Retailing
MKTG 3346
Retail Competition and
Strategy
Professor Edward Fox
Cox School of Business/SMU
Retail Competition Overview





Types of Retailers and Retail Formats
Strategic Profit Model
The Wheel of Retailing
Competitive Advantage
Competitive Positioning




Low Price
Convenience
Variety / Assortment
Service
Types of Retailers
 Type of retailer depends on:
 Merchandise
 Variety (Breadth)
 Assortment (Depth)
 Services, rather than merchandise
 Service
 Pricing
 Infinite Variations
 “Survival of the Fittest” - Formats must best satisfy
needs of significant segment(s)
Adapted from Levy and Weitz
Types of Retailers
SIC System for Classifying Retailers
Types of Retailers
Sales by SIC Category
Source: U.S. Department of Commerce, 1998 Census of Retail Trade
Types of Retailers – Merchandise
 Variety (Breadth of Merchandise)
Examples of broad-line retailers:
 JCPenney, Sears
 Costco, Sam’s Club
 Carrefour
 Family Dollar, Dollar General
 Assortment (Depth of Merchandise)
Examples of “Category Killers,” or specialty stores:
 PetSmart, Petco
 Edwin Watts
 Bed, Bath and Beyond, Container Store
Types of Retailers – Price
 Discount Stores – lower margins, higher volume
 Wal-Mart, Target, Kmart
 Off-Price Retailers – lower cost merchandise
 TJMaxx, Marshall’s
 Factory Outlets – manufacturer outlet for out-of season
 Burlington Coat Factory, Off-Fifth, Nordstrom Rack
 Entire outlet malls
 Warehouse Clubs
 Costco, Sam’s Club
 Carrefour
Adapted from Levy and Weitz
Types of Retailers – Service
 Self-Service – Customer is on his/her own
 Food and drug stores (e.g., Kroger, Walgreen’s)
 Limited Service – Available salesperson
 Most department stores, some specialty stores (e.g., JCPenney,
Gap, Kohl’s)
 Full Service – Salesperson assists the customer
 Some department stores and specialty stores (e.g., Nordstrom,
Nine West), restaurants, etc.
Self Service
Full Service
Retailer Costs Increase with Service!
Retailers of Services
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
Adapted from Levy and Weitz
Retailers of Services
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
Adapted from Levy and Weitz
Focus on General Merchandise Retailers
Adapted from Levy and Weitz
Focus on General Merchandise Retailers –
Department Stores
 Competition from:
 Discount Stores on Price
 Category Killers on Assortment and Service
 Possible Competitive Responses
 Lower Costs By Reducing Services
 More Sales (by Expansion, Acquisition)
 Focus on Strong Categories (e.g., Apparel, Home, Jewelry)
 Improve Services
 Develop Private Labels, Exclusive Brands
A Decline in Mall Shopping Threatens
Mall-Based Department Stores!
Adapted from Levy and Weitz
Focus on General Merchandise Retailers –
Discount Stores
Big Three – Wal-mart, Target, Kmart
 Competition from Category Killers – Toys ‘R Us, Best
Buy, PetSmart
 Possible Competitive Responses:
 Continue to Reduce Costs
 More Focus on Apparel Because It Offers Higher Margins
… Except Wal-Mart, Which is Focusing on Food!
Adapted from Levy and Weitz
Retail Competition Example
MARKET FOR WOMENS APPAREL
Source: Levy and Weitz
Strategic Profit Model Overview
Net profit
x
Net profit
x
Net sales (crossed out)
Asset turnover
= Return on assets
Net sales (crossed out) = Net profit
Total assets
Total assets
Source: Levy and Weitz
Strategic Profit Model Detail
Net Sales
Cost of
goods sold
Gross
margin
Variable
expenses
+
Fixed
expenses
Net profit

Total
expenses
Net profit
margin
Net Sales
x
Return on
assets
Inventory
Net sales
+
Accounts
receivable
Total current
assets
+
+
Other current
assets
Fixed assets

Asset
turnover
Total assets
Source: Levy and Weitz
Strategic Profit Model
RETURN ON ASSETS
Return on assets
=
Net profit margins X Asset
turnover
=
Net profit
Net sales
=
Net profit
Total assets
X
Wal-Mart:
$ 4,430
$49,996
=
8.86%
Tiffany:
$ 90
$1,057
=
8.51%
Net sales
Total assets
Source: Levy and Weitz
“Wheel of Retailing”
Retailers Change Over Time in a Predictable Way
Source: Levy and Weitz
Retailing and Competitive Advantage
 Competitive Advantage - An advantage enjoyed by a
given retailer relative to others in the market
 General sources of competitive advantage:
 Overall cost leadership - can offer best value (i.e., lowest
prices) or earn higher margins
 Wal-Mart
 Differentiation - unique product or service characteristics
 Abercrombie and Fitch, Papa Johns, Sewell Automotive
 Narrow customer focus (niching) - address wants and
needs of particular customer segment(s)
 Container Store, Hallmark
Adapted from
Michael Porter
Competitive Positioning
Depends on:
 Retailer’s competitive advantage(s)
 Needs and wants of target customers
 Current perceptions of the retailer
Competitive Positioning – Examples
Value, or Low
Price
Away from
Competitors
Wide Variety;
Deep Assortment
Service; Ease
of Shopping
G
H
C
A
Against a
Competitor
D
E
B
User Image
F
Convenience
Trends in Retail Competition
 Increasing Diversity of Retail Formats
 Category killers
 Supercenters
 Electronic Retailers
 Blurring of Products/Services Across Formats
 Pharmacy
 Food
 Soft goods / apparel
 Small Store Formats Make a Comeback
 Dollar store format
 Hard discounters in Europe
 Wal-Mart’s Neighborhood Market format
 Increasing Concentration within Formats
 Centralization of Decision-Making
 Information and Communication Systems
 Retailers Go International
 Wal-Mart expands outside the US
 Retailers spread through Europe and Asia
 Multi-Channel Retailing
Trends in Retail – Blurring Formats
Various Formats Now Offer:
 Pharmacy
 Financial Services, Banking
 Video Rental
 Prepared Foods
The Service Aisle, or Perimeter Departments, Are
Growing!
Retail Competition
SHOPPING ACROSS RETAIL FORMATS
 Shoppers are much more likely to shop at multiple formats
in a given week than to shop at grocery stores alone
40%
20%
0%
Grocery Only
Grocery + Mass
Grocery + Drug
Grocery + Club
Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
Retail Competition
SHOPPING ACROSS RETAIL FORMATS
 Category by category, which packaged goods
purchases are made in which formats?
Packaged Goods Purchases in Retail Formats for Selected Categories
Sales
Ranking
1
2
3
4
5
8
11
12
14
20
25
Description
REGULAR SOFT DRINKS
READY TO EAT CEREAL
LOW CALORIE SOFT DRINKS
REFRIGERATED SKIM/LOW-FAT MILK
SHELF STABLE BREAD
CIGARETTES CARTON
TOILET TISSUE
DISPOSABLE DIAPER/LINER
INTERNAL ANALGESICS TABLET
DRY CELL BATTERY
PAPER TOWELS
% Spending % Spending % Spending % Spending
in Grocery
in Mass
in Drug
in Club
88.5%
7.7%
2.0%
1.8%
91.3%
4.7%
0.3%
3.8%
88.9%
8.2%
2.1%
0.7%
90.3%
1.5%
3.9%
4.3%
95.3%
3.5%
0.4%
0.8%
31.0%
52.4%
35.8%
36.9%
25.2%
46.4%
36.2%
35.5%
55.8%
29.1%
47.9%
40.1%
10.4%
3.0%
5.9%
27.4%
20.1%
2.0%
22.4%
9.1%
2.5%
6.6%
6.8%
11.4%
Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997
Trends in Retail – Consolidation
 Discount Stores
 Wal-Mart, Kmart, Target
 Drug stores
 Walgreens, CVS, Eckerd
 Office Supply Category Killers
 Office Depot, Staples, Office Max
Consolidation increases efficiency and lowers costs
Source: Levy and Weitz
Revenue / Margin % Portfolio
CONVENIENCE STORES
Sales Dollar Volume
High
High
Low
Hot Bev
Fountain
Drinks
Gross
Margin
Percentage
Tobacco
Low
Soft Drinks
Beer
Frozen
Bev
Ice
Sandwiches Other SandFast
Candy &
-Fresh
Food wichesGum
Cooked
Salty
GM Juices Food Auto Frozen
Snacks
Bottled
CookIce
HBC Cream ies Pckg’dWater
Deli Frozen
Deli Svcs
Food
Groceries
Wine/
LiquorProduce
Breads &
Cakes
Eggs
Milk Publications
Revenue / Margin % Portfolio
GENERAL MERCH. DISCOUNT STORES
High
Sales Dollar Volume
Low
High
Giftware
Women's
Wear
Gross
Margin
Percentage
Stationary/
Greeting
Cards Shoes
Kitchen/ Hardware/
Men's House- Building
Wear wares Supplies
Toys
Automotive
Sporting
Goods
Consumer
Electronics
Low
Jewelry & Handbags/
Watches Accessories
Hosiery Paint &
Girls’
Wallpaper
Boys’ Wear
Pet Luggage
Wear
Supplies
Books
Infants’
Ware
Lawn &
Garden
Photo CDs &
Goods Tapes
Candy
Traffic
Appliances
RTA
Furniture
Tobacco
Magazines
Revenue / Margin % Portfolio
GROCERY STORES
High
Sales Dollar Volume
High
Foils, bags,
wraps
Milk
Bread
Gross
Margin
Percentage
Ice cream
Ice cubes
Spices
Pasta
Yogurt
Teas
Cat litter
Rices
Cookies
Soup
Crackers
Cooking oils
Spaghetti sauce
Tuna
Laundry detergent
RTE cereal
Low
Low
Toilet tissue
Facial tissue
Peanut butter
Bleaches