Retail Competition and Strategy

Retail Competition and Strategy

RetailingMKTG 3346

Professor Edward Fox

Cox School of Business/SMU

Retail Competition Overview

Types of Retailers and Retail Formats Strategic Profit Model The Wheel of Retailing Competitive Advantage Competitive Positioning

Low Price Convenience Variety / Assortment Service

Types of Retailers

Type of retailer depends on: Merchandise

Variety (Breadth)Assortment (Depth)Services, rather than merchandise

Service Pricing

Infinite Variations “Survival of the Fittest” - Formats must best satisfy

needs of significant segment(s)

Adapted from Levy and Weitz

Types of Retailers SIC System for Classifying Retailers

Types of Retailers Sales by SIC Category

Source: U.S. Department of Commerce, 1998 Census of Retail Trade

Types of Retailers – Merchandise

Variety (Breadth of Merchandise)Examples of broad-line retailers: JCPenney, Sears Costco, Sam’s Club Carrefour Family Dollar, Dollar General

Assortment (Depth of Merchandise)Examples of “Category Killers,” or specialty stores: PetSmart, Petco Edwin Watts Bed, Bath and Beyond, Container Store

Types of Retailers – Price

Discount Stores – lower margins, higher volume Wal-Mart, Target, Kmart

Off-Price Retailers – lower cost merchandise TJMaxx, Marshall’s

Factory Outlets – manufacturer outlet for out-of season Burlington Coat Factory, Off-Fifth, Nordstrom Rack Entire outlet malls

Warehouse Clubs Costco, Sam’s Club Carrefour

Adapted from Levy and Weitz

Types of Retailers – Service

Self-Service – Customer is on his/her own Food and drug stores (e.g., Kroger, Walgreen’s)

Limited Service – Available salesperson Most department stores, some specialty stores (e.g.,

JCPenney, Gap, Kohl’s)

Full Service – Salesperson assists the customer Some department stores and specialty stores (e.g., Nordstrom,

Nine West), restaurants, etc.

Self Service Full Service

Retailer Costs Increase with Service! Retailer Costs Increase with Service!

Type of Service Service Retail Firms

Airlines American, Delta, British Airways, Singapore Airways

Automobile maint/repair Jiffy Lube, Midas, AAMCO

Automobile rental Hertz, Avis, Budget, Alamo

Banks Citibank, NCNB, Bank of America

Child care centers Kindercare, Gymboree

Credit cards American Express, VISA, Mastercard

Education University of Florida, Babson College

Entertainment parks Disney, Universal Studios, Six Flags

Express package delivery Federal Express, UPS, US Postal Service

Financial services Merrill Lynch, Dean Witter

Fitness Jazzercise, Bally’s, Gold’s Gym

Health Care Humana, HCA

Home maintenance Chemlawn, MiniMaid, Roto-Rooter

Retailers of Services

Adapted from Levy and Weitz

Type of Service Service Retail Firms

Hotels and motels Hyatt, Sheraton, Marriott, Days Inn

Income tax preparation H & R Block

Insurance Allstate, State Farm

Internet access/Elec info. American On-Line, CompuServe

Long-distance telephone AT&T, MCI, Sprint

Movie theaters AMC, Loews/Sony, Universal

Real estate Century 21, Coldwell Banker

Restaurants TGI Friday’s, Wendy’s, Pizza Hut

Truck rentals U-Haul, Ryder

Weight loss Weight Watchers, Jenny Craig

Video rental Blockbuster

Vision centers Lenscrafter, Pearle

Retailers of Services

Adapted from Levy and Weitz

Focus on General Merchandise Retailers

Adapted from Levy and Weitz

Focus on General Merchandise Retailers – Department Stores

Competition from: Discount Stores on Price

Category Killers on Assortment and Service

Possible Competitive Responses Lower Costs By Reducing Services

More Sales (by Expansion, Acquisition)

Focus on Strong Categories (e.g., Apparel, Home, Jewelry)

Improve Services

Develop Private Labels, Exclusive Brands

A Decline in Mall Shopping Threatens A Decline in Mall Shopping Threatens Mall-Based Department Stores! Mall-Based Department Stores!

Adapted from Levy and Weitz

Focus on General Merchandise Retailers – Discount Stores

Big Three – Wal-mart, Target, Kmart Competition from Category Killers – Toys ‘R Us, Best

Buy, PetSmart Possible Competitive Responses:

Continue to Reduce Costs More Focus on Apparel Because It Offers Higher Margins

… … Except Wal-Mart, Which is Focusing on Food! Except Wal-Mart, Which is Focusing on Food!

Adapted from Levy and Weitz

Retail Competition ExampleMARKET FOR WOMENS APPAREL

Source: Levy and Weitz

Net profit x Asset turnover = Return on assets

Net profit x Net sales (crossed out) = Net profitNet sales (crossed out) Total assets Total assets

Strategic Profit Model Overview

Source: Levy and Weitz

Net Sales

Cost of goods sold

Variable expenses

Fixed expenses

Gross margin

Total expenses

Net profit

Net Sales

Net profit margin

Asset turnover

Return on assets

-

-

+

Inventory

Accounts receivable

Other current assets

Total current assets

Fixed assets

Net sales

Total assets

+

+ +

x

Strategic Profit Model Detail

Source: Levy and Weitz

Return on assets = Net profit margins X Asset turnover

= Net profit X Net sales Net sales Total assets

= Net profit Total assets

Wal-Mart: $ 4,430 = 8.86%$49,996

Tiffany: $ 90 = 8.51%$1,057

Strategic Profit ModelRETURN ON ASSETS

Source: Levy and Weitz

“Wheel of Retailing”

Retailers Change Over Time in a Predictable Way Retailers Change Over Time in a Predictable Way Source: Levy and Weitz

Retailing and Competitive Advantage

Competitive AdvantageCompetitive Advantage - An advantage enjoyed by a given retailer relative to others in the market

General sources of competitive advantage:Overall cost leadershipOverall cost leadership - can offer best value (i.e., lowest

prices) or earn higher marginsWal-Mart

DifferentiationDifferentiation - unique product or service characteristicsAbercrombie and Fitch, Papa Johns, Sewell Automotive

Narrow customer focus (nichingNarrow customer focus (niching) - address wants and needs of particular customer segment(s)Container Store, Hallmark

Adapted from Michael Porter

Competitive Positioning

Depends on: Retailer’s competitive advantage(s) Needs and wants of target customers Current perceptions of the retailer

Competitive Positioning – Examples

ConvenienceConvenience

Away fromCompetitors

Away fromCompetitors

Value, or Low Price

Value, or Low Price

Service; Ease of Shopping

Service; Ease of Shopping

User ImageUser Image

BB

AA

EE DD

CCHHGG

FFAgainst aCompetitor

Against aCompetitor

Wide Variety; Deep

Assortment

Wide Variety; Deep

Assortment

Trends in Retail Competition

Increasing Diversity of Retail Formats Category killers Supercenters Electronic Retailers

Blurring of Products/Services Across Formats Pharmacy Food Soft goods / apparel

Small Store Formats Make a Comeback Dollar store format Hard discounters in Europe Wal-Mart’s Neighborhood Market format

Increasing Concentration within Formats Centralization of Decision-Making Information and Communication Systems

Retailers Go International Wal-Mart expands outside the US Retailers spread through Europe and Asia

Multi-Channel Retailing

Trends in Retail – Blurring Formats

Various Formats Now Offer: Pharmacy Financial Services, Banking Video Rental Prepared Foods

The Service Aisle, or Perimeter Departments, Are The Service Aisle, or Perimeter Departments, Are Growing!Growing!

Shoppers are much more likely to shop at multiple formats in a given week than to shop at grocery stores alone

0%

20%

40%

Grocery Only Grocery + Mass Grocery + Drug Grocery + Club

Retail CompetitionSHOPPING ACROSS RETAIL FORMATS

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

Retail CompetitionSHOPPING ACROSS RETAIL FORMATS

Category by category, which packaged goods purchases are made in which formats?

SalesRanking Description

% Spendingin Grocery

% Spendingin Mass

% Spendingin Drug

% Spendingin Club

1 REGULAR SOFT DRINKS 88.5% 7.7% 2.0% 1.8%2 READY TO EAT CEREAL 91.3% 4.7% 0.3% 3.8%3 LOW CALORIE SOFT DRINKS 88.9% 8.2% 2.1% 0.7%4 REFRIGERATED SKIM/LOW-FAT MILK 90.3% 1.5% 3.9% 4.3%5 SHELF STABLE BREAD 95.3% 3.5% 0.4% 0.8%

8 CIGARETTES CARTON 31.0% 36.2% 10.4% 22.4%11 TOILET TISSUE 52.4% 35.5% 3.0% 9.1%12 DISPOSABLE DIAPER/LINER 35.8% 55.8% 5.9% 2.5%14 INTERNAL ANALGESICS TABLET 36.9% 29.1% 27.4% 6.6%20 DRY CELL BATTERY 25.2% 47.9% 20.1% 6.8%25 PAPER TOWELS 46.4% 40.1% 2.0% 11.4%

Data Source: IRI panel of 589 panelists from Oct 1995 - Oct 1997

Packaged Goods Purchases in Retail Formats for Selected Categories

Trends in Retail – Consolidation

Discount Stores Wal-Mart, Kmart, Target

Drug stores Walgreens, CVS, Eckerd

Office Supply Category Killers Office Depot, Staples, Office Max

Consolidation increases efficiency and lowers costs Consolidation increases efficiency and lowers costs

Source: Levy and Weitz

Revenue / Margin % PortfolioCONVENIENCE STORES

High Low

High

Low

Gross Margin

Percentage

Sales Dollar Volume

Frozen Bev

Eggs

Produce

Bottled Water

Sand-wiches-Frozen

Frozen Food

Auto

Pckg’d Deli

Other Fast Food

Wine/ Liquor

Cook-ies

Ice

Cooked Food

Deli Svcs

Sandwiches-Fresh

Ice CreamHBC

Hot Bev

Juices

Fountain Drinks

GM

Breads & Cakes

Publications

Groceries

Salty Snacks

Candy & Gum

Milk

Soft Drinks

BeerTobacco

Revenue / Margin % PortfolioGENERAL MERCH. DISCOUNT STORES

High Low

High

Low

Gross Margin

Percentage

Sales Dollar Volume

Paint & Wallpaper

Handbags/ Accessories

Tobacco

Pet Supplies

Books

Luggage

Magazines

Giftware

Hosiery

RTA Furniture

CDs & Tapes

Candy

Jewelry & Watches

Photo Goods

Girls’ Wear

Shoes

Boys’ Wear

Stationary/ Greeting

Cards

Infants’ Ware

Consumer Electronics

Sporting Goods

Lawn & Garden

Traffic Appliances

Hardware/ Building Supplies

Women'sWear Men's

Wear

Toys

Kitchen/ House-wares

Automotive

Revenue / Margin % PortfolioGROCERY STORES

High Low

High

Low

Gross Margin

Percentage

Sales Dollar Volume

Spices

Ice cream

Milk

Bread

RTE cerealLaundry detergent

Cookies

Soup

Foils, bags, wraps

PastaYogurt

Toilet tissue

Tuna

Spaghetti sauce

Crackers

Cat litter

Rices

Teas

Ice cubes

Facial tissue

Bleaches

Cooking oils

Peanut butter