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Chapter 10

Channel Institutions - Retailing

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Learning Objectives

• Understand what retailing is all about• Global retail scene and trends• Indian retail scene and trends• Types of retailers• Trade and retail formats, trading area• Retail management strategies and operations• Measuring retail performance• Franchising and e-tailing• FDI in retail in India

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What is Retailing? • Any business entity selling to consumers

directly is retailing – in a shop, in person, by mail, on the internet, telephone or a vending machine

• Retail also has a life cycle – newer forms of retail come to replace the older ones – the corner grocer may change to a supermarket

• Includes all activities involved in selling or renting products or services to consumers for their home or personal consumption

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Retailing • Term retail derived from French word ‘retaillier’

meaning ‘to break bulk’• Characteristics:

– Order sizes tend to be small but many– Caters to a wide variety of customers. Keeps a large

assortment of goods– Lot of buying in the outlet is ‘impulse’- inventory management

is critical– Selling personnel and displays are important elements of the

selling process– Strengths in ‘availability’ and ‘visibility’– Targeted customer mix decides the marketing mix of the

retailer

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Retailing

• Retail stores are independent of the producers – not attached to any of them

• A survey shows that only 35% of supermarket purchases are pre-planned. The rest are ‘impulse’- greatly influenced by quality of the merchandising efforts

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Functions of Retailers

• All marketing functions in order to provide consumers a wide variety

• Helps create time, place and possession utilities

• May add form utility (alteration of a trouser bought by a customer)

• Helps create an ‘image’ for the products he sells

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Functions of Retailers

• Add value through:– Additional services – extended store

timings, credit, home delivery– Personnel to identify and solve customer

problems– Location in a bazaar to facilitate

comparison shopping

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How do Customers Decide on a Retailer?

• Price

• Location and right ambience

• Product selection

• Fairness in dealings

• Friendly sales people

• Vehicle parking facilities

• Specialized services provided

Theories in Retailing

• Wheel of retailing: from a simple, low margin retailer to adding value through additional services and going on to a premium store.

• Accordion theory: a general retailer grows into a specialized one and then on to being a bigger general retailer

• Theory of natural selection: environmental factors influence the evolution of retail stores

• Retail life cycle: innovation, quick growth, maturity and decline

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Kinds of Retailers

Type of retailer

Characteristics

Specialty store Narrow product lines with deep assortment – apparel, furniture, books

Department store

Several product lines in different departments – Shoppers Stop, Big Bazaar

Supermarket Large, low-cost, low-margin, high volume, self-service operation with a wide offering

Convenience store

Small stores in residential areas, open long hours all days of the week – limited variety of fast moving products like groceries, food

Discount store Standard merchandise sold at lower prices for low margins

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Kinds of Retailers

Type of retailer

Characteristics

Corporate chains

More outlets owned and controlled by one firm – Globus

Voluntary chain Wholesaler sponsored group of independent retailers

Retailer co-ops Independent retailers with centralized buying operations and common promotions

Consumer co-ops

Co-op societies of groups of consumers operating their own stores – farmers, industrial workers etc

Franchise organisation

Contractual arrangement between the producer and retailers – selling products exclusively – Kemp Toys

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Retailing Scene - Global

• Well organised in most developing countries• Global biz worth about $ 6.6 trillion• Retail market size is $2325 bln in the US and

$ 280 bln in India.• Organised retail is 85% in the US and about

5% in India. China 20% Taiwan 80%• Retail sector is part of the service sector and

if organised, is a major contributor to a country’s GDP

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Retailing Scene - Global

• High potential for generating employment – 2 mln retail outlets in the US employ about 22 mln people

• Retail sector contributes significantly to the growth of the economy

• Organised retail is becoming powerful over its suppliers (who may also be big corporates)

• Producers of goods taking action to protect their turf

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Retailers’ Strengths

• Choice of merchandise is their prerogative – put pressure on producer suppliers

• Many new products on offer. Can charge penalty if products do not do well

• New developments in IT help them run operations optimally and keep track of loyal customers. Also helps them identify profitable store locations.

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The Indian Retail Scene

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Salient Features

• Estimated over 12 mln retail outlets with most of them in the unorganized sector

• 10 outlets per 1000 population

• Average per capita space – 2 sq ft compared to 15 sq ft in the US

• Organized retail is estimated between 4 to 7% but growing fast

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Organized Retail

• Growing trends attracting global players• Some of them like Wal Mart and Tesco have

already created buying hubs here.• In Jan 2006, GOI has permitted FDI upto 51%

in single brand retail outlets• Well known brands like Marks & Spencer,

Reebok, Levis, Adidas, Nike,McDonalds, KFC, Swarowski are already in India.

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Organized Retail - Features• Sponsored by companies or corporate groups• Large formats like supermarkets, department

stores and now hypermarkets• Right ambience to make shopping a pleasure• Use latest technology for customer care and

supply chain management.• Large employment potential• Effectively manage operating costs• Offer consumers value for money

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Retailing Trends - India• Consumer wants more benefits without

additional costs• Rising income levels – cheap no longer

works, but ‘value for money’• Explosion of communication channels

influences choices of products• Increased literacy has made consumer more

conscious of his bargaining power• Growing number of urban nuclear families

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Retailing Trends - India• Influence of retailer increasing – assortment

plus other facilities offered• Rural consumers want the same things as

their urban counterparts and are willing to pay for it

• Better organized supply chains to cater to a large number of outlets in different locations

• Improved infrastructure helping the consumers

• Bigger volumes help in economies of scale

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FDI in Retail in India• MNC players showing interest to operate in India• Resistance from the existing players• So far only cash-and-carry permitted• Franchisees also allowed – KFC, Tag Heuer,

Swatch, McDonalds• Jan 2006, 51% FDI permitted in single brand

businesses:– All products should be under the same brand name– Same brands should be sold internationally– Branding at the time of manufacturing itself

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Trade / Retail Format

• Range of goods and customer service dimensions determine the ‘format’. Elements distinguish between stores and include:– Store ambience. (Kemp Fort)– Saving in time for shopping – interiors of practical

design – reduce time for search and pick-up of goods– Location – Physical characteristics – external appearance,

arrangement of goods

• All these are parts of the positioning strategy and influence the ‘footfalls’ to the store.

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Categories of Shoppers (1)• Identified by Cook & Walters• Task focused shopper – visits the store to buy

specific things he has planned for – Convenience, minimum time, easily accessible goods,

pleasing store format– Grocery shopping is an example

• Leisure shopper – more interested in the ambience and environment – Has plenty of time, wants to have a good time while

shopping– Lifestyle stores are examples

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Category of Shoppers (2)

• Convenience goods (low value): probable gain from shopping and making comparisons is small compared to the time, effort and mental discomfort required in the search -toothpaste

• Shopping goods (high value): gain is large - refrigerator

• Specialty goods: clearly distinguished by brand preferences – Maruti Zen car or Tag-Heuer watch

Trading area…

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Trading Area

• Catchment area from where most of the customers of a retail store come– Corner grocery store caters to the locality in which

it is situated– Discount stores have a wider area. Subhiksha

locations for consumers in 2 km radius– Specialty stores have a much wider trading area –

MTR, Shoppers’ Stop etc

• Trading area increases with the size of the store and the variety it offers

Retail Strategy

• Some of the ‘convenience’ factors expected by customers:– Access to the store– Access to products within the store– Possession utility – making goods

available and visible – Speed of completing the transaction

process

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Strategy Guidelines

Market focus Format selected Appropriate strategy

Existing Current Market penetration

Existing New Format development

New Existing Market expansion

New New Diversification

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Retail Strategy Steps

• Mission statement – purpose of the organisation

• The ownership pattern• Clearly stated objectives • Segmentation and positioning of the retailer• Overall operational strategy• Planning of routine activities • ‘Control’ mechanisms to be put in place• Define parameters for measuring performance

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Retail Strategy

• Positioning of the retailer

• Merchandising

• Pricing strategy

• Target market segments

• Customer service

• Customer communication

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Positioning Strategy

• Wide range with a high value add – Lifestyle brand of stores

• Limited range but a high value add – Tanishque jewelry store

• Limited range with a limited value add – Bata stores

• Wide range of goods but a limited value add – a Food World outlet

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Merchandising

• A set of activities involved in acquiring goods and services and making them available at the places, times and prices and the quantity that enable a retailer to reach his goals

• The most critical function in retail• Directly effects the revenue and profitability of

the store• Also takes into account the assortment of

goods and their quality

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Customer Service Strategy

• Developed to create ‘stickiness’ in customers• Personal data collected using IT – including

purchasing practices and preferences• Customer loyalty programs planned• Create ‘customer’ delight• Location strategy to give competitive

advantage• Understanding the buying profile of the

customers Communication …

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Customer Communication• The manner in which the retailer makes himself

known to his customers. Has two parts to it:– The messages which the retailer sends to his

customers and prospects– The word of mouth support which satisfied

customers give to the retailer by talking to others

• Retailer communicates about:– Announcing the opening of a store– Promotions running in the store– Additional facilities introduced by the stores

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Pricing Strategy

• Premium and indicating high value

• Reasonable pricing with good value

• Low pricing but high value for money

• All strategies are focused on giving value to the customer

Product differentiation….

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Product Differentiation

• Feature exclusive national brands not available in competing retailers – unlikely

• Exclusivity of products – specialty stores• Mostly private labels – Westside• Feature, big, specially planned

merchandising events – Kemp Fashion sows• Introduce new products before competition -

-again unlikelyPerformance measures…

Competitive Advantage

• Location: most important• Building customer relationship through service • Getting preferential treatment from vendors• Managing information effectively• People management – employees should

demonstrate ‘ownership’ of the stores• Good management of the merchandise• Overall store management – ambience, easy

access, quick check-outs, help in buying decisions

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Building Relationships

• Customer value= product value + service value + image value

• Some of the factors to deliver customer value:– Should be what the customer thinks is right– Should be consistent – System in place to measure customer satisfaction– Retailer communication to customer is clear on

promised value proposition– Positioning of retailer in line with targeted market

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Retail Performance Measures

• Gross margin return on inventory investment – GMROI– Gross margin multiplied by ratio of sales to

inventory (50%*4= 200%)

• Gross margin per full time equivalent employee

• Gross margin per square foot

Category Types• Routine: small value items like milk,

bread etc• Destination: customer’s first choice for

specific products – apparel, footwear• Season: retailer is known for selling

seasonal merchandise – mangoes, strawberries

• Convenience: cigarettes from panwalas

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Category Management

• Category is a ‘basic unit’ for making buying decisions by a retailer

• Category management focuses on:– Efficient introduction of new products into

stores– Effective product promotions to improve off-

takes– Optimum store assortment reflecting trading

area customer needs

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Category Management• Reflects the trading area customer profile• Stocking on shelves in a manner which customers

would prefer• Serves as a differentiator between two retailers selling

same merchandise• Ensure multiple purchases and impulse buying

through proper availability and visibility• Dynamic decisions to reflect changing customer needs• Create unique customer value to ensure ‘stickiness’• Ensure profitability of all categories

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Merchandise Buying Rules

• Selection of vendor: price, quality, reliability

• Selection of merchandise: sampling, negotiated terms, order and delivery times, inventory norms, re-ordering costs etc

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Franchising

• Franchisor is the firm which wants to sell its goods or services

• Franchisee is the firm or group that are willing to sell the products or services on behalf of the franchisor– The first party gives advice and help to the

second to find good locations, blue prints for a store, financial, marketing and management assistance

Franchisor benefits…

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Benefits to Franchisor

• Faster expansion

• Local franchisee pays lower advertising rates than a national firm

• Owners motivated to work more hours than mere employees

• Local taxes and licenses are responsibility of franchisees

Franchisee benefits…

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Benefits to Franchisee

• Quick recognition among potential customers• Management training provided by principal• Principal may buy ingredients and supplies

and sell to franchisee at lower prices• Financial assistance• Promotional aids, in-store displays etc

Electronic channels…

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Retailing on the Internet

• Unlimited assortment• Items may not be on hold – someone has to

deliver the product – delays• No product touch or feel• More info makes the customer a better shopper• Comparison shopping possible• Consumer has to plan purchases ahead• No need to handle cash – payment can be on-

line• Shopping is 24X7

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E-tailing Issues

• Logistics support to selling

• Payment gateway

• Customer product returns

• Conflicts with Brick &Mortar – overcome by selling separate products

FDI in retail….

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Key Learnings• Any business selling / renting a product or

service to a consumer is retailing• A consumer selects a retailer based on price,

location, merchandise selection, fairness in dealings, helpful sales people and other services

• Organized retail is growing strong and negotiating better terms from producer suppliers

• In India, upto 51% foreign investment is permitted in single brand businesses

Key Learnings

• Most theories in retailing highlight the way in which retailers progress through different stages line in a life cycle.

• Consumers look for convenience factors like location, access to products, visibility and quick transactions.

• Providing these elements could also help build competitive advantage for a retailer.

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Key Learnings

• Category is a basic unit for making buying decisions for a retailer.

• Category management focuses on right assortment, introduction of new products and effective promotions.

• Categories reflect the profile of the trading area of the retailer.

• The purpose of category management is to ensure both footfalls and stickiness.

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Key Learnings

• Format defines the physical features of the store and its service

• Trading area is the catchment area from where the customers of store come from

• Retail strategy is built on positioning, product offerings, merchandising and communication

• Retail performance is measured by utilisation of space, inventory and manpower

• E-tailing is buying goods on the Internet

End of Notes – Chapter 10

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