Module 3: Retail Strategy
Introduction
 Retail strategy is about corporate survival and prosperity in a changing retail environment.
 It is about environmental analysis; identification of those factors critical to success;
recognition and building of corporate competences; developing, maintaining and
communicating strategic direction – to staff, to customers, to competitors.
The Strategic Planning Process: Three main Steps:
 Firstly, the external, competitive and organisational environment are audited and analyzed.
 Secondly, strategic options are explored and evaluated, before strategy or strategies are
selected.
 Thirdly, strategy is implemented through setting up action plans and allocating human,
financial and material resources to meet objectives.
Corporate Strategy and Objectives
 Despite the changing environment, successful retail organisations tend to have a clear
direction, or mission, which is really a rationale for the existence and progress of the
company. Often, organisations verbalise this mission in a mission statement.
 As the company reviews and adjusts its strategic direction over time, the mission, values
and objectives will change.
 The organisation’s mission and strategy are normally set out in a series of corporate
objectives, which are explicit time-related goals against which to assess organisational
progress and achievements.
 Corporate objectives form the basis for planning and setting objectives for other operational
areas such as logistics, marketing and human resource management.
Environmental Analysis (PESTEL)
1- Political factors, 2- Economic factors, 3- Socio-Culture factors, 4- Technological factors,
5- Environmental factors, 6- Legal factors
 Abroad knowledge of PEST trends and developments is essential for retail organisations
because they operate in fast-paced, highly competitive environments, and many problems
and opportunities are created by trends in the wider environment.
Industry Analysis (five forces approach)
 According to this approach, the five forces which form the theatre of competition are:
1. Threat of entrants: depends on the barriers to entry such as economies of scale, channels.
In retailing the barriers to entry are low.
2. Bargaining power of suppliers: Supplier power is likely to be high when there is a
concentration of large suppliers with strong, established brands.
3. Bargaining power of buyers: clearly likely to be high when there is a concentration of
buyers and volume of purchases is high,
4. Threat of substitutes: retailing. Substitution also exists in the form of competition for
customer spends. For retailers, the growing proportion of disposable income spent on
leisure, travel and mortgages can pose substitution threat.
5. Competitive rivalry: This increases where barriers to entry are low, supplier or buyer
power is high, and there is a high threat of substitutes.
Resource Audit and Analyses (internal capabilities)
 The exploitation of environmental opportunity requires:
1. Recognition that an opportunity exists: requires management experience, creativity and
acumen, in addition to organisational capability in environmental scanning and analysis and
organizational communication systems which facilitate the vertical flow of market and
consumer information
2. Assessment of whether the opportunity is viable. Requires assessment of the opportunity
against organisational capability.
 Corporate audit is the objective assessment of the organisation’s financial, material and
human resource capability
The financial resource audit may include:
 sources of capital and credit;
 control of debtors and creditors;
 cash management;
 relationship with key financial contacts;
 investments.
The physical resource audit may include:
 property portfolio – size/age/location/state of repair;
 equipment – amount/capability/location/age/durability;
 physical resource outsourcement organisations and relationships.
The human resource audit may include:
 organisational structure;
 numbers and deployment of staff;
 contracts/job descriptions/flexibility;
 staff skills and capabilities.
 human resource function: recruitment agency and relationships.
 Value chain analysis focuses on achievement of competitive advantage through
organisational competences, and helps to show where the organisation can add value and
create cost savings in business and supply chain processes.
 Resource-based theory of the firm focuses on the various resources, capabilities and core
competences within organisations, which will allow it to compete effectively
 Sustainable competitive advantage depends on the ability and creativity of the
organisation in acquisition, combination and deployment of resources to yield
productivity or value advantages.
 Network theory focuses on creating partnerships based on trust, cross-functional
teamwork and inter-organisational cooperation
 SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a widely used
means of rationalizing and prioritizing the outcomes.
 The main S&Ws of the organization, highlighted through the resource audit, are listed.
 Then the main opportunities and threats for the organization, revealed by analysis of the
external and competitive environment, are summarized
Strategic Choice
1. Generic Strategies: three main strategic choices (porter’s)
1. Focus on cost: driving down organizational costs through streamlining their
operations, logistics and other functions.
2. Differentiate their offer: creating value for their customers in the retailer brand itself.
3. Focus on a highly targeted market segment: directing organizational efforts to
filling the needs of a known and predetermined group of customers.
4. Pursue simultaneously all three strategies under the guise of differing retailer brands
2. Expansion Strategies:
 the major growth vectors for retail
 Expansion of core operational platform is where the existing proposition grows market
share through organic growth
 New segment development involves developing, profiling and targeting new consumer
and organisational segments.
 New products/services development has been the focus of much recent retail strategy,
as new merchandise and an extended service offering exploits the potential of current
markets.
 Channel strengths can be exploited in the development of new retail activity
 Geographical development involves growth of market share through movement into
adjacent areas and regions and, more radically, into international or global expansion.
3. Evaluating Strategies
 Strategic alternatives need to be assessed for their strategic fit with the current
organisational operations.
 Does the strategy exploit organizational strengths and extend use of core competences?
Does it compensate for organizational weaknesses or add to existing competences?
 Does it fit with the organisation’s mission?
 Some of the analytical tools outlined in other modules of this book can also be used. For
example, portfolio analysis can be used to show where a new format fits with the
current portfolio of formats. Life cycle analysis can be used to indicate whether a
strategy is liable to extend or renew the life cycle of a format or product group. Value
chain analysis can be used to assess where a strategy adds to the value system
 The acceptability of implementing the various potential strategies can also be compared
in terms of stakeholder expectations, profitability, and financial, corporate and
environmental risk.
Location Strategy
 Retailing is about delivering to the customer the right products or services, in the right
quantities, at the right time, in the right place. Retail location, therefore, is fundamental to
the success of the business.
 Retail location is important to customers, who take the location of the store into
consideration when making the decision of where to buy.
 For frequently bought goods such as groceries, customers tend to choose the closest shop
(to home or work),
 For shopping goods such as clothes, or specialty goods, customers are influenced by a
variety of factors such as distance to travel, access, availability and cost of car parking and
other ancillary facilities.
 Location is an essential strand of corporate strategy which has to be considered in an
integrated manner when expanding a retail business.
Location and Methods of Expansion
1. Organic growth is investment channeled from the financial capability of the current
organization into development of organizational capability – for example, to fund the
development and roll-out of formats, horizontal or vertical integration and international
growth. Growth tends to be slow or steady, and the organization retains autonomy, decision
making control, and benefits from development of new areas of competence, while
avoiding the difficulties. Types:
1. contagious diffusion: It is the expansion method chosen by many small retail
businesses, but has also been used by dominant retailers
2. hierarchical diffusion: the growth route for many established retail organizations
which open outlets in major cities and towns
 Both strategies can be deployed simultaneously by rolling out operations in selected
large urban centers and expanding outwards by contagious diffusion.
2. Merger and acquisition offers a route to growth in market share and market dominance in
addition to rapid entry of new product and market areas.
 A merger is where two retail organizations come together to form a combined operation,
 An acquisition describes the action of one retailer buying more than a 50 per cent share
of another.
 Both methods have been widely used by retailers competing in the international retail
market, such as Tesco, Ahold and Casino, which benefit from the acquisition, across
diverse markets, of sources of established expertise, knowledge, property portfolio,
contact and supply networks. Wal-Mart used this method of international expansion
when it acquired the chain of ASDA superstores to secure entry to the UK market.
 One of the main problems with acquisition is the merging of organizational cultures and
styles of management, and this is exacerbated by the prospect of rationalization of
activities and closure of outlets, which creates job uncertainty.
3. Strategic alliances, where two or more organizations come together to complete a project,
to apply combined power or to gain synergy from the combination of diverse organizational
competences and assets, are a growing feature of retailing, aided by implementation of
principles of relationship marketing and facilitated by enhanced communication capability.
There are three main types of strategic alliance:
1. Loose relationships: collaborative networks and alliances to exploit a market
opportunity or to combat a market threat.
2. Contractual relationships: subcontracting of licenses and franchises.
 Subcontracting of licenses: where the right to produce or distribute a product is
granted for a fee;
 Franchises: involves a contract to a franchisee to produce, distribute or sell
merchandise or services, while the franchisor maintains and markets the brand
 There are four main types of franchise
1. Manufacturer–dealer.
2. Manufacturer–wholesaler.
3. Wholesaler–retailer.
4. Business format. The parent company allows the franchisee to sell its products or
services,
3. Formalized ownership/relationships: joint ventures and consortia where two or more
organizations set up a jointly owned organization, to facilitate expansion or exploit a
market opportunity, minimises risk when diversifying into new product markets
Catchment Definition and Site Selection
 The catchment is the area from which a town centre, a shopping centre or a store draws its
customers.
 Typically, the higher the cumulative attraction of the centre, the further customers will
travel to shop there.
 Important are access, availability and cost of car parking, and toilet facilities.
 Edge/out-of-town retail developments attract custom from multiple catchments, defining
catchment in terms of drive time, drive by or customer flow, rather than spatially.
 The catchment of e-tailers: defined by for example by the number of ‘click-throughs’ on
the website, or through the web links and portals with which they are associated.
Methods of defining a catchment:
1. Customer spot mapping: the easiest ways to define a catchment is to ask potential
customers where they have travelled from and plot the results on a map.
2. The law of retail gravitation: relates catchment of a potential retail site to the population
size of competing centers and the distance between them.
3. Breaking-point model. The break point between two competing centers – that is, the point
at which a person residing in an intermediate community would be likely to travel to one
centre rather than the other – could be calculated as follows:
4. A more up-to-date gravity model : determines the probability that a customer living in a
particular area will shop at a particular store or shopping centre
Probability ij = probability of a customer at a given point of origin i travelling to a
shopping centre j
Sj= size of shopping centre j
Tij= travel time or distance from customer point of origin to shopping centre
b = exponent to Tij which reflects effect of travel time on different kinds of shopping trips.
The value of b is related to the type of merchandise
 The Retail Saturation Index (RSI) is a basic method of comparing the potential return
within different urban locations. It is a means of calculating the potential sales per square
foot of retail space for a retailer wanting to open a shop in a town, or within a larger
catchment area.
 The population of the town or catchment area is multiplied by the annual expenditure on
the category of goods the retailer wants to sell. This is divided by the total square footage
of selling space for the category of goods in the town or catchment.
 The higher the RSI, the higher the likelihood of the retailer succeeding in the new location.
 Drawbacks to the method, includes the assumption that increased floor space will decrease
sales potential when it can increase the cumulative attraction of the town.
Types of Location
 There are a number of locational classifications in simultaneous use by various agencies.
The Institute of Grocery Distribution, for example, classifies location opportunities as:
1. purpose-built shopping centre;
2. traditional ‘high street’;
3. local or neighborhood centre;
4. Edge of town (free-standing).
In- and Out-of-town Location
 In-town location suits retailers of shopping goods – those goods for which customers like
to compare information on quality, styles and prices before buying.
 Locating within, or close to, other retailers with a similar or complementary merchandise
range can be beneficial to new and existing retailers, as it increases the total attraction of
the area.
 The growth in the suburbanization of towns and cities has caused people to move from
walking to driving as a means of transport. This enhanced mobility led to a growing
proportion of the population working and shopping in centers distant from their home.
 Out-of-town shops attract custom due to easy access and free car parking, which is also a
plus for suppliers and retail staff. Retailers also benefit from the lower cost of development
and location in out-of-town sites