Retailing
What is retailing? We all know that Costco, Home Depot, Macy’s, and Whole Foods Market are retailers, but so are Amazon.com, the local Hampton Inn, and a doctor seeing patients. Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, nonbusiness use. Many institutions—manufacturers, wholesalers, and retailers—do retailing. But most retailing is done by retailers, businesses whose sales come primarily from retailing. Retailing plays a very important role in most marketing channels. Last year, retailers accounted for more than $5.3 trillion of sales to final consumers.2
Retailing: Connecting Brands with Consumers
Retailers connect brands with consumers in the final phases of the buying process and at the point of purchase. In fact, many marketers are now embracing the concept of shopper marketing, focusing the entire marketing process—from product and brand development to logistics, promotion, and merchandising—toward turning shoppers into buyers as they approach the point of sale. Of course, every well-designed marketing effort focuses on customer buying behavior. What differentiates the concept of shopper marketing is the suggestion that these efforts should be coordinated around the shopping process itself.
Shopper marketing builds around what P&G calls the “First Moment of Truth”—the critical three to seven seconds that a shopper considers a product on a store shelf. However, the dramatic growth of online and mobile shopping has added new dimensions to shopper marketing. The retailing “moment of truth” no longer takes place only in stores. Instead, Google defines a “zero moment of truth,” when consumers begin the buying process by searching for and learning about products online.3
Today’s consumers are increasingly omni-channel buyers, who make little distinction between in-store and online shopping and for whom the path to a retail purchase runs across multiple channels. For these buyers, a particular purchase might consist of researching a product online and buying it from an online retailer without ever setting foot in a retail store. Alternatively, they might use a smartphone to research a purchase on the fly or even while in retail store aisles. For example, it’s common to see a consumer examining an item on a shelf at Target while at the same time using a mobile app to look for coupons or check product reviews and prices at Amazon.com.
Shopper marketing: The dramatic growth in online and mobile shopping has added new dimensions to “point of purchase.” Influencing consumers’ buying decisions as they shop now involves omni-channel efforts aimed at integrating in-store, online, and mobile shopping.
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Thus, these days, shopper marketing and the “point of purchase” go well beyond in-store buying.
They involve consumers working across multiple channels as they shop. Influencing consumers’ buying decisions calls for omni-channel retailing, creating a seamless cross-channel buying experience that integrates in-store, online, and mobile shopping.4
Although most retailing is still done in retail stores, in recent years direct and online retailing have been growing much faster than store retailing. We discuss direct, online, and omni-channel retailing in detail later in this chapterand in Chapter 17. For now, we will focus on store retailing.
Types of Retailers
Retail stores come in all shapes and sizes—from your local hairstyling salon or family-owned restaurant to national specialty chain retailers such as REI or Williams-Sonoma to megadiscounters such as Costco or Walmart. The most important types of retail stores are described in
Table 13.1 and discussed in the following sections. They can be classified in terms of several characteristics, including the amount of service they offer, the breadth and depth of their product lines, the relative prices they charge, and how they are organized.
Table 13.1
Major Store Retailer Types
Amount of Service
Different types of customers and products require different amounts of service. To meet these varying service needs, retailers may offer one of three service levels: self-service, limited service, and full service.
Self-service retailers serve customers who are willing to perform their own locate-compare-select process to save time or money. Self-service is the basis of all discount operations and is typically used by retailers selling convenience goods (such as supermarkets) and nationally branded, fast-moving shopping goods (such as Target or Kohl’s). Limited-service retailers, such as Sears or JCPenney, provide more sales assistance because they carry more shopping goods about which customers need information. Their increased operating costs result in higher prices.
Full-service retailers, such as high-end specialty stores (for example, Tiffany or Williams-Sonoma) and first-class department stores (such as Nordstrom or Neiman Marcus), assist customers in every phase of the shopping process. Full-service stores usually carry more specialty goods for which customers need or want assistance or advice. They provide more services, which results in much higher operating costs. These higher costs are passed along to customers as higher prices.
Product Line
Retailers can also be classified by the length and breadth of their product assortments. Some retailers, such as specialty stores, carry narrow product lines with deep assortments within those lines. Today, specialty stores are flourishing. The increasing use of market segmentation, market targeting, and product specialization has resulted in a greater need for stores that focus on specific products and segments.
By contrast, department stores carry a wide variety of product lines. In recent years, middle-market department stores have been squeezed between more focused and flexible specialty stores on the one hand and more efficient, lower-priced discounters on the other. In response, many have added promotional pricing to meet the discount threat. Others have stepped up the use of store brands and single-brand shop-in-shop concepts to compete with specialty stores. Still others are trying direct and online selling. Service remains the key differentiating factor. Retailers such as Nordstrom, Saks, Neiman Marcus, and other high-end department stores are doing well by emphasizing exclusive merchandise and high-quality service.
Supermarkets are the most frequently visited type of retail store. Today, however, they are facing slow sales growth because of slower population growth and an increase in competition from discounters (Walmart, Costco, and Dollar General) on the one hand and specialty food stores (Whole Foods Market, Trader Joe’s, ALDI, Sprouts) on the other. Supermarkets’ share of U.S. packaged foods sales slipped from 53 percent in 1998 to 37 percent in 2012.5 Supermarkets also have been hit hard by the rapid growth of out-of-home eating over the past two decades.
In the battle for “share of stomachs,” some supermarkets are competing head-on with large discounters such as Costco and Walmart by cutting costs, establishing more-efficient operations, and lowering prices. An example is WinCo, the fast-growing regional discount-grocery chain in the western United States that positions itself directly against mighty Walmart as “The Supermarket Low Price Leader.” WinCo’s large, efficient, no-frills stores carry a limited assortment of basic fast-moving merchandise, and customers help to keep costs down by bagging their own groceries and paying cash (no credit cards accepted). As a result, WinCo doesn’t just match Walmart’s prices; it often undercuts them.
Other supermarkets have moved upscale, providing improved store environments and higher-quality food offerings, such as from-scratch bakeries, gourmet deli counters, natural foods, and fresh seafood departments. Still others are introducing their own smaller, fresh-format stores that compete with higher-end specialty grocers such as Whole Foods Market, Sprouts, or Fresh Thyme. These fresh-format stores cater to customers seeking health and wellness and the ease of shopping in smaller, warmer environments. They specialize in fresh produce and high-quality prepared foods—all at affordable prices. An example is Kroger’s Main & Vine stores, “where eating is healthy, affordable, and fun.”6 According to its online site, “Main & Vine is an awesome new market (really, it’s awesome!) where fresh food comes first and flavor brings people together. You’ll find groceries you can feel good about, friendly advice, and a whole lot more . . . right where you live, work and play.”
Convenience stores are small stores that carry a limited line of high-turnover convenience goods. After several years of stagnant sales, these stores are now experiencing growth. Many convenience store chains have tried to expand beyond their primary market of young, blue-collar men by redesigning their stores to attract female shoppers. They are shedding the image of a “truck stop” where men go to buy gas, beer, cigarettes, or shriveled hot dogs on a roller grill and are instead offering freshly prepared foods and cleaner, safer, more-upscale environments.
Many convenience stores are expanding their offerings to attract “fill-in” shoppers—people looking to pick up a few items between major grocery store trips. For example, in addition to supermarkets, Kroger operates almost 800 convenience stores. It is currently testing the fill-in concept in its Loaf ‘N Jug chain:7
Loaf ‘N Jug convenience stores offer gas and an expanded selection of fresh produce, meats, frozen foods, and dairy items along with a wide variety of snacks, beverages, groceries, and other convenience products. They offer a range of healthier options as well, such as fresh fruit, salads, and nuts and dried fruit. Loaf ‘N Jug stores also carry Kroger’s affordable Simple Truth store brand of natural and organic foods. “We’re trying to provide that one-stop shop for the customer who’s looking for a place for that fill-in shop: fresh produce, meat, meal solutions, whether it be hot meal solutions or expanded grocery, expanded frozen,” says the president of Loaf ‘N Jug. “It’s the place where variety meets convenience.”
Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, nonfood items, and services. Walmart, Target, Meijer, and other discount retailers offer supercenters, very large combination food and discount stores. Whereas a traditional grocery store brings in about $517,000 a week in sales, a supercenter brings in about $1.4 million a week.8
Recent years have also seen the rapid growth of superstores that are actually giant specialty stores, the so-called category killers (for example, Best Buy, Home Depot, Petco, and Bed Bath & Beyond). They feature stores the size of airplane hangars that carry a very deep assortment of a particular line. Category killers are found in a wide range of categories, including electronics, home-improvement products, books, baby gear, toys, home goods, party goods, sporting goods, and even pet supplies.
Finally, for many retailers, the product line is actually a service. Service retailers include hotels and motels, banks, airlines, restaurants, colleges, hospitals, movie theaters, tennis clubs, bowling alleys, repair services, hair salons, and dry cleaners. Service retailers in the United States are growing faster than product retailers.
Relative Prices
Retailers can also be classified according to the prices they charge (see Table 13.1). Most retailers charge regular prices and offer normal-quality goods and customer service. Others offer higher-quality goods and service at higher prices. Retailers that feature low prices are discount stores and “off-price” retailers.
Discount Stores
A discount store (for example, Target, Kohl’s, or Walmart) sells standard merchandise at lower prices by accepting lower margins and selling higher volume. The early discount stores cut expenses by offering few services and operating in warehouse-like facilities in low-rent, heavily traveled districts. Today’s discounters have improved their store environments and increased their services while at the same time keeping prices low through lean, efficient operations.
Leading “big-box” discounters, such as Walmart and Target, now dominate the retail scene. However, even “small-box” discounters are thriving in the current economic environment. For example, dollar stores are now today’s fastest-growing retail format. Back in the day, dollar stores sold mostly odd-lot assortments of novelties, factory overruns, closeouts, and outdated merchandise—most priced at $1. Not anymore. Dollar General, the nation’s largest small-box discount retailer, makes a powerful value promise for the times: “Save time. Save money. Every day”:9
Discounter Dollar General, the nation’s largest small-box discount retailer, makes a powerful value promise for the times: “Save time. Save money. Every day!”
Bloomberg via Getty Images
Off-Price Retailers
As the major discount stores traded up, a new wave of off-price retailers moved in to fill the ultralow-price, high-volume gap. Ordinary discounters buy at regular wholesale prices and accept lower margins to keep prices down. By contrast, off-price retailers buy at less-than-regular wholesale prices and charge consumers less than retail. Off-price retailers can be found in all areas, from food, clothing, and electronics to no-frills banking and discount brokerages.
The three main types of off-price retailers are independents, factory outlets, and warehouse clubs. Independent off-price retailers either are independently owned and run or are divisions of larger retail corporations. Although many off-price operations are run by smaller independents, most large off-price retailer operations are owned by bigger retail chains. Examples include store retailers such as TJ Maxx, Marshalls, and HomeGoods, all owned by TJX Companies, and online sellers such as Overstock.com. TJ Maxx promises brand name and designer fashions for 20 to 60 percent off department store prices. How does it fulfill this promise? Its buyers are constantly on the lookout for deals. “So when a designer overproduces and department stores overbuy,” says the company, “we swoop in, negotiate the lowest possible price, and pass the savings on.”10
Factory outlets—manufacturer-owned and operated stores by firms such as J.Crew, Gap, Levi Strauss, and others—sometimes group together in factory outlet malls and value-retail centers. At these centers, dozens of outlet stores offer prices as much as 50 percent below retail on a wide range of mostly surplus, discounted, or irregular goods. Whereas outlet malls consist primarily of manufacturers’ outlets, value-retail centers combine manufacturers’ outlets with off-price retail stores and department store clearance outlets.
These malls in general are now moving upscale—and even dropping factory from their descriptions. A growing number of outlet malls now feature luxury brands such as Coach, Polo Ralph Lauren, Dolce & Gabbana, Giorgio Armani, Burberry, and Versace. As consumers become more value-minded, even upper-end retailers are accelerating their factory outlet strategies, placing more emphasis on outlets such as Nordstrom Rack, Neiman Marcus Last Call, Bloomingdale’s Outlets, and Saks Off 5th. Many companies now regard outlets not simply as a way of disposing of problem merchandise but as an additional way of gaining business for fresh merchandise. For example, 90 percent of the merchandise sold in Neiman Marcus’s Last Call outlets is made specifically for those stores.11 The combination of highbrow brands and lowbrow prices found at outlets provides powerful shopper appeal, especially in thriftier times.
Warehouse clubs (also known as wholesale clubs or membership warehouses), such as Costco, Sam’s Club, and BJ’s, operate in huge, warehouse-like facilities and offer few frills. In exchange for the bare-bones environment, they offer ultralow prices and surprise deals on selected branded merchandise. Warehouse clubs have grown rapidly in recent years. These retailers appeal not only to low-income consumers seeking bargains on bare-bones products but also to all kinds of customers shopping for a wide range of goods, from necessities to extravagances.
Consider Costco, now the world’s second-largest retailer behind only Walmart. Low price is an important part of Costco’s equation, but what really sets Costco apart is the products it carries and the sense of urgency that it builds into the Costco shopper’s store experience (see Real Marketing 13.1).
Organizational Approach
Although many retail stores are independently owned, others band together under some form of corporate or contractual organization.
Table 13.2 describes four major types of retail organizations—corporate chains, voluntary chains, retailer cooperatives, and franchise organizations.
Table 13.2
Major Types of Retail Organizations
Corporate chains are two or more outlets that are commonly owned and controlled. They have many advantages over independents. Their size allows them to buy in large quantities at lower prices and gain promotional economies. They can hire specialists to deal with areas such as pricing, promotion, merchandising, inventory control, and sales forecasting.
The great success of corporate chains caused many independents to band together in one of two forms of contractual associations. One is the voluntary chain—a wholesaler-sponsored group of independent retailers that engages in group buying and common merchandising. Examples include the Independent Grocers Alliance (IGA), Western Auto, and True Value hardware stores. The other type of contractual association is the retailer cooperative—a group of independent retailers that bands together to set up a jointly owned, central wholesale operation and conduct joint merchandising and promotion efforts. Examples are Associated Grocers and Ace Hardware. These organizations give independents the buying and promotion economies they need to meet the prices of corporate chains.
Another form of contractual retail organization is a franchise. The main difference between franchise organizations and other contractual systems (voluntary chains and retail cooperatives) is that franchise systems are normally based on some unique product or service; a method of doing business; or the trade name, goodwill, or patent that the franchisor has developed. Franchising has been prominent in fast-food restaurants, motels, health and fitness centers, auto sales and service dealerships, and real estate agencies.
However, franchising covers a lot more than just burger joints and fitness centers. Franchises have sprung up to meet just about any need. For example, Mad Science Group franchisees put on science programs for schools, scout troops, and birthday parties. Soccer Shots offers programs that give kids ages two to eight an introduction to basic soccer skills at daycare centers, schools, and parks. Mr. Handyman provides repair services for homeowners, while Merry Maids tidies up their houses. Supercuts offers affordable, anytime, walk-in haircuts, and H&R Block provides tax-preparation services.
More than one-third of H&R Block’s 12,000 retail offices are owned and operated by franchisees.12
Franchising covers a lot more than just burger joints and fitness centers. More than one-third of H&R Block’s 12,000 retail offices are owned and operated by franchisees.
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Franchises now command about 45 percent of all retail sales in the United States. These days, it’s nearly impossible to stroll down a city block or drive on a city street without seeing a McDonald’s, Subway, Jiffy Lube, or Hampton Inn. One of the best-known and most successful franchisers, McDonald’s, now has more than 36,000 stores in more than 100 countries, including more than 14,000 in the United States. It serves 69 million customers a day and racks up more than $98 billion in annual system-wide sales. More than 80 percent of McDonald’s restaurants worldwide are owned and operated by franchisees.13