Chapter 4

Evaluating the Competition in Retailing

Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.

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Learning Objectives
Explain the various models of retail competition Distinguish between various types of retail
competition

Describe the four theories used to explain the

evolution of retail competition

Describe the changes that could affect retail

competition

Models of Retail Competition

LO 1

The Competitive Marketplace Market Structure The Demand Side of Retailing The Supply Side of Retailing The Profit-Maximizing Price Nonprice Decisions Competitive Actions

The Competitive Marketplace

LO 1

While retailers typically compete for customers on a local level, catalog and electronic retailers compete at national and international levels.

Market Structure
LO 1

Pure Competition Pure Monopoly Monopolistic Competition Oligopolistic Competition

Market Structure
LO 1

Pure Competition Occurs when a market has homogenous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers.

Market Structure
LO 1

Pure Monopoly Occurs when there is only one seller for a product or service.

Market Structure
LO 1

Monopolistic Competition Occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products.

Market Structure
LO 1

Oligopolistic Competition Occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers.

Market Structure
LO 1

Outshopping Occurs when individuals in one community travel usually to a larger community to shop.

The Demand Side of Retailing

Demand as a Function of Price
LO 1: Exhibit 4.1

Price

Quantity Demanded
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The Supply Side of Retailing

Fixed Costs
LO 1

Dollars Unit Sales Quantity or Sales Volume

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The Supply Side of Retailing

Variable Costs
LO 1

Dollars Unit Sales Quantity or Sales Volume

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The Supply Side of Retailing

Total Costs
LO 1

Dollars Unit Sales Quantity or Sales Volume

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The Profit-Maximizing Price

LO 1

A profit-maximizing price seeks to get as much profit

as possible from the sale of each unit.

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Nonprice Decisions
LO 1

Nonprice competition strategies Position itself as different from the competition by altering its merchandise mix to offer higher quality goods, great personal service, etc. Offering private label merchandise.

Provide free services or products, such as free gas to out of town customers.
Strive to always have basic merchandise in stock.

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Nonprice Decisions
LO 1

Store Positioning Is when a retailer identifies a well-defined market segment using demographic or lifestyle variables and appeals to this segment with a clearly differentiated approach.

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Nonprice Decisions: Private Labels of Major Retailers

LO 1: Exhibit 4.2

Kmart: Joe Boxer, Martha Stewart Everyday, Disney Sears apparel brands: Apostrophe, TKS, Lands End JCPenny: St. Johns Bay, Arizona, Stafford Wal-Mart: Equate, Simply Basic, Great Value Target: Cherokee, Honors, Furio

Saks Fifth Avenue: 5/48, Real Clothes, SFA Collections Federated Department Stores: I.N.C., Alfani, Green Dog Nordstrom: BP, Halogen, Studio 121 Lord and Taylor: Katie Hill, Context, Identity

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Competitive Actions
LO 1

Competitive activity can be examined by the number of retail establishments of a given type per thousand households.

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Competitive Actions
LO 1

Overstored
Is a condition in a community where the number of stores in relation to households is so large that to engage in retailing is usually unprofitable or marginally profitable.

Understored
Is a condition in a community where the number of stores in relation to households is relatively low so that engaging in retailing is an attractive economic endeavor.

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Types of Competition
LO 2

Intratype and Intertype Competition Divertive Competition

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Types of Competition
LO 2

Intratype Competition
Occurs when two or more retailers of the same type as defined by NAICS codes in the Census of Retail Trade, compete directly with each other for the same households.

Intertype Competition
Occurs when two or more retailers of a different type, as defined by NAICS codes in the Census of Retail Trade, compete directly by attempting to sell the same merchandise lines to the same households.

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Intratype and Intertype Competition

LO 2

Intratype competition for books.

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Intratype and Intertype Competition

LO 2

Intertype competition for video rentals.

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Intratype and Intertype Competition

LO 2

Intertype Competition

Supermarkets offering Home Meal Replacements (HMR) compete with fast-food restaurants
Albertsons Supermarket

McDonalds

Food Giant Supermarket

Intratype Competition
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Types of Competition
LO 2

Divertive Competition Occurs when retailers intercept or divert customers from competing retailers.

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Types of Competition
LO 2

Break-even Point Is where total revenues equal total expenses and the retailer is making neither a profit nor a loss.

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Evolution of Retail Competition

LO 3

The Wheel of Retailing The Retail Accordion Retail Life Cycle

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Evolution of Retail Competition

LO 3

The Wheel of Retailing Theory

Describes how new types of retailers enter the market as low-status, low-margin, low-price operators; however, as they meet with success, these new retailers gradually acquire more sophisticated and elaborate facilities, and thus become vulnerable to new types of low-margin retail competitors who progress through the same patter.

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The Wheel of Retailing Theory

LO 3: Exhibit 4.3

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Wheel of Retailing
LO 3

Some would argue that McDonalds has become a victim of the wheel of retailing. When McDonalds started out, it served a select menu. Over the years, the McDonalds product offering has expanded to the inclusion of playgrounds, thus opening the way for new, low-cost fast-food providers, such as Checkers.
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Evolution of Retail Competition

LO 3

Retail Accordion Describes how retail institutions evolve from outlets that offer wide assortments to specialized stores and continue repeatedly through the pattern.

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The Retail Accordion

LO 3

Wide Assortment

Time

Narrow Assortment

Wide Assortment
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Evolution of Retail Competition

LO 3

Retail Life Cycle Describes four distinct stages that a retail institution progresses through: Introduction Growth

Maturity
Decline

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Evolution of Retail Competition: The Retail Life Cycle

LO 3

Introduction Begins with an aggressive, bold entrepreneur who is willing and able to develop a different approach to retailing of certain products. During this stage profits are low, despite increasing sales levels.

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Evolution of Retail Competition: The Retail Life Cycle

LO 3

Growth Sales and profits explode, validating the entrepreneurs good idea. New retailers enter the market and begin to copy the retailers idea. Late in this stage both market share and profitability approach their maximum levels.

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Evolution of Retail Competition: The Retail Life Cycle

LO 3

Maturity Market share stabilizes and profits decline because: managers use to managing simple small retail outlets must now manage large complex firms,

industry has overexpanded, and

competitive assaults by new retail formats.

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Evolution of Retail Competition: The Retail Life Cycle

LO 3

Decline The once promising idea is no longer needed in the marketplace. As a result, market share and profits fall.

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Retail Institutions in the Four Stages of The Retail Life Cycle

LO 3: Exhibit 4.4

Introduction Growth E-tailing Food Courts (1990s) (1980s)

Recyclers (2000s)

Airport-based retailers (1980s) Supercenters (2000s)

Maturity Warehouse clubs(1970s) Department stores (1860s) Supermarkets (1930s) Convenience stores (1960s) Category killers (1970s) Fast food (2000s)

Decline Variety Stores (1890s)

Factory outlet malls (1970s) Department stores (2000s)

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Resource-Advantage Theory
LO 3

Resource-advantage theory Is based on the idea that all firms seek superior performance in an ever-changing environment.

Illustrates two important lessons for retailers:

Superior performance at any point in time is a result of achieving a competitive advantage in the market place as a result of some tangible or intangible entity (resource). All retailers cannot achieve superior results at the same time.

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Future Changes in Retail Competition

LO 4

Nonstore Retailing New Retail Formats Heightened Global Competition Integration of Technology Increased use of Private Labels

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Future Changes in Retail Competition

LO 4

Nonstore Retailing

Direct selling Catalog sales E-tailing

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Future Changes in Retail Competition

LO 4

New Retail Formats Supercenters Recycled Merchandise Retailers Liquidators

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Future Changes in Retail Competition: New Retail Formats

LO 4

Off-price Retailers Sell products at a discount but do not carry certain brands on a continuous basis. They carry those brands they can buy from manufacturers at closeout or deep one-time discount prices.

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Future Changes in Retail Competition: New Retail Formats

LO 4

Supercenters Combine a discount store and grocery store to carry 80,000 to 100,000 products in order to offer one-stop shopping.

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Future Changes in Retail Competition: Supercenters

LO 4

Number of Supercenters by Retailer 1998 1999 721 127 126 105 16 2000 894 144 135 115 31

Wal-Mart Meijer Kroger Kmart Target

564 117 105 102 14

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Future Changes in Retail Competition: New Retail Formats

LO 4

Recycled Merchandise Retailers Are establishments that sell used and reconditioned products.

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Future Changes in Retail Competition: New Retail Formats

LO 4

Liquidators Liquidates leftover merchandise when an established retailer shuts down or downsizes.

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Leading U.S. Retailers by Sales

LO 4
$200B $30B $10B

Sears

Wal-Mart
$5B $800M $500M $200M 1900 20 30 40 50 60 70 80 90 2000
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K-Mart A&P

The Relationship of Price Versus Nonprice Actions and Demand Curve

LO 4
Price Price D1 D2

Quantity Pricing Actions move the consumer up and down the current demand curve.

Quantity Non-price Actions seek to shift the demand curve to right and make it more inelastic.
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Future Changes in Retail Competition

LO 4

Heightened Global Competition Increasing Rate of Change Greater Diversity Creation of New Retail Formats

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Future Changes in Retail Competition

LO 4

Integration of Technology Supply Chain Management Customer Management Customer Satisfaction

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Future Changes in Retail Competition

LO 4

Increasing Use of Private Labels Helps in protecting retailer niche Sets retailer apart from competition

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Arizona Jeans Co.

LO 4

JCPenney has built significant store loyalty through the introduction and development of the private label brand Arizona Jeans Co.

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Question to Ponder
Should retailers advertise the fact that they are the
owners of the private label brand(s) they sell?

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Future Changes in Retail Competition

LO 4

Private Label Branding Strategies

Developing a partnership with well-known celebrities, noted experts, and institutional authorities. Developing a partnership with traditionally higher-end suppliers to bring an exclusive variation on their highly regarded brand name to the market. Reintroducing products with strong name recognition that have fallen from the retail scene. Branding an entire department or business; not just a product line.

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Additional Slides

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Market Structure
LO 1

Monopolistic Pure Competition Competition

Retail Competition

Oligopolistic Competition

Pure Monopoly

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Future Changes in Retail Competition

LO 4
Nonstore Retailing

New Retail Formats

Integration of Technology Increased use of Private Labels

Heightened Global Competition

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Future Changes in Retail Competition: Nonstore Retailing

LO 4

Direct Selling

Catalog Sales

E-tailing

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Future Changes in Retail Competition: New Retail Formats

LO 4

Supercenters

Recycled Merchandise Liquidators Retailers

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Future Changes in Retail Competition: Heightened Global Competition

LO 4

Increased Rate of Change Greater Diversity Creation of New Retail Formats

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Future Changes in Retail Competition: Integration of Technology

LO 4

Supply Chain Management

Customer Customer Management Satisfaction

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