well as apparel and
soft home goods.

 Outlet stores are off-price retailers owned

by manufacturers, or by department or
specialty store chains.

 Outlet stores owned by manufacturers are

frequently referred to as factory outlets.

 Manufacturers view outlet stores as an

opportunity to improve their revenues from
irregulars, production overruns, and
merchandise returned by retailers. Outlet
stores also allow manufacturers some control
over where their branded merchandise is sold
at discount prices.
See PPT 2-28, 2-35 and 2-36 for a summary of the
IV. Nonstore Retailers
categories and results typical for popular
nonstore retail formats.
 The major nonstore retailing channels are the
Internet, catalogs and direct mail, direct Ask students to think about their most recent
selling, television home shopping, and purchase of a product through the Internet, a
vending machines. catalog or cable TV network. Engage in a
discussion of the types of products bought most
often through these formats.
See PPT 2-29
A. Electronic Retailers

 Electronic Retailing (also called e-tailing,

online retailing and Internet Retailing) is a
retail format in which the retailers
communicate with customers and offer
products and services for sale over the
Internet. Engage students in a discussion of which types of
consumers would or would not prefer to shop
 In today’s marketplace, the Internet is through the Internet. Focus the discussion on types
primarily used by traditional retailers as a tool of merchandise, services, risks involved, etc.
to complement their store and catalog
offerings and to provide additional value to
customers.
  It is interesting to note that two of the most
prominent Internet “retailers”, Amazon.com
and eBay, are not retailers at all. Rather, a
majority of Amazon’s revenues are generated See PPT 2-30 for a discussion of Amazon.com and
through sales of its Web site development and eBay.
fulfillment services to other retailers, while
eBay is not directly involved in transactions
between buyers and sellers.
See PPT 2-31
B. Catalog and Direct-Mail Retailers

 Catalog Retailing is a nonstore retail format

in which the retail offering is communicated
to a customer through a catalog.

 Direct-mail Retailers communicate with

their customers using letters and brochures.

 Major catalog retailers have embraced

a multichannel strategy by integrating
the Internet into their catalog
operations..
1. Types of Catalog and Direct-Mail Retailers
Ask students about products they or someone in
 Two types of firms selling products through their household usually purchase through a
the mail are (1) general merchandise and catalog. Do they think there is a good on-going
specialty-catalog retailers and (2) direct mail relationship between the catalog marketer and the
retailers. consumer? What are the benefits and/or
disadvantages in buying through catalogs?
 General Merchandise Catalog Retailers
offer a broad variety of merchandise in their
catalogs that are periodically mailed to their
customers (e.g., JCPenney).

 Specialty-catalog Retailers focus on specific Ask students if they have received catalogs
categories of merchandise, such as fruit and direct-mail solicitations. What are the
(Harry and David), gardening tools (Smith & types of catalogs and direct-mail letter that
Hawken), and seeds and plants (Burpee). they would simply discard as "junk mail?"
Why?
See PPT 2-32
C. Direct Selling

 Direct Selling is a retail format in which a

salesperson, frequently an independent
businessperson, contacts a customer
directly in a convenient location, either at
the customer's home or at work, and
demonstrates merchandise benefits, takes Ask students if they have experienced direct selling,
an order, and delivers the merchandise to either the party plan system (e.g., Tupperware) or
the customers. multilevel selling (e.g., Amway) and have them
describe their experiences.
 Direct selling is a highly interactive form of
 retailing in which considerable information is
conveyed to customers through face-to-face
discussions with a salesperson. However,
providing this high level of information,
including extensive demonstration, is costly.

 Two types of direct selling are party plan

and multilevel selling.
What ethical issues do students find in the direct
 In a party plan system, salespeople selling category?
encourage customers to act as hosts and invite
friends or co-workers to a "party" at which
the merchandise is demonstrated in a party-
like atmosphere. The host or hostess receives
a commission for arranging the meeting.

 In a multilevel network, people serve as

master distributors, recruiting other people to
become distributors in their network. The
master distributors either buy merchandise
from the firm and resell it to their distributors
or receive a commission on all merchandise
purchased by the distributors in their network.

 Some multilevel direct selling firms are

illegal pyramid schemes. A pyramid scheme
develops when the firm and its program are
designed to sell merchandise and services to
other distributors rather than to end users.
The founders and initial distributors in
pyramid schemes profit from the inventory
bought by later participants but little
merchandise is sold to consumers who use it.
See PPT 2-33
D. Television Home Shopping

 Television Home Shopping is a retail format

in which customers watch a TV program
demonstrating merchandise and then place
orders for the merchandise by telephone. The Ask students if they have bought anything in
three forms of electronic home shopping response through cable TV advertisements,
retailing are: (1) dedicated cable channels, infomercials or through direct-response
(2) infomercials (TV programs, typically 30 advertisements. What types of merchandise are
minutes long), and (3) direct-response usually bought through these formats? Why are
advertising (advertisements on TV and radio these formats more appropriate for such
that describe products and provide and merchandise?
opportunity for consumers to order them).

 The major advantage of TV home shopping

compared to catalog retailing is that
consumers can see the merchandise
 demonstrated on the TV screen.

 However, consumers can't examine a

particular type of merchandise or a specific
item when they want to, as they can with
catalogs.
See PPT 2-34
E. Vending Machine Retailing

 Vending Machine Retailing is a nonstore

format in which merchandise or services are Ask students about the types of products they would
stored in a machine and dispensed to like to see offered through convenient vending
customers when they deposit cash or use a machines. Explore the current limitations
credit card. Vending machines are placed at (regulatory or technological) due to which such
convenient, high-traffic locations such as in products are not currently offered through vending
the workplace or on university campuses and machines.
primarily contain snacks or drinks.

 Technological developments in vending

machine design may result in long-term
sales growth.
See PPT 2-37, 2-38, 2-39
VI. Services Retailing
Ask students to give examples of service retailers.
 Service Retailers are firms that primarily What is an example of a services retailer with a
sell services rather than merchandise and are broad variety? Narrow variety? Deep assortment?
a large and growing part of the retail Shallow assortment?
industry.

 Trends contributing to the growth of services

retailing include: aging population, younger
people spending more time and money on
health and fitness, and parents in two-income
families requiring household services. Compare the elements in the retail mix -- location,
assortment, pricing, promotion, visual
 Many organizations such as banks, hospitals, merchandising and customer services -- in
health spas, doctors, legal clinics, merchandise and services retailers. How are they
entertainment firms, and universities that the same and how are they different?
offer services to consumers traditionally
haven't considered themselves as retailers.
Due to increased competition, these
organizations are adopting retailing principles
to attract customers and satisfy their needs.

 All retailers provide goods and services for

PPT 2-40 provides a merchandise/service
their customers. However, the emphasis
continuum that can be used for discussion.
placed on the merchandise versus the
services differs across retail formats.
Supermarkets and warehouse clubs consist of
self-service stores that offer very few
services. Optical centers and restaurants lie
somewhere in the middle of the
merchandise /service continuum. Retailers
whose offering is
 primarily services include airlines and banks.

A. Differences between Services and

Merchandise Retailers

 Four important differences in the nature of

the offering provided by services and
merchandise retailers are: (1) intangibility, (2)
simultaneous production and consumption,
(3) perishability, and (4) inconsistency of the
offering to customers.

1. Intangibility
Ask students how customers can evaluate the
 Services are generally intangible -- customers quality of an intangible service offering. What
cannot see, touch, or feel them. Services are problems does intangibility cause for the services
performances or actions rather than objects. retailer?

 Intangibility introduces a number of

challenges for services retailers. It is difficult
for customers to evaluate services before they
buy them, or even after they buy and
consume them. Services retailers often use
tangible symbols to inform customers about
the quality of their services.

 Services retailers also have difficulty in

evaluating the quality of services they are
providing. To evaluate the quality of their
offering, services retailers place emphasis on
soliciting customer evaluations and
complaints.

2. Simultaneous Production and

Consumption What problems does simultaneous production
cause for the services retailer?
 Service providers create and deliver the
service as the customer is consuming it. The
simultaneity of production and consumption
creates some special problems for services
retailers.

 First, the customers are present when the

service is produced, may have an opportunity
to see it produced, and in some cases, may be
part of the production process.

 Other customers consuming the service at the

same time can affect the quality of the
service provided.

 Finally, the services retailer often does not get

 a second chance to satisfy the needs of their
customers. While customers can return
damaged merchandise to a store, customers
that are dissatisfied with services have limited
recourse. Thus it is critical for services
retailers to get it right the first time.

 Because services are produced and consumed

at the same time, it is difficult to reduce costs
through mass production.

3. Perishability
What problems does perishability cause for the
 Because the creation and consumption of services retailer? Give examples of retailers for
services is inseparable, services are which perishability is a real problem? What do
perishable. They can't be saved, stored, or these retailers do to minimize the problem?
resold. This is in contrast to merchandise,
which can be held in inventory until a
customer is ready to buy it. What actions have students seen services retailer
take to make waiting time more enjoyable for
 In addition, the demand for a service varies customers?
considerably over time. Thus, service retailers
often have times when their services are
underutilized and other times when they have
to turn customers away because they can not
accommodate them.

 Service retailers use a variety of programs to

match demand and supply. The also attempt
to make customer waiting time more
enjoyable.
What problems does inconsistency cause for the
4. Inconsistency
services retailer? Are there services retailers
whose inconsistency is acceptable? (Custom
 Merchandise is often produced by machines
designers, hair “artists”)
with very tight quality control. Because
services are performed by people, no two
services will be identical.

 Thus, an important challenge for service

retailers is providing consistently high-quality
services.
See PPT 2-41
VII. Types of Ownership

 Another way to classify retailers is by their

ownership. The major classifications of retail .
ownership are: (1) independent, single-store
establishments, (2) corporate chains, and (3)
franchises.
Ask students to give examples of local independent,
A. Independent, Single-Store
 Establishments single-store retailers. Do they shop at
independents? Why? Will national chains drive all
 Over 60,000 new retail businesses are started independents out of business?
in the United States each year, and many such
stores are owner-managed.

 While single-store retailers can tailor their

offering to their customers' needs, corporate
chains can more effectively negotiate lower
prices for merchandise and advertising due to
their larger size.

 To better compete against corporate chains,

some independent retailers join a
wholesale-sponsored voluntary chain.

 A wholesale-sponsored voluntary
cooperative group is an organization
operated by a wholesaler offering a
merchandising program to small,
independent retailers on a voluntary basis.

B. Corporate Retail Chains

There is a lot of concern in small towns that
 A retail chain is a company operating corporate retail chains such as Wal-Mart will drive
multiple retail units under common local independent retailers out of business. What
ownership and usually having some can small retailers do to compete against these
centralization of decision making in defining giants?
and implementing its strategy.

 Due to scale economies and an efficient Wal-Mart has pursued a strategy of opening stores
distribution system, corporate chains can sell on the outskirts of small rural towns with
at lower prices. This forces some directly populations between 25,000 and 50,000. These
competing local retailers out of business and stores offer broader selection of merchandise at
alters the community fabric. much lower prices than previously available from
local retailers. Discuss the pros and cons of this
 On the other hand, local retailers offering strategy in class. What ramifications may result?
complementary merchandise and services can (Monopolizing market, demise of small stores,
prosper. Often, all stores in a chain have the potential to become major employer in rural area).
same merchandise and services, while local
retailers can provide merchandise compatible
with local market needs.

Ask students to give examples of local franchises. If

C. Franchising
they wanted to own a retail business, would they
want a franchise or their own store? Why? What
 Franchising is a contractual agreement
are the advantages of being a franchisee?
between a franchisor and a franchisee that
allows the franchisee to operate a retail outlet
using a name and format developed and
supported by the franchisor. Approximately PPTs 2-42 and 2-43 provide a brief introduction to
one-third of all US retail sales are made by the Franchising form of retail ownership. For a
 franchisees. more detailed discussion on Franchising, see the
Ancillary Lecture 2-1 at the end of this chapter.
 In a franchise contract, the franchisee pays a
lump sum plus a royalty on all sales for the
right to operate a store in a specific location.
The franchisee also agrees to operate the
outlet as per the procedures prescribed by the
franchisor. The franchisor provides
assistance in locating and building the store,
developing the products and/or services sold,
management training, and advertising.

 The franchise ownership format attempts

to combine the advantages of owner-
managed businesses with efficiencies of
centralized decision-making in chain store
operations.
VIII. Summary
 Over the past 30 years, U.S. retail markets
have been characterized by the emergence of
many new retail institutions. Traditional
institutions have been joined by category
specialists, hypermarkets and nonstore
retailers among others.

IX. Appendix 2A: Comparison Shopping

For an exercise on comparison shopping see
Ancillary Exercise 2-2. Breaking the class into
 All retailers learn about their competitors
groups and having each group do a comparison
through comparison shopping. It might be as
shopping exercise is a good way to get students to
informal as walking through a competitor's
understand the difference between retailers and the
store and looking around. But, a structured
types of decisions retail manager make. Have each
analysis is more helpful in developing a retail
group compare different institutions selling the
offering that will attract consumers from a
same merchandise category. For example, men's
competitor's store.
suits in a department store and men's specialty
store, athletic shoes in a discount store and
 The first step is to define the scope of the
specialty shoe store, CD's in a discount store and a
comparison. For example, the comparison specialty music store.
might be between two retail chains, two
specific stores, two departments, or two
categories of merchandise. The appropriate
scope depends on the responsibilities of the
person undertaking the comparison.

 Comparisons might also focus on chains'

financial resources, inventory levels, number
of stores and employees, store locations,
merchandise sold, employee compensation
programs, and return policies.
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. Distinguish between variety and assortment. Why are these important elements
of retail market structure?
The main difference between variety and assortment is that variety refers to the number
of different merchandise categories a retailer sells, whereas assortment is the number of
different items or SKUs in a merchandise category. In addition, variety is often referred
to as the breadth of merchandise carried by the retailer, and assortment is referred to as
the depth of merchandise. These elements form an integral part of the retail market
structure, since it is the retail offering that ultimately distinguishes one retailer from
another.

2. How can small independent retailers compete against the large national chains?
It is very difficult for independents to compete against chains on price. Corporate chains
can buy merchandise at lower cost because they buy in large quantities. Thus, they can
offer the same merchandise at lower prices than independents.
However, chains also tend to have the same merchandise in all stores. Thus
independents can compete effectively against chains by offering merchandise that is
tailored to the needs of the local community.
In addition, chains are often very bureaucratic. They have a lot of rules, which constrain
the nature of the service that can be provided to customers. In addition, store managers
in chains often move from store to store or they are promoted to higher-level
management positions. Therefore, they have less opportunity to develop long-term
relationships with customers.
Independents can compete by offering better service—by developing personal
relationships with local customers.

3. What do off-price retailers need to do to compete against other formats in

the future?
The main competitive weapon for the off-price retailers is their low price. While they
may not directly compete with higher service formats, such as department and specialty
stores, they do face increasing competition from discount stores. Here, the off-price
stores may be at a relative disadvantage since their merchandise is based upon
opportunistic buying, while discount stores offer a relatively stable mix of merchandise
at stable prices (everyday low pricing).
Since the option of improving service may increase costs and weaken their only source
of competitive advantage, low price, off-price retailers should focus on strategies to
keep their costs and prices low and explore low cost methods of attracting and retaining
customers. In terms of keeping operational costs low, they can locate in lower cost
urban and rural areas (note that outlet stores are more clustered within outlet malls
located farther from the city but near major highways). They can also implement more
efficient inventory and merchandise management systems (note that for a discount
store, such as Wal-Mart, operational efficiency and costs reductions are crucial to
offering lower prices to customers). Also, they can expand their sourcing to include
imports from low cost international markets.
 Another threat for off-price retailers may be from Internet stores. Often several stores
publicize their low prices and also attempt to match consumer price preferences through
reverse bidding and auctions (sites such as Priceline and eBay). Off-price retailers can
explore the possibility of using the Internet for relatively low cost advertising about
current merchandises (since their merchandise stocks fluctuate more rapidly due to
opportunistic buying). Factory outlet stores. On the other hand, can compete more
directly over the Internet.

4. Compare and contrast the retail mixes of convenience stores, traditional

supermarkets, superstores, and warehouse stores. Can all of these food
retail institutions survive over the long run? How? Why?

Element of Convenience Traditional Superstore Warehouse

Retail Mix Store Supermarket Store
Location Typically Typically in strip Typically in strip shopping Typically in
freestanding, shopping centers centers strip shopping
easily accessible centers
sites
Merchandis Limited variety Average variety and Greater variety with deeper Greater variety
e and assortment assortment assortment than supermarket with about the
Assortment same
assortment as
supermarket.
Primary
difference is
that
merchandise
assortment
varies because
of opportunistic
buying.
Pricing Higher pricing Average pricing. Some Lower pricing than supermarkets. Lower pricing
than chains have constant Typical every day pricing. than
supermarkets (every day) pricing and supermarkets.
others have special sale Pricing
(high-low) pricing. depends on
cost of
merchandise
bought on
special buys.
Advertising Limited High-low pricing chains Limited advertising since most have Minimal
and advertising, advertise weekly specials. everyday pricing. promotion
Promotion frequent shopper since all
programs tied to Minimal Minimal merchandise is
gasoline sales. basically on
Personal Minimal sale.
selling
Minimal
Store Designed for Typically use a grid-iron Same as supermarket. Same as
design and quick and easy with cross-hatch aisles, supermarket. A
display merchandise extensive signs. bit more
selection and disorganized to
checkout give the
customers the
feel of
searching for a
bargain.

Service Minimal Some services for Some services for produce, bakery, Minimal
produce, bakery, meat meat and fish areas.
and fish categories.

All four types will persist because they appeal to different customer needs. The
warehouse stores typically have larger pack sizes that are very attractive to customers
with large families and to small business owners like local restaurants. In addition, due
to the varying assortments, customers who are brand loyal might not want to shop in
these stores.
Convenience stores are located and designed to offer customers a snack, quick meal or
minimal grocery/general merchandise purchase along with their gasoline. These retailers
offer easy in and out access and speedy transactions. In response to competitive
pressures from other food retailers, as well as dependency on gasoline sales, many
convenience stores are now offering consumers fresh food and healthy fast food choices
to reduce dependency on fuel sales while maintaining on-the-go ease and convenience.
The superstores are low in price but more inconvenient to shop in because of the large
size. Thus they appeal to customers who are very price conscious and are willing to
drive a longer distance and spend more time shopping in a larger store.
Conventional supermarkets are the most convenient. In major metro areas, there is a
conventional supermarket two to three miles from everyone’s home. They also provide
more services for customers such as cutting meat to order. Conventional supermarkets
appeal to customers who value service and convenience and are not as price conscious.
Note that the same consumer may shop at all four types of food retailers depending on
the nature of the shopping trip. For example, a consumer might stock up on basic such
as toilet paper, soft drinks, and can goods at a warehouse or superstore and then go to a
supermarket to buy meat, produce, and gourmet food.

5. Why are retailers in the limited assortment supermarket and extreme value
discount store sectors growing so rapidly?
Both limited assortment supermarkets and extreme value discount stores focus on
relatively limited merchandise offerings at highly appealing (low!) prices. The retail
formats are able to offer their extremely low prices through maximizing efficiency. By
reducing extras and service offerings, as well as managing a relatively low merchandise
assortment, these retailers are able to provide consumers with the “thrill of the hunt” for
amazing deals.
6. The same brand and model personal computer is sold in specialty computer stores,
discount stores, category specialists, and warehouse stores. Why would a customer
choose one store over another?
Each type of retail store provides a unique combination of price and services tailored to
the needs of different types of customers. The specialty store typically will have higher
prices, but will offer more services. It will have salespeople with technical expertise
available to provide information to customers and answer questions. This service is
particularly valuable to customers who do not know much about computers.
On the other hand, discount stores, category specialists, and warehouse stores have
lower prices and do not offer much personalized service. These stores are more
attractive to customers who have more expertise and do not need personalized service.
Due to the greater assortment in category specialists, customers are able to compare the
prices and features of different brands in one store visit. Warehouse and discount stores
have limited assortments and thus customers can only see a limited set of brands and
models. But they can also buy merchandise in different product categories at the same
time they are buying a computer.

7. Choose a product category that both you and your parents purchase (e.g., clothing,
CDs, electronic equipment). In which type of store do you typically purchase this
merchandise? What about your parents? Explain why there is (and is not) a
difference in your store choices.
Students may emphasize specialty stores such as The Gap, Old Navy, Circuit City, Best
Buy etc. for their purchases for clothing, CDs, or electronic equipment, while
mentioning that their parents favor traditional department stores such as Macy's or
Sears for the purchase of such product categories. If price is a major factor, there may
be some similarities between the students and their parents; both may shop at discount
stores.
The merchandise, service and prices for the various retail formats stocking different
product categories are different. In general, stores deliberately targeting a younger
population will be favored by students since these stores would better match their
expectations of merchandise (such as fashion clothing), prices and services (students
may consider themselves savvy customers for certain products, such as CDs and
electronic equipment, and may not need the type of service demanded by their parents).

8. At many optical stores you can get your eyes checked and purchase glasses or
contact lenses. How is the shopping experience different for the service as
compared to the product? Design a strategy designed to get customers to purchase
both the service and the product. In so doing, delineate specific actions that should
be taken to acquire and retain optical customers.
Optical stores present an interesting mix of service and related merchandise. On one
hand, the eye examination is usually done by a trained and licensed eye doctor and here
the service experience is often very professional and similar to a visit to any physician or
hospital. On the other hand, the glasses or contact lenses are displayed in a retail store
setting with the service being mostly oriented towards helping the customer try out
various options. The contrasts between the service and retail environments may be
unnerving for some customers.
 One strategy to reduce the gap is to ensure that the retail setting is very professional and
courteous. Since the problem has been detected and identified by the eye doctor, the
sales staff in the retail setting could engage and interact more directly with the customer
with more of a problem-solving approach. This would involve educating consumers on
various issues, including the merits/demerits of using glasses or contact lenses, the types
of lenses and coatings, proper care of glasses and contact lenses, etc.
It must also be recognized that most customers who are prescribed glasses for the first
time are likely to continue wearing glasses or contact lenses for the rest of their lives.
Thus, it is important to start building consumer trust and confidence through
professional service and expertise. One strategy would be to encourage customers to
return for an eye examination every year and also have their current prescription for the
glasses or lenses checked. Another is to provide free repair service for the frames.

9. Which of the store-based retail formats discussed in this chapter is most

vulnerable to competition from the Internet retailers? Why? Which is least
vulnerable? Why?
Over the Internet, consumers can easily compare the prices of standardized and branded
products. Also, in several cases (such as for books, music, software, and travel), the
convenience of searching over the Internet for various products is higher than physical
comparison shopping. However, Internet shopping also suffers from various risks and
disadvantages. Shoppers may not feel comfortable in providing their credit card and
other information over the Internet. Also, buying over the Internet may add to the
delivered price for the consumer, especially when considering shipping and handling
costs. Moreover, Internet buying also involves delayed gratification, i.e., consumers
would have to await delivery of the products they purchased. There is also the added
disadvantage of not being able to try out a product (such as clothing) or seeing a
demonstration (such as the working of a stereo system).
Category specialists that deal in product categories, such as books, CDs, DVDs,
software, computer hardware, travel reservations, etc. are most vulnerable to
competition from the Internet, since the Internet provides consumers with greater
convenience of shopping for a needed product from home and also better price
comparison across various retailers. On the other hand, category specialists that provide
superior service and consumer information, such as fashion goods retailers, may be less
vulnerable to Internet competition. Of course, the least vulnerable will be the service
retailers who provide services to consumers that require either the consumer's or their
product's presence (such as a haircut or car repair).

10. Many experts believe that customer service is one of retailers' most important
issues in the new millennium. How can retailers that emphasize low price (such as
discount stores, category specialists, and off-price retailers) improve customer
service without increasing costs and thus, prices?
It is very difficult to offer high-quality, personalized customer service at a low cost,
because personalized service is provided by people who have to be paid more. Price-
oriented retailers provide service by using signage to make it easy for customers to
locate products, having many checkout counters so customers can pay for merchandise
quickly, and using displays to demonstrate the use of merchandise and information
about the merchandise. These store layout and display activities do not require people,
but they make it easier for customers to buy merchandise.
 Personalized service from employees can be provided economically by having a
centralized place in the store where experts are available to answer questions. Rather
than have a lot of employees circulating throughout the store, a smaller number of
employees can be in one central location. However, customers will have to come to the
service providers rather than the service providers going to the customers.

SAMPLE ANSWERS TO SELECTED “GET OUT AND DO ITS”

4. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau
of the Census Internet site at www.census.gov/mrts/www/mrts.html. Look at the
unadjusted monthly sales by NAICS. Which categories of retailers have the largest
percentage of sales in the fourth quarter (the holiday season)?

Students will notice that many retail categories generate their largest percentage of sales
in the fourth quarter. Some 2005 examples (in $millions) are:
(443) Electronics and Applicance Stores: 31,115
(44312) Computer and Software Stores: 5,571
(4453) Beer, Wine and Liquor Stores: 10,373
(44812) Women’s Clothing Stores: 11,171
(45111) Sporting Goods Stores: 9,038
(454) Nonstore Retailers: 74,062

6. INTERNET EXERCISE Go to Entrepreneur Magazine’s Franchise Zone web page

at http://www.entrepreneur.com/franchise500 and list the top 500 franchises for the past
year. How many of these retailers in the Top Ten have you patronized as a customer?
Did you know that they were operated as a franchise? Look at the list for previous years
to see changes in the rankings. Click on the link, About the Franchise 500, and describe
what factors were used to develop the list. Finally, what is the nature of the business
that seems to lend itself to franchising?

The Top 10 Francises for 2006 include many familiar names. Students will likely report having
visited a Subway, Quiznos, Dunkin’ Donuts or 7-Eleven. While Subway has held the number
one spot on the Top 10 listing for several years, students should uncover some notable changes
in the Top 10. Perhaps most significant, Quiznos Sub has moved up the Top 10 List over the
past fours years to its current position at number two. This should prove an interesting point for
discussion of competitive strategy. Do students believe Quiznos can overtake Subway? Other
major changes over the past 3 years have been the movement of McDonald’s, Taco Bell and
KFC out of the Top 10 List and the replacement of convenience food franchises with tax
preparation and real estate service businesses.

The web site notes that the list of the Top 500 franchises is based on quantifiable measures such
as financial strength and stability, growth rate, size of the system, and number of years in
business. Students will likely notice that service-based retailers tend to lend themselves best to
the franchise system, particularly those services that allow for standardization of business
practices and retail operating formats.
ADDITIONAL ASSIGNMENTS AND EXERCISES

Exercise 2-1

Types of Retailers - In-class Exercise

Retail Formats

Chapter 2 discusses several types of retail formats. After reviewing this section of your text,
complete the table below by listing the key issues impacting each retail format. Be prepared to
discuss your responses with the entire class.

Retail Format Key Issues

Food Retailers

Discount Stores

Specialty Stores

Category
Specialists

Department Stores
Exercise 2-1 with Answers

Types of Retailers - In-class Exercise

Chapter 2 discusses several types of retail formats. After reviewing this section of your text,
complete the table below by listing the key issues impacting each retail format. Be prepared to
discuss your responses with the entire class.

Retail Format Key Issues

Food Retailers - Increasing competition form other types of retailers
- Wal-Mart and other discounters selling more food items
- Drug chains carry much of the same merchandise as food stores
- Fast food restaurants sell healthy food alternatives
- Convenience stores sell prepared meals, drinks and snacks
- Offering “meal solutions” to counter competitive pressures, see
better margins on prepared foods
Discount Stores - Push to carry more grocery items
- Intense competition from other formats
- Creating a more attractive place to shop with more apparel and
strong private label merchandise
- EDLP and efficient operations
- Americans want good value, not just cheap merchandise
- High concentration – three top players
- Wal-Mart dominates the category
Specialty Stores - Weak, slow growing area in retailing
- Aging population is less interested in fashion spending
- Competition from discount stores
- Fashion rapidly changes as do customers tastes and preferences
Category - Regional roots, now expanding
Specialists - Competition is intense and focused on price, therefore the result is
thin margins and little differentiation
- Stress decreasing costs through efficient operations and economies
of scale
- Service level may be used for brand differentiation
Department Stores - Overall sales are stagnant and market share has fallen in recent years
- Increased competition from discount and specialty stores
- Not seen as “romantic or convenient” as in the past
- Located in large malls
- Specific merchandise is hard to find
- Less service is being offered
- Charge higher prices than competitors
- Some are lowering prices and offering more private label merchandise
- Work closely with vendors to better stock merchandise
Exercise 2-2

Types of Retailers – Reading Assignment

Value Retailers

Read the articles listed below and answer the following question:

Why are Value Retailers one of the fastest growing segments in retailing?

Berner, Robert. “Bargains at either end of the spectrum.” Businessweek, December 29, 2003.
(Business Source Premier)

“Wal-Mart ‘in small boxes’ is booming.” The Baltimore Sun, December 6, 2003. (National
Newspapers)

Consider each of the following in your response:

 Growth plans

 Direct competition in the category

 Competition against other formats

 Geographic and socioeconomic segmentation strategy

 Pricing strategy

 Investor’s perspective
Exercise 2-2 with Answers

Types of Retailers – Reading Assignment

Value Retailers

Read the articles listed below and answer the following question:

Why are Value Retailers one of the fastest growing segments in retailing?

Berner, Robert. “Bargains at either end of the spectrum.” Businessweek, December 29, 2003.
(Business Source Premier)

“Wal-Mart ‘in small boxes’ is booming.” The Baltimore Sun, December 6, 2003. (National
Newspapers)

Growth plans
- Poised well to grow during economic recovery
- Opening larger stores that will sell more food items
- Regional growth planned
- 600 new stores this year, and 675 new stores next year
Direct competition in the category
- Four leading chains – Dollar General, Family Dollar Stores, 99 Cents Only, and
Dollar Tree
Competition against other formats
- Squeezing out competitors
- Smaller than Wal-Mart and Target
- This format is showing 18% growth annually vs. 14.5% for mass discounters and 12%
for warehouse clubs
Geographic and socioeconomic segmentation strategy
- Urban and rural strip malls
- Convenient locations
- Poor neighborhoods
- Targets consumer with <$35,000 household income
- Tries to serve an underserved market
Pricing strategy
- Low prices on commodities
Investor’s perspective
- Stock is performing well
- Solid margins
- Accounting scandal - new management now in place and SEC fine expected
- Strong growth
ANCILLARY LECTURES AND EXERCISES
LECTURE # 2-1: FRANCHISING
--------------------------------------------------
Instructor’s Note: Franchising is one of the most popular and successful ways for individuals to
start their own business. The growth in franchising as a retail format will probably continue in
the near future. Many students who take a retailing course have intentions of someday starting
their own business and this lecture may provide them with an interesting possibility to consider.
Instructors might want to use this lecture as a stimulus to a class discussion on the topic.
PowerPoint slides 2-42 to 2-52 can be used with this lecture.

--------------------------------------------------
Introduction
Franchising is the licensing of an ENTIRE business format by a parent company
(FRANCHISOR) to a number of outlets (FRANCHISEES) to market a product or service
and engage in a business developed by the FRANCHISOR using the FRANCHISOR’S trade
names, trademarks, know-how, and methods of doing business.
In 1985, sales of goods and services by all franchising companies exceeded $529 billion,
approximately 33 percent of all U.S. retail sales flow.
There are roughly half a million establishments in franchise-related businesses.

The growth of franchising

See PPT 2-44. Franchising has had a steady stream of growth. Some of the reasons include

1. Technological advances,
2. Profitable utilization of capital resources,
3. Attainment of the American dream,
4. Demographic expansion, and
5. Product/service consistency.
Technological advances
Equipment and systems--reduce product variability and more efficient marketing and
distribution systems.
For example: Electronic Data interchange.

Profitable utilization of capital resources

Can tap savings and credit capacity of individuals to realize national product/service
saturation

Attainment of the American dream

Owning your own business.

Demographic expansion
Urban “sprawl” creates need for more small retail establishments.
No-longer just downtown locations.
Product/service consistency
Due to geographic mobility, franchises have provided a level of homogeneous (boring)
quality in its product or service.
For example: A Big Mac tastes the same everywhere.

Types of franchise systems

See PPT 2-45. There are various types of franchise systems including

1. Territorial,
2. Operating,
3. Mobile,
4. Distributorship,
5. Co-ownership,
6. Co-management,
7. Leasing/Licensing,
8. Manufacturing, and
9. Service.

Territorial franchise
The franchise granted encompasses several counties or states.
The holder of the franchise assumes the responsibility for setting up and training individual
franchisees within his territory and obtains an ‘override” on all sales in his territory.
For example: McDonalds and Burger King Regional franchises.

Operating franchise
The individual independent franchisee that runs his own franchise.
He deals either directly with the parent organization or with the territorial franchise holder.
For example: McDonalds and Burger King individual locations.
Mobile franchise
A franchise that dispenses its product from a moving vehicle, which is either owned by the
franchisee or leased from the franchisor.
For example: Country Store on Wheels and Snap-On Tools.

Distributorship
The franchisee takes title to various goods and further distributes them to sub-franchisees.
The distributor has exclusive coverage of a wide geographical area and acts as a supply
house for the franchisee that carries the product.
For example: Texaco gasoline supply centers.
Co-ownership
The franchisor and franchisee share the investment and profits.
For Example: Denny’s Restaurant.
Co-management
The franchisor controls the major part of the investment.
The partner-manager shares profits proportionately.
For example: Travelodge and Holiday Inn.
Leasing/Licensing
The franchisor leases/licenses the franchisee to use his trademarks and business techniques.
The franchisor either supplies the product or provides franchisees with a list of approved
suppliers.
For example: Sheraton Hotels.

Manufacturing
The franchisor grants a franchise to manufacture its product through the use of specified
materials and techniques.
The franchisee distributes the product, utilizing the franchisor’s techniques.
This method enables a national manufacturer to distribute regionally when distribution costs
from central manufacturing facilities are prohibitive.
For example: Sealy.
Service
The franchisor describes patterns by which a franchisee supplies a professional service, as
exemplified by employment agencies.
For example: Personnel One.

Why franchises fail

Individuals who are interested in franchising need to recognize that there is risk despite the
high potential for success.
See PPT 2-46. Franchises can fail for several reasons including
1. Inept management,
2. Fraudulent activities, and
3. Market saturation.
Inept management
Poor finances, product/service mix rejected, grew too quickly.
Fraudulent activities
The selling of unsound or unproven franchises to ignorant buyers, unfair contracts, etc.

Market saturation
Too many franchises of same type, e.g., chicken fast-food.

Franchisors and the marketing channel

See PPT 2-47. A franchisor may occupy any position in the marketing channel.
Manufacturer-retailer franchise
Automobile dealers and service stations.
Manufacturer-wholesaler franchise
Coca-Cola, Pepsi, Seven-Up, etc. sell syrup they manufacture to franchised wholesalers who
bottle and distribute to retailers.

Wholesalers-retailer franchise
Rexall Drugs and Sentry Drugs.

Service Sponsor--Retailer franchise

Avis, Hertz, and National, McDonald’s, Chicken Delight, KFC, Howard Johnson’s and
Holiday Inn, Midas and AMCO, Kelly Girl and Manpower

Franchisor benefits
See PPT 2-48. Franchisees (the store) provide benefits for the franchisor (the parent
company).

Continuous market
Insured through consistent quantity and quality and strong promotion.

Market information
Information such as sales, local advertising, employee turnover, profits, etc. is usually
provided.

Money
Principal sources of franchise company revenue.

Royalty fees
Royalties provide continuous income although often the rate may decrease as sales
volume increase.
Sometimes a flat rate is established regardless of level of sales.
Sales of products
Often the franchisor supplies raw materials and finished products to the franchisee at a
profit.
For example, Coke supplies syrup, Holiday Inn supplies furniture and carpeting.

Rental and lease fees

The franchisor may lease buildings, equipment, and fixtures.

License fees
There may be special fees that allow the franchisee to use and display the franchisor’s
trademark.

Management fees
Franchisor can charge for consultant fees, management reports, training, etc.
Franchisee benefits
See PPT 2-49. Franchisors provide benefits for the franchisee through initial and continuous
services. .

Initial services
There are a number of initial services that franchisors provide for franchisees including
1. Market survey and site selection,
2. Facility design and layout,
3. Lease negotiation advice,
4. Financing advice,
5. Operating manuals,
6. Management training programs, and
7. Employee training.

Continuous Services
There are also a number of continuous services that franchisors offer to franchisees
including
1. Field supervision,
2. Merchandising and promotional materials,
3. Management and employee retraining,
4. Quality inspection,
5. National advertising,
6. Centralized purchasing,
7. Market data and guidance,
8. Auditing and record keeping,
9. Management reports, and
10. Group insurance plans.

Franchisor advantages/disadvantages
Depending upon which viewpoint one takes (the franchisor or franchisee) there are many
advantages and disadvantages of franchising.
See PPT 2-50. From the perspective of the franchisor, the advantages include
1. Rapid expansion,
2. Highly motivated franchisees do a good job, and
3. Additional profits by selling franchisees products and services.
The disadvantages include
1. Company-owned units may be more profitable,
2. Less control than independent retailers over advertising, pricing, personnel practices, etc.
(e.g., can’t fire franchisee).
Franchisee advantages/disadvantages
See PPT 2-51. From the viewpoint of the franchisee the advantages include
1. Established/proven product/service,
2. Business and technical assistance, and
3. Reduction in risk.
The disadvantages include
1. Loss of control -- are really only semi-independent business people,
2. Many franchisors own a number of their outlets which may compete with those
owned by franchisees, and
3. High royalties, fees, costs of equipment, supplies, merchandise, rental or lease
rates and mandatory participation in promo and support services.

Franchising trends for the New Millennium

Most of the growth of franchising occurred in the 1980s in the retailing of goods and
services. However, there two basic types of franchising that merit consideration.
The first, product and trade franchising, a common form of retailing in the automobile and
petroleum industry, focuses on what is sold.
Examples include brands like Ford, Honda, and Texaco.
The second, business format franchising, sells the right to operate the same business in
different geographic locations.
The emphasis here is on how the business is run.
Examples include Kentucky Fried Chicken, McDonald’s and Burger King.
See PPT 2-52. The major franchising trends perceived for New Millennium are
1. Sustained growth,
2. Enduring plus unimagined applications,
3. International expansion,
4. Increased tensions, and
5. Greater emphasis on financial returns.
Sustained Growth
It is perceived that franchising will continue to grow steadily, a trend begun in the 1980s.
One of the possible explanations for this growth is that franchising offers franchisors rapid
expansion as well as highly motivated owner-managers.
Also, annual growth in franchised sales volume will exceed the inflation rate by several
percentage points.

Enduring plus unimagined applications

Today, such things like video yearbooks, house-sitting services, and house calls by doctors
may be owned by franchises.
With the applications such as these, the possibilities are certainly diverse.
 For example, in the future, franchisees will come from three main sources, which include
middle managers, women, and independent small-business owners.

International expansion
Franchisors are currently exploring foreign markets.
In fact, in 1988 one-sixth of all business-format franchisors had businesses outside the
United States.
In addition, this trend has also been reciprocated by foreign franchisors as well.
However, non-U.S. franchisors have had a more difficult time in the U. S. due to stiff
competition.

Increasing tensions
Despite the overwhelming of franchisors on the whole, there is still a major source of
contention.
That is, franchisor-franchisee relations have witnessed a rise in class-action suits and
arbitration hearings.
In 1989, over 400 franchisee-related hearings were held.
Dissatisfaction among franchisees could originate from various sources.
First, perceived inequity among this group regarding mandated or proposed changes may be
a major source of conflict.
Also unsatisfactory financial performance may be another cause of discord.

Greater emphasis on financial returns

The main sources of financial returns include: dual operations in which a franchisee may be
permitted to run two or more franchises from a common or adjacent area; reduced costs due
to downsizing; and incentives for ownership.
[Source: This lecture was adapted from Gerald Pintel and Jay Diamond, Retailing, 4th ed.
(Englewood Cliffs, NJ.: Prentice-Hall, 1987), pp. 73-76. in El-Ansary and Stern’s book,
Marketing Channels, Prentice-Hall, 3rd. ed. , 1988, p. 333); Bruce J. Walker, “Retail Franchising
in the 1990s,” Retailing Issues Letter, Published by Arthur Andersen & co, in conjunction with
the Center for Retailing Studies, Texas A&M University, Vol.; 3, No.1, January 1991, pp. 1-.]

EXERCISE # 2-2: COMPARATIVE SHOPPING ASSIGNMENT

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Instructor’s Note: The purpose of this assignment is to give the student an opportunity to get out
and examine retailing strategy from an objective, professional, and non-consumer point of view.
For many students, this will be the first time that they have looked at a retail store from this
perspective. Instructors might want to use this exercise as a stimulus to a class discussion on the
topic.

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Instructions
Students should choose two stores selling the same classifications of merchandise, e.g. Best
Buy and Circuit City.
Another alternative would be to choose two departments within different department stores
as long as they sell the same classifications, e.g. Juniors at Neiman Marcus and Juniors at
Macy’s.
Students could even choose one department within a department store and one specialty
store with the same merchandise classifications, e.g. Brooks Brothers and the men’s
suit department at J. C. Penney.
The important thing is that these two stores/departments cater to two very different market
segments.
Students should be required to collect information on the two stores or departments by
posing as a customer and interviewing a manager or buyer.
In the formal interview, they should be sure to have the questions thought out in advance
(Note that students will find the Appendix to Chapter 2 in the text to be helpful in this area).
Also, they should document, with footnotes, information which was obtained by the store, or
by secondary sources of information.
The written phase of the project is designed to answer two questions.
First, what is the description of the target markets being addressed by both stores or
departments.
This section need not be long, but should be as specific as possible.
Clearly, this section will benefit from a personal interview.
The second section of the paper consists of a comparison of strategies between the two
stores or departments using the following elements of the “Retailing Mix”:
1. Merchandising,
2. Location,
3. Price,
4. Promotion, and
5. Services/Organization and Personnel.
The final project should be evaluated according to specific guidelines established by the
instructor.
Generally, most instructors have found that it is helpful if papers are typed double-spaced.
In addition, formal business report writing is a good experience for the students.
Although there may be some discretion with regard to length, ten pages seems to be a
minimal amount in order to gain any type of in-depth knowledge.