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Retail Institutions by Ownership

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RETAIL MANAGEMENT: A STRATEGIC APPROACH 11th Edition

BERMAN 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 to 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 Account for one-third of total store sales 70% of independents operated by owners and

their families 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, personnel functions, and 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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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 900,000 establishments

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Competitive State of Chains

Advantages Bargaining power Cost efficiencies Efficiency maintained

by computerization, warehouse sharing, 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: Louis Vuitton A Powerhouse of Upscale Retailing

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Franchising A contractual agreement between a franchisor and a

retail franchisee that 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 McDonalds for Potential Franchisees

Financial resources

Customer and employee focus

Strong credit

Willingness to complete training

Ability to manage finances

Planning ability

Growth capability

Ideal Franchisee

Experience

Full-time commitment

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Figure 4-6: Structural Arrangements in Retail Franchising

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Wholesaler-Retailer Structural Franchising 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 acquisition of well-

known names operating/

management skills taught

cooperative marketing possible

exclusive rights less costly per unit

Disadvantages over-saturation could

occur franchisors may

overstate potential contractual

confinement 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

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 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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States of America.

Chapter 4Chapter ObjectivesFigure 4-1: A Classification Method for Retail InstitutionsOwnership FormsIndependent RetailersCompetitive State of IndependentsFigure 4-2: Useful Online Publications for Small RetailersChain RetailersCompetitive State of ChainsFigure 4-3: Louis Vuitton A Powerhouse of Upscale RetailingFranchisingFranchise FormatsFigure 4-5: Business Qualifications Sought by McDonalds for Potential FranchiseesFigure 4-6: Structural Arrangements in Retail FranchisingWholesaler-Retailer Structural Franchising ArrangementsFigure 4-7: Franchise and Business OpportunitiesCompetitive State of FranchisingFrom the Franchisors PerspectiveLeased DepartmentsCompetitive State of Leased DepartmentsFigure 4-8a: Vertical Marketing SystemsFigure 4-8b: Vertical Marketing SystemsFigure 4-8c: Vertical Marketing SystemsFigure 4-9: Sherwin-Williams Dual Vertical Marketing SystemSlide Number 25