Chapter 44Retail Institutions by Ownership

RETAIL MANAGEMENT:A STRATEGICAPPROACH,

10th Edition

BERMANBERMAN EVANS EVANS

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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

IIStore-Based

Retail Strategy Mix

IIINonstore-Based

Retail Strategy Mix

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Ownership Forms

IndependentChainFranchiseLeased departmentVertical marketing systemConsumer cooperative

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Independent Retailers

2.2 million independent U.S. retailers70% of these are run by owners and their

familiesAccount for 35% of total stores and 3% of

U.S. store salesWhy 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

Variety store Traditional

department store Full-line discount

store Off-price chain Factory outlet Membership club Flea market

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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

Disadvantages Limited flexibility Higher investment

costs Complex managerial

control Limited

independence among personnel

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Figure 4-3: The Body Shop

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Nonstore-Based Retail Strategy Mixes and Nontraditional Retailing

Direct marketingDirect sellingVending machinesWorld Wide WebOther 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

Business Format Franchisee receives

assistance: location, quality control, accounting systems, startup practices, management training

Common for restaurants, real-estate

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Figure 4-5: Business Qualifications Sought by McDonald’s for Potential Franchisees

Financial resources

Customer and employee focus

Strong credit

Willingness to complete training

Ability to manage finances

Planning ability

Growth capability

IdealFranchisee

Experience

Full-timecommitment

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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 Franchisor’s 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

Potential Pitfalls Lessees may negate

store image Procedures may

conflict with department store

Problems may be blamed on department store rather than lessee

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Figure 4-8a: Vertical Marketing Systems

Independent Channel SystemFunctions:

ManufacturingWholesaling

Retailing

Ownership:Independent ManufacturerIndependent Wholesaler

Independent Retailer

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Figure 4-8b: Vertical Marketing Systems

Partially Integrated Channel SystemFunctions:

ManufacturingWholesaling

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 SystemFunctions:

ManufacturingWholesaling

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