Chapter 4 Retail Institutions by Ownership

RETAIL MANAGEMENT: A STRATEGIC APPROACH,

10th Edition BERMAN EVANS

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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Independent Retailers
2.2 million independent U.S. retailers 70% of these are run by owners and their families Account for 35% of total stores and 3% of U.S. store sales Why so many? Ease of entry

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Competitive State of Independents

Advantages Flexibility in formats, locations, and strategy Control over investment costs and personnel functions, strategies Personal image Consistency and independence Strong entrepreneurial leadership Disadvantages Lack of bargaining power Lack of economies of scale Labor intensive operations Over-dependence on owner Limited long-run planning

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Figure 4-2: Useful Online Publications for Small Retailers

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Store-Based Retail Strategy Mixes

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
Operate multiple outlets under common ownership Engage in some level of centralized or coordinated purchasing and decision making In the U.S., there are roughly 110,000 retail chains operating about 800,000 establishments
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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

Figure 4-3: The Body Shop

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Nonstore-Based Retail Strategy Mixes and Nontraditional Retailing

Direct marketing Direct selling Vending machines 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, startup practices, management training Common for restaurants, realestate

Figure 4-5: Business Qualifications Sought by McDonalds for Potential Franchisees

Experience
Growth capability Planning ability Ability to manage finances Full-time commitment
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Financial resources
Strong credit Ideal Franchisee Customer and employee focus Willingness to complete training

Figure 4-6: Structural Arrangements in Retail Franchising

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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: Franchise and Business Opportunities

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Competitive State of Franchising

Advantages Low capital required Acquire well-known names Operating/ management skills taught Cooperative marketing possible Exclusive rights Less costly per unit Disadvantages Oversaturation could occur Franchisors may overstate potential Locked into contracts Agreements may be cancelled or voided Royalties are based on sales, not profits

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From the Franchisors Perspective

Benefits National or global presence possible Qualifications for franchisee/operations are set and enforced Money obtained at delivery Royalties represent revenue stream Potential Problems 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 Provides one-stop shopping to customers Lessees handle management Reduces store costs Provides a stream of revenue
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Potential Pitfalls Lessees may negate store image Procedures may conflict with department store Problems may be blamed on department store rather than lessee

Definition- vertical marketing system

It consists of all the levels of independently owned business along a channel of distribution. Goods and services are normally distributed through one of these systems- independent, partially integrated, fully integrated. There are three channels- manufacturing, wholesaling, retailing.

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Figure 4-8a: Vertical Marketing Systems

Independent Channel System Functions: Manufacturing Wholesaling Retailing
Ownership: Independent Manufacturer Independent Wholesaler Independent Retailer
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Figure 4-8b: 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 4.8c: 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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Figure 4-9: Sherwin-Williams Dual Vertical Marketing System

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