Chapter 4

Evaluating the Competition in Retailing

Learning Objectives

• Explain the various models of retail competition

• Distinguish between various types of retail competition

• Describe the four theories used to explain the evolution of retail competition

• Describe the changes that could effect retail competition

Models of Retail Competition

• The competitive marketplace• Market structure• The demand side of retailing• Nonprice decisions• Competitive actions• Suppliers as partners and competitors

LO 1

The Competitive Marketplace

• Helps identify primary and secondary competitors

• Retailers compete for target customers on five major fronts: (Food)• The price for the benefits offered• Service level• Product selection • Location or access• Customer experience

LO 1

More Jeopardy

• Has a natural equilibrium price point• What is pure competition• Many buyers and many seller trading over a

wide range of prices. No one buyer or seller can impact price

• What is monopolistic competition

Market Structure• Pure competition

• Occurs when a market has:• Homogenous products • Many buyers and sellers, having perfect knowledge of

the market• Ease of entry for both buyers and sellers

• Each retailer: • Faces a horizontal demand curve • Must sell its products at the going ‘‘market’’ or

equilibrium price• It is rare in retailing

LO 1

Market Structure

• Pure monopoly: Occurs when there is only one seller for a product or service• Law of diminishing returns or declining marginal

utility• As the retailer seeks to sell more units, it must lower

the selling price

LO 1

Market Structure

• Monopolistic competition • Products offered are different, yet viewed as

substitutable for each other • Sellers recognize that they compete with sellers of

these different products• Retailers attempt to differentiate themselves with

the products or services they offer

LO 1

Market Structure• Oligopolistic competition

• Essentially homogeneous products are sold• Relatively few sellers or many small firms who follow

the lead of the few large firms• Any action by one seller is expected to be noticed and

reacted to by the other sellers• Sellers end up selling at a similar price• Is rare in retailingOutshopping: Occurs when a household:

Travels outside their community of residence or uses the Internet to shop in another community

LO 1

The Demand Side of Retailing

• Negatively sloping demand curve• Consumers will demand a higher quantity as price

is lowered

• The true price (or cost) the customer pays actually includes:• The retailer charges• Sales tax on the purchase• Delivery or transportation cost

LO 1

Exhibit 4.1- Demand as a Function of Price

The Demand Side of Retailing

• Retailers will need to recognize when:• A drop in a competitor’s prices is temporary and

inconsequential to long-term competition• The competitor has set a new permanent pricing

standard

Nonprice Decisions

• Nonprice variables are directed at: • Enlarging the retailer’s demand by offering

customers benefits beyond the lowest price

• Price is the easiest variable for competitors to copy

LO 1

Nonprice Decisions• Using nonprice variables

• Store positioning: Identifying a well-defined market segment using:

• Demographic or lifestyle variables and appealing to this segment with a clearly differentiated approach

• Offering private-label merchandise that has unique features or offers better value than competitors

• Providing additional benefits for the customer• Mastering stock keeping with basic merchandise

assortment• Becoming a destination store for certain products

LO 1

Positioning

• Best Buy• Bass Pro Shop• Forever 21• Radio Shack

How to Implement a Store Positioning Program

• Assess how shoppers and even competitors view the retailer

• Determine the best position for the retailer• Analyze the retailer’s current target customers• Factor in current environmental trends• Implement the new positioning strategy

LO 1

Competitive Actions

• Overstored• Condition in a community where the number of

stores in relation to households is so large: • That to engage in retailing is usually unprofitable or

marginally profitable

• Understored• Condition in a community where the number of

stores in relation to households is relatively low:• So that engaging in retailing is an attractive economic

endeavor

LO 1

Competitive Actions

• Competition is most intense in overstored markets• Many retailers are achieving an inadequate return

on investment

LO 1

Suppliers as Partners and Competitors• Retailers must:

• Develop a loyal group of patrons that encourages the supplier to accommodate their needs

• Determine how they can be most productive for their suppliers yet still maintain profitability

• Unique product or promotion by suppliers:• Can provide critical competitive

advantage to retailersLO 1

Types of Competition

• Intratype competition • Two or more retailers of same type compete

directly with each other for the same households

• Intertype competition• Two or more retailers of different type compete

directly by:• Attempting to sell the same merchandise lines to the

same households

LO 2

Types of Competition

• Divertive competition: Retailers intercept or divert customers from competing retailers• Can be intertype or intratype (video rentals)• Retailers operate very close to their breakeven point• Pop-up stores

• Temporary small scale stores• Set up for a relatively short period of time• Explicitly intercept shoppers

• Has escalated due to the Internet

LO 2

Evolution of Retail Competition

• The wheel of retailing• The retail accordion• Retail life cycle• Resource-advantage theory

LO 3

Wheel of Retailing Theory

• New types of retailers:• Enter the market as low-status, low-margin, and

low-price operators• Gradually, enter a trading-up phase and acquire

more sophisticated and elaborate facilities thus:• Become vulnerable to new types of low-margin retail

competitors who progress through the same pattern

Exhibit 4.6 - Wheel of Retailing

LO 3

The Retail Accordion

• Describes how retail institutions evolve from:• Outlets that offer wide assortments to specialized

stores

• Is vague about the competitive importance of providing wide assortments to customers

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The Retail Life Cycle• Introduction Zip cars Bag borrow or steal

• Simple methods of distribution• Savings passed to the customers • Low profits despite increasing sales levels

• Growth • Sales and profits explode• Towards the end, cost pressure increases• Market share reaches maximum levels• Profitability begins to decline

LO 3

The Retail Life Cycle

• Maturity - Market share stabilizes and profits decline due to:• The shift from a simple and small high growth firm

to a large and complex firm with static growth• Overexpansion• Intense competition

LO 3

The Retail Life Cycle

• Decline• Major loss of market share • Profits fall• Once-promising idea is no longer required

LO 3

Exhibit 4.6 - Retail Institutions in Their Various Stages of the Retail Life Cycle

LO 3

Resource-Advantage Theory• Firms gain competitive advantage by:

• Offering superior value to customers • Having lower costs of operating

• Important lessons for retailers:• Superior performance is due to tangible or intangible

resources• All retailers cannot achieve superior results at the

same time• A retailer uses unique resources to:

• Offer greater relative value to the marketplace• Operate firms at a lower cost

LO 3

Future Changes in Retail Competition

• Nonstore retailing• New retailing formats• Heightened global competition• Integration of technology• Increasing use of private labels

LO 4

Nonstore Retailing

• Result of accelerated communication technology and changing consumer lifestyles

• Prerequisite for the success of e-tailing:• Having enough consumers with access to the Internet• Paying attention to customer service• What are concerns about e-tailing?

• State Taxes, Food, immediate gratification, bulky shipping, try on, security

• 3% to 5% (shift in demand not increase demand)

LO 4

New Retailing Formats

• Off-price retailers• Sell products at a discount • Do not carry certain brands on a continuous basis• Carry brands that can be bought at closeout or

deep one-time discount prices• Merchandise brands and selection could be

unpredictable • Examples of off-price retailers - Factory outlets,

independent carriers, and warehouse clubs

LO 4

New Retailing Formats

• Supercenter • Combination of supermarket and discount

department store • Carries more than 80,000 to 100,000 SKUs

LO 4

New Retailing Formats• Recycled merchandise retailers

• Sell used and reconditioned products• Examples - Pawn and thrift shops, auction houses,

flea markets, and eBay

• Liquidators - Purchase the inventory of the existing retailer

• Rentals

LO 4

Heightened Global Competition

• The increase in the rate of change in retailing• Greater diversity• Creation of new retail formats

LO 4

Integration of Technology

• Technological innovations can be grouped under:• Supply chain management - Using new initiatives

such as:• Direct store delivery (DSD)• Collaborative planning, forecasting, and replenishment

(CPFR) systems

• Customer management• Customer satisfaction

LO 4

Name that Brand

• Kenmore• Sears• Route 66• Kmart• Sam’s Choice• Walmart• Arizona Jean• JCPenney• Equate• Walmart• Merona• Target• Stafford• JCPenney

• Cherokee• Target• Joe Boxer• Kmart• Martha Stewart• Kmart• Faconnable• Nordstrom• Die Hard• Sears• Canyon River Blues• Sears• Kirkland• Costco

•North Face•North Face

Increasing use of Private Labels

• Set the retailer apart from the competition • Private-label branding strategies

• Develop a partnership with: • Well-known celebrities, noted experts, and institutional

authorities• Traditionally higher-end suppliers

• Reintroduce products that have strong name recognition

• Brand an entire department or business

LO 4