Chapter 4

Evaluating the Competition in Retailing

Models of Retail Competition

The competitive marketplace

Market structure The demand side of

retailing Nonprice decisions Competitive actions Suppliers as partners and

competitors

The Competitive Marketplace

Retailers compete for target customers on five major fronts: The price for benefits

offered Service level Product selection Location or access Customer experience

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Market Structure Economists use four different economic terms to describe

the competitive environment in the retailing industry:

Pure Competition – is rare in retailing and occurs when a market has homogeneous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers.

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

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.

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.

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Market Structure

Monopolistic competition Retailers in monopolistic competition attempt to

differentiate themselves with the products or services they offer.

Oligopolistic competition - Oligopolies are likely to end up selling at a similar

price since everybody knows what others are doing.

In rare cases, retailing is characterized as oligopolistic competition.

Oligopolistic competition is more common at a local level, especially in smaller communities.

Outshopping - Occurs when a household travels outside their community of residence or uses the Internet to shop in another community.

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The Demand Side of Retailing

In a monopolistically competitive market, the retailer will be confronted with a negatively sloping demand curve.

caused by ―the law of diminishing returns

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Nonprice Decisions

Price is the easiest variable for competitors to copy.

Ways of using nonprice variables to achieve a protected niche: Store positioning - Identifying a well-

defined market segment using demographic or lifestyle variables and appealing to this segment with a clearly differentiated approach.

Offering private-label merchandise that has unique features or offers better value than do competitors.

Providing additional benefits for the customer.

Mastering stockkeeping with its basic merchandise assortment. LO 1

Competitive Actions

Overstored - 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 - 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.

Competition is most intense in overstored markets because many retailers are achieving an inadequate return on investment

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Suppliers as Partners and Competitors

Suppliers as competitors – Suppliers compete for gross margins throughout the supply chain. The retailer must develop a loyal group of patrons that encourages the supplier to accommodate the needs of its retail partner.

Suppliers as customers– Suppliers can be a critical competitive advantage to retailers when they provide a unique product or promotion.

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Types of Competition

Intratype competition - two or more retailers of the same type compete directly with each other for the same households. The most common type of retail competition.

Intertype competition - two or more retailers of a different type compete directly by attempting to sell the same merchandise lines to the same households.

Divertive competition - retailers intercept or divert customers from competing retailers. Can be either in the form of intertype or intratype . Most retailers operate very close to their breakeven point. Break-even point - Total revenues equal total expenses and

the retailer is making neither a profit nor a loss.LO 2

Exhibit 4.6 - Retail Institutions in Their Various Stages of the Retail Life Cycle

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The Retail Life Cycle

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.

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

Maturity - Market share stabilizes and profits decline due to: shift in type of establishment overexpansion competition

Decline - A major loss of market share will occur, profits will fall, and the once-promising idea will no longer be needed in the marketplace.

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Future Changes in Retail Competition

Nonstore retailing (e-tailing, direct selling, catalog sales)

New retailing formats Heightened global competition Integration of technology Increasing use of private labels

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New Retailing Formats

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. Primary examples of off-price retailers—factory outlets and warehouse clubs.

Supercenter - A cavernous combination of supermarket and discount department store carrying more than 80,000 to 100,000 SKUs that allows for one-stop shopping.

Recycled merchandise retailers - Establishments that sell used and reconditioned products; examples include pawn and thrift shops, auction houses, flea markets, and eBay.

Liquidators - These firms purchase the inventory of the existing retailer and run its ‘‘going-out-of-business’’ sale.

Rentals, another form of retailing, has been popular for a limited number of items for decades

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Heightened Global Competition Increasing rate of change Greater diversity Creation of new retail formats

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Integration of Technology

Technological innovations can be grouped under three main areas: Supply chain management using

new initiatives such as direct store delivery (DSD) and collaborative planning, forecasting, and replenishment (CPFR) systems.

Customer management Customer satisfaction

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Increasing use of Private Labels

Develop a partnership with well-known celebrities, noted experts, and institutional authorities.

Develop a partnership with traditionally higher-end suppliers to bring an exclusive variation on their highly regarded brand name to the market.

Reintroduce products that have strong name recognition but that have fallen from the retail scene.

Brand an entire department or business; not just a product line.

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