Chapter 4
Retail Institutions by Ownership
Dr. Pointer
Chapter Objectives
To show the ways in which retail
institutions can be classified
To study retailers on the basis of
ownership type and examine the
characteristics of each
To explore the methods used by
manufacturers, wholesalers, and
retailers to exert influence in the
distribution channel
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Figure 4.1 A Classification
Method for Retail Institutions
I
Ownership
II
Store-based
Retail Strategy Mix
III
Nonstore-based
Retail Strategy Mix
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Ownership Forms
Independent
Chain
Franchise
Leased department
Vertical marketing system
Consumer cooperative
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Each Ownership Form
Serves a Unique Marketing Niche
• Independents are targeted and have loyal followers
based on friendly appeal
• Chains benefits from widely known image and
economies of scales and mass promotions
• Franchisors have strong geographic coverage
• Vertical integrated channels gives firms greater
control
• Leased departments is a good partnership for
outside parties and store operators to accomplish
mutual goals
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Independent Retailers
2.1 million independent U.S. retailers
50% of these are run by owners and their
families
Account for 40% of total stores and 3% of
U.S. store sales
Why so many? Ease of entry
So market is very competitive and very high
failure rate
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Competitive State of Independents
Advantages
Disadvantages
 Flexibility in formats,
 Lack of bargaining
locations, and strategy
power
 Control over investment  Lack of economies of
costs and personnel
scale
functions, strategies
 Labor intensive
 Personal image
operations
 Consistency and
 Over-dependence on
independence
owner
 Strong entrepreneurial  Limited long-run
leadership
planning
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Store-based Retail Strategy Mix
 Convenience store
 Conventional
supermarket
 Food-based
superstore
 Combination store
 Box store
 Warehouse store
 Specialty store
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 Variety store
 Traditional
department store
 Full-line discount
store
 Off-price chain
 Factory outlet
 Membership club
 Flea market
Chain Retailers
Operates multiple outlets under common
ownership
Engages in some level of centralized or
coordinated purchasing and decision
making
In the U.S., there are roughly 100,000 retail
chains operating about 750,000
establishments (-5%) of all retail stores
Account for about 60% of Retail Sales
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Competitive State of Chains
Advantages
 Bargaining power
 Cost efficiencies
 Efficiency from
computerization,
sharing warehouse
and other functions
 Defined management
philosophy
 Considerable efforts
in long-run planning
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Disadvantages
 Limited flexibility
 Higher investment
costs
 Complex managerial
control
 Limited
independence among
personnel
Nonstore-based Retail Strategy
Mix and Nontraditional Retailing
Direct marketing
Direct selling
Vending machine
World Wide Web
Other emerging retail formats
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Franchising
A contractual agreement between a
franchisor and a retail franchisee, which
allows the franchisee to conduct business
under an established name and according
to a given pattern of business
Franchisee pays an initial fee and a monthly
percentage of gross sales in exchange for
the exclusive rights to sell goods and
services in an area
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Franchise Formats
Product/ Trademark
 franchisee acquires
the identity of a
franchisor by
agreeing to sell
products and/or
operate under the
franchisor name
 franchisee operates
autonomously
 2/3 of retail
franchising sales
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Business Format
 franchisee receives
assistance: location,
quality control,
accounting systems,
start-up practices,
management training
 common for
restaurants, real
estate
Figure 4.5 Business Qualifications Sought by
McDonald’s for Potential Franchisees
Personal Integrity
Entrepreneurial
Spirit
Ability to motivate
and train
Financial
resources
Ideal
Franchisee
Ability to manage
finances
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Willingness to
complete training
Willingness to
devote time
Figure 4.6 Structural Arrangements in
Retail Franchising
Auto/truck dealer
Petroleum products
Manufacturerretailer
Voluntary
WholesalerRetailer
Cooperative
Service type
-retailer
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Consumer electronics
Auto Accessories
Consumer electronics
Auto Accessories
Auto rentals
Hotels/motels
fast foods
Wholesaler-Retailer
Structural Arrangements
Voluntary: A wholesaler sets up a franchise
system and grants franchises to individual
retailers
Cooperative: A group of retailers sets up a
franchise system and shares the ownership
and operations of a wholesaling
organization
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Figure 4.7 Franchises and
Business Opportunities
At the FTC franchising site
www.ftc.gov/bcp/franchise/netfran.htm
There are many free downloads about
franchise opportunities
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Competitive State of Franchising
Advantages
 small capital required
 acquire well-known
names
 operating/manageme
nt skills taught
 cooperative
marketing possible
 exclusive selling
rights
 less costly per unit
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Disadvantages
 oversaturation could
occur
 franchisors may
overstate potential
 locked into contracts
 agreements may be
cancelled or voided
 royalties are based
on sales, not profits
From the Franchisor’s Perspective
Benefits
Potential Problems
 national or global
presence possible
 qualifications for
franchisee/ operations
are set and enforced
 money obtained at
delivery
 royalties represent
revenue stream
 potential for harm to
reputation
 lack of uniformity may
affect customer loyalty
 ineffective franchised
units may damage
resale value,
profitability
 potential limits to
franchisor rules
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Leased Departments
• A leased department is a department in a
retail store that is rented to an outside party
– The proprietor is responsible for all
aspects of its business and pays a
percentage of sales as rent
– The department store sets operating
restrictions to ensure consistency and
coordination
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Competitive State of Leased
Departments
Benefits
Potential Pitfalls
 provides one-stop
 lessees may negate
shopping to
store image
customers
 procedures may
 lessees handle
conflict with
management
department store
 reduces store costs  problems may be
blamed on
 provides a stream of
department store
revenue
rather than lessee
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Vertical Marketing Systems
• VMS consists of all the levels of
independently owned businesses along a
channel of distributions
• Three functions and ownership
●Independent systems
● Partially integrated systems
● Fully integrated systems
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Figure 4.8 Vertical Marketing
Systems
Independent Channel System
Functions:
Manufacturing
Wholesaling
Retailing
Ownership:
Independent Manufacturer
Independent Wholesaler
Independent Retailer
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Figure 4.8 Vertical Marketing
Systems
Partially Integrated Channel System
Functions:
Manufacturing
Wholesaling
Retailing
Ownership:
Two channel members own all facilities and
perform all functions
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Figure 4.8 Vertical Marketing
Systems
Fully Integrated Channel System
Functions:
Manufacturing
Wholesaling
Retailing
Ownership:
All production and distribution functions
are performed by one channel member
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Other Factors to Consider
• Dual distribution channel (dual marketing)
engages in multi channels distribution to
reach different consumers
• Channel control – usually one member of
channel dominates the decisions made in
channel
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Figure 4.9 Sherwin-Williams’ Dual
Vertical Marketing System
Sherwin William
brand of paint
Co-owned shores
sell to consumers
Dutch Boy
brand of paints
Independent
Wholesalers
Retailers and others
Customers
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Web-Based Exercise
Subway is one of the largest retail
franchisors in the world
Based on the information found under
Franchise Opportunities on the Subway
website, would you be interested in
becoming a Subway franchisee?
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Questions
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