Classification

Organization to track competition

NAICS Codes: 44-45 Retail Trade

441: Motor Vehicle and Parts Dealers442: Furniture and Home Furnishing Stores443: Electronic and Appliance Stores444: Building Material and Garden Equipment and Supplies

Dealers445: Food and Beverage Stores446: Health and Personal Care Stores447: Gasoline Stations448: Clothing and Clothing Accessories Stores451: Sporting Goods, Hobby, Book, and Musical Stores452: General Merchandise Stores453: Miscellaneous Store Retailers454: Nonstore Retailers

Concentration Ratios

• Dominance of retail chains

• Shows an decreasing number of establishments…

• Within a small number of firms…

• Accounting for an increasing proportion of sales in a number of important categories.

Concentration Ratios The proportion of an industry's assets

owned/within a specified number of the largest firms.

In retailing, these resources can be the amount of sales, amount of payroll, number of outlets, or number of employees.

Presented in the Census of Retail Trade for the:– 4 largest firms– 8 largest firms– 20 largest firms– 50 largest firms

Vertical Integration in Retailing

• Wholesaling functions– Transporting, operating a fleet of distribution

vehicles.– Warehousing, no longer using contractual

warehouses, building distribution centers.

• Manufacturing– Managing the production of private labels– Employing in-house clothing designers, as

opposed to “brand managers”

Price

Quantity

Retail demand

RetailerM.R.= Supplier demand

SupplierM.R.

Price

Quantity

Retail demand

RetailerM.R.= Supplier demand

Avoiding the Successive Markup

• Leads to lower retail prices…

• And higher quantity sales

• Higher retailer gross margins

• Caution: Analysis focuses only on gross margins. Fixed costs of providing the functions still must be covered with volume.

Types of Vertical Arrangements

• Corporate Systems

• Wholesaler Sponsored Voluntary Chains

• Retail Sponsored Cooperatives

• Franchise Systems

• Markets vs. hierarchies, make or buy, vertical integration

• Retailer becomes a wholesaler, develops distribution centers and transportation system.

• Supplier forward integrates into retailing, such as franchisors operating company owned outlets.– Avoids the successive markup problem

– lower retail prices

– higher volumes

– higher profits

Corporate Channel

For vertical integration to compete effectively

• Must operate both sides of “channel” at an efficient scale: retail and wholesale– “Unbalanced throughput”– Inefficiencies emerge

• Overcome “dulled incentives” for the “not for profit” side of operation.

• Coalition at one level in the channel (retailers) pool resources to own and operate the supplying function (wholesaling).

• This cooperative level is operated at "not-for-profit" or provides "dividends" to members based on volume.

• Avoids the successive markup problem.• Frequently criticized for not being able to manage costs

effectively.• Examples:

– Affiliated Grocers, Topco– Farmland Industries

Contractual: Cooperative

• Specified retail format, proven successful with an established trademark.

• Lump sum, nonrefundable fee.• Payment of a royalty as a proportion of net sales

revenues.• Payment of an advertising royalty (percent of

revenues, to be spent by franchisor).• Specified territories, multi-unit operations more

prevalent.

Contractual: Franchising

Wholesaler sponsored voluntary chains

• Independent Grocers Alliance, i.e., IGA Food Stores, Fleming

• Ace Hardware

• Independently owned stores

• Wholesaler coordinates pricing, specials, private labels, and supplier relations.

• Efficiently managed supply.