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Retail Competition and Strategy Retailing MKTG 3346 Professor Edward Fox Cox School of Business/SMU.

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Presentation on theme: "Retail Competition and Strategy Retailing MKTG 3346 Professor Edward Fox Cox School of Business/SMU."— Presentation transcript:

1 Retail Competition and Strategy Retailing MKTG 3346 Professor Edward Fox Cox School of Business/SMU

2 Retail Competition Overview lTypes of Retailers and Retail Formats lStrategic Profit Model lThe Wheel of Retailing lCompetitive Advantage lCompetitive Positioning tLow Price tConvenience tVariety / Assortment tService

3 Types of Retailers lType of retailer depends on: tMerchandise Variety (Breadth) Assortment (Depth) Services, rather than merchandise tService tPricing lInfinite Variations l“Survival of the Fittest” - Formats must best satisfy needs of significant segment(s) Adapted from Levy and Weitz

4 Types of Retailers SIC System for Classifying Retailers

5 Types of Retailers Sales by SIC Category Source: U.S. Department of Commerce, 1998 Census of Retail Trade

6 Types of Retailers – Merchandise lVariety (Breadth of Merchandise) Examples of broad-line retailers: tJCPenney, Sears tCostco, Sam’s Club tCarrefour tFamily Dollar, Dollar General lAssortment (Depth of Merchandise) Examples of “Category Killers,” or specialty stores: tPetSmart, Petco tEdwin Watts tBed, Bath and Beyond, Container Store

7 Types of Retailers – Price lDiscount Stores – lower margins, higher volume tWal-Mart, Target, Kmart lOff-Price Retailers – lower cost merchandise tTJMaxx, Marshall’s lFactory Outlets – manufacturer outlet for out-of season tBurlington Coat Factory, Off-Fifth, Nordstrom Rack tEntire outlet malls lWarehouse Clubs tCostco, Sam’s Club tCarrefour Adapted from Levy and Weitz

8 Types of Retailers – Service lSelf-Service – Customer is on his/her own tFood and drug stores (e.g., Kroger, Walgreen’s) lLimited Service – Available salesperson tMost department stores, some specialty stores (e.g., JCPenney, Gap, Kohl’s) lFull Service – Salesperson assists the customer tSome department stores and specialty stores (e.g., Nordstrom, Nine West), restaurants, etc. Self Service Full Service Retailer Costs Increase with Service!

9 Type of Service Service Retail Firms Airlines American, Delta, British Airways, Singapore Airways Automobile maint/repair Jiffy Lube, Midas, AAMCO Automobile rental Hertz, Avis, Budget, Alamo Banks Citibank, NCNB, Bank of America Child care centers Kindercare, Gymboree Credit cards American Express, VISA, Mastercard Education University of Florida, Babson College Entertainment parks Disney, Universal Studios, Six Flags Express package delivery Federal Express, UPS, US Postal Service Financial services Merrill Lynch, Dean Witter Fitness Jazzercise, Bally’s, Gold’s Gym Health Care Humana, HCA Home maintenance Chemlawn, MiniMaid, Roto-Rooter Retailers of Services Adapted from Levy and Weitz

10 Type of Service Service Retail Firms Hotels and motels Hyatt, Sheraton, Marriott, Days Inn Income tax preparation H & R Block Insurance Allstate, State Farm Internet access/Elec info. American On-Line, CompuServe Long-distance telephone AT&T, MCI, Sprint Movie theaters AMC, Loews/Sony, Universal Real estate Century 21, Coldwell Banker Restaurants TGI Friday’s, Wendy’s, Pizza Hut Truck rentals U-Haul, Ryder Weight loss Weight Watchers, Jenny Craig Video rental Blockbuster Vision centers Lenscrafter, Pearle Retailers of Services Adapted from Levy and Weitz

11 Focus on General Merchandise Retailers Adapted from Levy and Weitz

12 Focus on General Merchandise Retailers – Department Stores lCompetition from: tDiscount Stores on Price tCategory Killers on Assortment and Service lPossible Competitive Responses tLower Costs By Reducing Services tMore Sales (by Expansion, Acquisition) tFocus on Strong Categories (e.g., Apparel, Home, Jewelry) tImprove Services tDevelop Private Labels, Exclusive Brands A Decline in Mall Shopping Threatens Mall-Based Department Stores! Adapted from Levy and Weitz

13 Focus on General Merchandise Retailers – Discount Stores Big Three – Wal-mart, Target, Kmart lCompetition from Category Killers – Toys ‘R Us, Best Buy, PetSmart lPossible Competitive Responses: tContinue to Reduce Costs tMore Focus on Apparel Because It Offers Higher Margins … Except Wal-Mart, Which is Focusing on Food! Adapted from Levy and Weitz

14 Retail Competition Example MARKET FOR WOMENS APPAREL Source: Levy and Weitz

15 Net profitxAsset turnover = Return on assets Net profitxNet sales (crossed out) = Net profit Net sales (crossed out) Total assets Total assets Strategic Profit Model Overview Source: Levy and Weitz

16 Net Sales Cost of goods sold Variable expenses Fixed expenses Gross margin Total expenses Net profit Net Sales Net profit margin Asset turnover Return on assets - - + Inventory Accounts receivable Other current assets Total current assets Fixed assets Net sales Total assets + + + x Strategic Profit Model Detail Source: Levy and Weitz

17 Return on assets = Net profit margins X Asset turnover = Net profit X Net sales Net sales Total assets = Net profit Total assets Wal-Mart:$ 4,430=8.86% $49,996 Tiffany:$ 90=8.51% $1,057 Strategic Profit Model RETURN ON ASSETS Source: Levy and Weitz

18 “Wheel of Retailing” Retailers Change Over Time in a Predictable Way Source: Levy and Weitz

19 Retailing and Competitive Advantage lCompetitive Advantage lCompetitive Advantage - An advantage enjoyed by a given retailer relative to others in the market lGeneral sources of competitive advantage: tOverall cost leadership tOverall cost leadership - can offer best value (i.e., lowest prices) or earn higher margins Wal-Mart tDifferentiation tDifferentiation - unique product or service characteristics Abercrombie and Fitch, Papa Johns, Sewell Automotive tNarrow customer focus (niching tNarrow customer focus (niching) - address wants and needs of particular customer segment(s) Container Store, Hallmark Adapted from Michael Porter

20 Competitive Positioning Depends on: lRetailer’s competitive advantage(s) lNeeds and wants of target customers lCurrent perceptions of the retailer

21 Competitive Positioning – Examples Convenience Away from Competitors Away from Competitors Value, or Low Price Service; Ease of Shopping User Image B B A A E E D D C C H H G G F F Against a Competitor Against a Competitor Wide Variety; Deep Assortment

22 Trends in Retail Competition lIncreasing Diversity of Retail Formats tCategory killers tSupercenters tElectronic Retailers lBlurring of Products/Services Across Formats tPharmacy tFood tSoft goods / apparel lSmall Store Formats Make a Comeback tDollar store format tHard discounters in Europe tWal-Mart’s Neighborhood Market format lIncreasing Concentration within Formats tCentralization of Decision-Making tInformation and Communication Systems lRetailers Go International tWal-Mart expands outside the US tRetailers spread through Europe and Asia lMulti-Channel Retailing

23 Trends in Retail – Blurring Formats Various Formats Now Offer: lPharmacy lFinancial Services, Banking lVideo Rental lPrepared Foods The Service Aisle, or Perimeter Departments, Are Growing!

24 lShoppers are much more likely to shop at multiple formats in a given week than to shop at grocery stores alone Retail Competition SHOPPING ACROSS RETAIL FORMATS Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

25 Retail Competition SHOPPING ACROSS RETAIL FORMATS lCategory by category, which packaged goods purchases are made in which formats? Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997 Packaged Goods Purchases in Retail Formats for Selected Categories

26 Trends in Retail – Consolidation lDiscount Stores tWal-Mart, Kmart, Target lDrug stores tWalgreens, CVS, Eckerd lOffice Supply Category Killers tOffice Depot, Staples, Office Max Consolidation increases efficiency and lowers costs Source: Levy and Weitz

27 Revenue / Margin % Portfolio CONVENIENCE STORES High Low High Low Gross Margin Percentage Sales Dollar Volume Frozen Bev Eggs Produce Bottled Water Sand- wiches- Frozen Frozen Food Auto Pckg’d Deli Other Fast Food Wine/ Liquor Cook- ies Ice Cooked Food Deli Svcs Sandwiches -Fresh Ice Cream HBC Hot Bev Juices Fountain Drinks GM Breads & Cakes Publications Groceries Salty Snacks Candy & Gum Milk Soft Drinks Beer Tobacco

28 Revenue / Margin % Portfolio GENERAL MERCH. DISCOUNT STORES High Low High Low Gross Margin Percentage Sales Dollar Volume Paint & Wallpaper Handbags/ Accessories Tobacco Pet Supplies Books Luggage Magazines Giftware Hosiery RTA Furniture CDs & Tapes Candy Jewelry & Watches Photo Goods Girls’ Wear Shoes Boys’ Wear Stationary/ Greeting Cards Infants’ Ware Consumer Electronics Sporting Goods Lawn & Garden Traffic Appliances Hardware/ Building Supplies Women's Wear Men's Wear Toys Kitchen/ House- wares Automotive

29 Revenue / Margin % Portfolio GROCERY STORES High Low High Low Gross Margin Percentage Sales Dollar Volume Spices Ice cream Milk Bread RTE cereal Laundry detergent Cookies Soup Foils, bags, wraps Pasta Yogurt Toilet tissue Tuna Spaghetti sauce Crackers Cat litter Rices Teas Ice cubes Facial tissue Bleaches Cooking oils Peanut butter

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