Retail marketing Chapter one

CHAPTER ONE

OVERVIEW OF RETAIL MANAGEMENT

1.1 Definitions and concept

The word retail is derived from the French word retailer, meaning to cut a piece off or break
bulk.
Retailing is the set of business activities that adds value to the products and services sold to
consumers for their personal or family use. Often people think of retailing only as the sale of
products in stores, but retailing also involves the sale of services: overnight lodging in a motel, a
doctor’s exam, a haircut, a DVD rental, or a home-delivered pizza. Not all retailing is done in
stores. Examples of non store retailing include Internet sales of hot sauces
(www.firehotsauces.com), the direct sales of cosmetics by Avon, and catalog sales by L.L. Bean
and Patagonia.
A retailer is a person who purchases a variety of goods in small quantities from different
wholesalers and sells them to the ultimate consumer. He is the last link in the chain of
distribution from the producer to the consumer.
A Retailer’s Role in a Supply Chain
A retailer is a business that sells products and/or services to consumers for their personal or
family use. Retailers are the final business in a supply chain that links manufacturers to
consumers. A supply chain is a set of firms that make and deliver a given set of goods and
services to the ultimate consumer. Manufacturers typically make products and sell them to
retailers or wholesalers.
When manufacturers like Nike and Apple sell directly to consumers, they are performing both
production and retailing business activities. Wholesalers, in contrast, engage in buying, taking
title to, often storing, and physically handling goods in large quantities, then reselling the goods
(usually in smaller quantities) to retailers or industrial or business users. Wholesalers and
retailers may perform many of the same functions described in the next section, but wholesalers
uniquely satisfy retailers’ needs, whereas retailers direct their efforts to satisfying the needs of
ultimate consumers. Some retail chains, like Costco and Home Depot, function as both retailers
and wholesalers: They perform retailing activities when they sell to consumers, but they engage

Page 1
Retail marketing Chapter one

in wholesaling activities when they sell to other businesses, like restaurants or building
contractors.
In some supply chains, the manufacturing, wholesaling, and retailing activities are performed by
independent firms, but most supply chains feature some vertical integration. Vertical
integration means that a firm performs more than one set of activities in the supply chain, such
as investments by retailers in wholesaling or manufacturing. Backward integration arises when
a retailer performs some distribution and manufacturing activities, such as operating warehouses
or designing private-label merchandise. Forward integration occurs when a manufacturer
undertakes retailing activities, such as Ralph Lauren operating its own retail stores.
Most large retailers—such as Safeway, Wal-Mart, and Lowe’s—engage in both wholesaling and
retailing activities. They buy directly from manufacturers, have merchandise shipped to their
warehouses for storage, and then distribute the merchandise to their stores. Other retailers, such
as J. Crew and Victoria’s Secret, are even more vertically integrated. They also design the
merchandise they sell and then contract with manufacturers to produce it exclusively for them.

Characteristics

The followings are some of the essential characteristics of a retailer:

 Is regarded as the last link in the chain of distribution.

 Purchases goods in large quantities from the wholesaler and sell in small quantity to the
consumer.
 Deals in general products or a variety of merchandise.
 Develops personal contact with the consumer.
 Aims at providing maximum satisfaction to the consumer.
 Has a limited sphere in the market.

1.2 Functions of retailing: Value- creating functions

In the process of acting as a link between the wholesaler (and the manufacturer) and the
consumer, a retailer performs many functions:

1. Buying and Assembling

Page 2
Retail marketing Chapter one

It has been said that a retailer stocks wide variety of products to meet the requirements of a large
number of customers. For this purpose, the retailer has to assemble products of different
manufacturers from different wholesalers through the process of buying. In buying these
products, he has to be cautious. He has to find out the best and cheapest source of supply. Then
he has to select only such of the goods offered which would suit the need of his customers. He
must purchase only in quantities enough to meet the demands of his customers.

2. Warehousing and storing

Products thus assembled have to be stored by the retailer so that they are held in reserve stocks
out of which consumers requirements are met without any interruption by selling in small
quantities.

3. Holding Inventory
A major function of retailers is to keep inventory that has been broken into user-friendly sizes so
that the products will be available when consumers want them. Thus, consumers can keep a
smaller inventory of products at home because they know local retailers will have the products
available when they need more. By maintaining an inventory, retailers provide a crucial benefit
to consumers: They reduce the cost consumers would have to pay to store products.
This function is particularly important to consumers with limited storage space and those who
want to purchase perishable merchandise, like meat and produce, just before they consume it.
4. Breaking Bulk
To reduce transportation costs, manufacturers and wholesalers typically ship cases of frozen
dinners or cartons of blouses to retailers. Retailers then offer the products in smaller quantities
tailored to individual consumers’ and households’ consumption patterns in a process called
breaking bulk. Breaking bulk is important to both manufacturers and consumers, because it
provides cost efficiencies for manufacturers that can package and ship merchandise in larger,
rather than smaller, quantities and it gives consumers the chance to purchase merchandise in the
smaller, more manageable quantities they prefer.

5. Assumption of Risk

Page 3
Retail marketing Chapter one

The retailer has to bear the risk of physical deterioration of goods and fall in value. A retailer has
to stock goods in anticipation of demand from his customers. This stock must always be
sufficient to meet any demand from the customers. This fact involves risk to the extent of the
stocks held by any retailer. Firstly, the products stored are subject to the usual risks of flood and
other natural calamities. Secondly, there are the risks of spoilage and deterioration due to the
very nature of goods. Then there is the risk of change in fashion. Fickle mindedness of the
consumers and human tendency to like change in life together make loss of value through change
in style and fashion - a very real risk to a retail trader.

6. Grading and Packing

Retailers have to sort out in different lots goods or products left ungraded by the producer or the
wholesaler. Also, they must make arrangements for proper packing of goods which are sold
loose.

7. Providing Financing Services

Often retailers have to grant credit to consumers. Credit sale in effect means facilitating the flow
of products through the marketing channel to its ultimate goal. Thus retailers contribute in
financing the marketing process.

8. Supply of Market Information

Retailers, being in touch with the consumers, are most favorably situated to study consumers'
behavior, changes in the tastes, fashions and demand etc. Thus they collect valuable information
pertaining to the problems of marketing.

9. Advertising

Retailers display goods in their stores.

10. Increasing the Value of goods and Services

Page 4
Retail marketing Chapter one

By providing assortments, breaking bulk, holding inventory, and providing services, retailers
increase the value that consumers receive from their products and services.

1.3 Types of retailing

In store retailer, non store retailer and franchise

 In store retailer
Supermarkets
A Conventional supermarket is a self-serviced food store offering groceries, meat, and produce
with limited sales of non food items, such as health and beauty aids and general merchandise.
Whereas conventional supermarkets carry about large items, limited assortment supermarkets,
also called extreme value food retailers, only limited stocks. Rather than carrying twenty brands
of laundry detergent, limited assortment stores offer one or two brands and sizes, one of which is
a store brand. Stores are designed to maximize efficiency and reduce costs.
Supercenters
The fastest growing retail category, are large stores that combine a supermarket with a full-line
discount store. By offering board assortments of grocery and general merchandise products
under one roof, super centers provide a one-stop shopping experience.
Hypermarkets: are also large combination food and general merchandise stores. Hypermarkets
typically stock fewer items than supercenters - between 40,000 and 60,000 items ranging from
groceries, hardware, and sports equipment to furniture and appliance to computers and
electronics. Both hypermarkets and supercenters are large, carry grocery and general
merchandise categories, offer self-service, and are located in warehouse-type structures with
large parking facilities.
However, hypermarkets carry a larger proportion of food items than supercenters with a greater
emphasis placed on perishables – produce, meat, fish, and bakery.
Supercenters, on the other hand, have a larger percentage of nonfood items and focus more on
dry groceries, such as breakfast cereal and canned goods, instead of fresh items
Warehouse Clubs

Page 5
Retail marketing Chapter one

 Warehouse clubs are retailers that offer a limited and irregular assortment of food and
general merchandise with little service at low prices for ultimate consumers and small
businesses.
 Warehouse clubs are large (at least 100,000-150,000 square feet) and typically located in
low-rent districts. They have simple interiors and concrete floors. Little service is offered.
Customers pick merchandise off shipping pallets, take it to checkout lines in the front of the
store, and usually pay with cash.
 Warehouse clubs can offer low prices because they use low-cost locations, inexpensive store
designs, and little customer service and keep inventory holding costs low by carrying a
limited assortment of fast selling items.
 Most warehouse clubs have two types of members: wholesale members who own small
businesses and individual members who purchase for their own use.

Convenience Stores
Convenience stores provide a limited variety and assortment of merchandise at a convenient
location in 2,000-3,000 square foot stores with speedy checkout. They are the modern version of
the neighborhood mom-and pop grocery/general store. Customers can shop very quickly.
Due to their small size and high sales, convenience stores typically receive deliveries every day.
Convenience stores only offer limited assortments and variety, and they charge higher prices
than supermarkets. In response to competitive pressures, convenience stores are taking steps to
decrease their dependency on gasoline sales, tailoring assortments to local markets, and making
their stores even more convenient to shop.
To increase convenience, convenience stores are opening smaller stores close to where
consumers shop and work.
General Merchandise Retailers
The major types of general merchandise retailers are department stores, full-line discount stores,
specialty stores, category specialists, home improvement centers, off-price retailers, and extreme
value retailers.
Department Stores

Page 6
Retail marketing Chapter one

 Department stores are retailers that carry a broad variety and deep assortment, offer customer
services, and organize their stores into distinctly separate departments for displaying
merchandise. Traditionally, department stores attracted customers by offering a pleasing
ambience, attentive service, and a wide variety of merchandise under one roof. They sold
both soft goods (apparel and bedding) and hard goods (appliances, furniture, and consumer
electronics). But now most department stores focus almost exclusively on soft goods.
 Department store chains can be categorized into three tiers. The first tier includes upscale,
high fashion chains with exclusive designer merchandise and excellent customer service. The
second tier of upscale traditional department stores, in which retailers sell more modestly
priced merchandise with less customer service. The value oriented tier caters to more price-
conscious consumers. Retail chains in the first tier have established a clearly differentiated
position and are producing strong financial results, while the value oriented tier is facing
significant competitive challenges from discount stores.
 Department stores still account for some of retailing’s traditions – multistoried downtown
stores, special events and holiday decorations – and offer designer brands that are not
available from other retailers.
 Department stores have not been as successful as discount stores and food retailers in
reducing costs by working with their vendors to establish just-in-time inventory systems, so
prices are relatively high. The performance of department stores is linked to the strengths of
the brands they sell. In light of the decline in department store patronage, many of these
brands, previously sold exclusively through department stores, are pursuing other growth
opportunities. To deal with their eroding market share, department stores are attempting to
increase the amount of exclusive merchandise they sell, Undertaking marketing campaigns to
develop strong images for their stores and brands, and Building better relationships with their
key customers. In recent years, department stores’ discount sales events have increased
dramatically to the point that consumers have been trained to wait for items to be placed on
sale rather than buy them at full price.
 Finally, department stores are using technology and information systems to improve
customer service in a cost effective manner.
Full-Line Discount Stores

Page 7
Retail marketing Chapter one

Full-line discount stores are retailers that offer a broad variety of merchandise, limited service,
and low prices. Discount stores offer both private and national label, but these brands are
typically less fashion oriented than the brands in department stores. Target is becoming one of
the most successful retailers in terms of sales growth and profitability. Target succeeds because
its stores offer fashionable merchandise at low prices in a pleasant shopping environment.
Specialty Stores
Specialty stores concentrate on a limited number of complementary merchandise categories and
provide a high level of service in relatively small stores. Specialty stores tailor their retail
strategy towards a very specific market segment by offering deep but narrow assortments and
sales associate expertise. Because specialty retailers’ focus on specific market segments, they are
vulnerable to shifts in consumer tastes and preferences.

Drugstores
Drugstores are specialty stores that concentrate on health and personal grooming merchandise.
Pharmaceuticals often represent over 50 percent of drugstore sales and an even greater
percentage of their profits. Drugstores, particularly the national chains, are experiencing
sustained sales growth because the aging population requires more prescription drugs.
Drugstores are also being squeezed by considerable competition from pharmacies in discount
stores and supermarkets, as well as from prescription mail-order retailers. Drugstore retailers are
using systems to allow pharmacists time to provide personalized service.
Category Specialists
Are big box discount stores that offer a narrow but deep assortment of merchandise? These
retailers are basically discount specialty stores. Most category specialists use a self-service
approach, but some specialists in consumer durables offer assistance to customers. For, example,
office depot stores have a warehouse atmosphere, with cartons of copying paper stacked on
pallets plus equipment in boxes on shelves. By offering a complete assortment in a category at
low prices, category specialists can “kill” a category of merchandise for other retailers and thus
are frequently called category killers. Due to their category dominance, they use their buying
power to negotiate low prices and are assured of supply when items are scarce. One of the largest
and most successful types of category specialist is the home improvement center. A home

Page 8
Retail marketing Chapter one

improvement center is a category specialist offering equipment and material used by do-it-
yourselfers and contractors to make home improvements.
Extreme Value Retailers
These are small, full-line discount stores that offer a limited merchandise assortment at very low
prices. The largest extreme value retailers are dollar general and Family dollar stores. Extreme
value retailers are one of the fastest growing segments in retailing. Like limited assortment food
retailers, extreme value full-line retailers reduce costs and maintain low prices by offering a
limited assortment and operating in low-rent, urban, or rural locations.
Off-Price Retailers
Offer an inconsistent assortment of brand name merchandise at low prices. America’s largest off-
price retail chains are; TJX companies, Ross Stores, and Burlington Coat Factory. Off-price
retailers sell brand name and even designer label merchandise at low prices through their unique
buying and merchandising practices. Most merchandise is bought opportunistically from
manufacturers or other retailers with excess inventory at the end of the season. Due to this
pattern of opportunistic buying, customers can’t be confident that the same type of merchandise
will be in stock each time they visit the store.
Closeout Retailers: are off-price retailers that sell a broad but inconsistent assortment of general
merchandise as well as apparel and soft home goods. The largest closeout chains are Big Lots
Inc. and Tuesday Morning.
Outlet stores: are off-price retailers owned by manufacturers or department or specialty store
chains. Those owned by manufacturers are frequently referred to as Factory Outlets. Out stores
are typically found in one of the fastest growing types of malls – the outlet mall.
 Non Store Retailers
In the preceding sections, we examined retailers whose primary channel is their stores. In this
section, we will discuss types of retailers that operate primarily through non-store channels.
Electronic Retailers
Electronic Retailing (also called e-tailing, online retailing, and Internet retailing) is a retail
format in which the retailers communicate with customers and offer products and service for sale
over the Internet. Even though online retail sales continue to grow much faster than retail sales
through stores and catalogs, we now realize the internet is not a revolutionary new retail format

Page 9
Retail marketing Chapter one

that will replace stores and catalogs. While the Internet continues to provide opportunities for
entrepreneurs in the retail industry, it is now primarily used by traditional retailers as a tool to
complement their store and catalog offerings, grow their revenues, and provide more value for
their customers. Most of the retailers that sell merchandise exclusively over the Internet target
niche markets – markets that are so small and dispersed that they cannot be economically
serviced by stores.
Catalog and Direct-Mail Retailers
Catalog retailing is a non-store retail format in which the retail offerings are communicated
through a catalog, whereas direct-mail retailers communicate with their customers using letters
and brochures. Historically, catalog and direct-mail retailing were most successful with rural
consumers who lacked ready access to retail stores. For Example; in 2003, $125 billion of
merchandise and services were sold through catalogs, and over 17 billion catalogs were
distributed in the United States. The merchandise categories with the greatest catalog sales are
apparel, gifts, books, and home décor.
Types of Catalog and Direct Mail Retailers
General merchandise catalog retailers- offer a broad variety of merchandise in catalogs that
are periodically mailed to their customers. Specialty catalog- retailers focus on specific
categories of merchandise, such as fruit, gardening tools, and seeds and plants. Direct mail
retailers- typically mail brochures and pamphlets to sell a specific product or service to
customers at one point in time. Catalog retailing is very challenging. First, it is difficult for
smaller catalog and direct-mail retailers to compete with large, well-established firms with
sophisticated CRM and fulfillment systems. Second, the mailing and printing costs are high and
increasing. Third, it is difficult to get customers’ attention as they are mailed so many catalogs
and direct mail promotions. Fourth, the length of time required to design, develop, and distribute
catalogs makes it difficult for catalog and direct mail retailers to respond quickly to new trends
and fashions.
Direct Selling
Direct selling is a retail format in which salespeople, frequently independent businesspeople,
contact customers directly in a convenient location, either at the customer’s home or at work;
demonstrate merchandise benefits and/or explain a service; take an order; and deliver the

Page 10
Retail marketing Chapter one

merchandise or perform the service. Direct selling is a highly interactive form of retailing in
which considerable information is conveyed to customers through face-to-face discussions with
salespeople. However, providing this high level of information, including extensive
demonstrations, is costly. Two special types of direct selling are the party plan and multilevel
selling. About 30 percent of all direct sales are made using a party plan system, in which
salespeople encourage customers to act as hosts and invite friends or coworkers to a “party” at
which the merchandise is demonstrated. Sales made at the party are influenced by the social
relationship of the people attending with the host or hostess, who receives a gift or commission
for arranging the meeting.
Television Home Shopping
Television home shopping is a retail format in which customers watch a TV program that
demonstrates merchandise and then place orders for the merchandise by telephone. The three
forms of electronic home shopping retailing are Cable channels dedicated to television
shopping, Infomercials, Direct-response advertising. Direct-response advertising includes
advertisements on TV and radio that describe products and provide an opportunity for consumers
to order them.
Infomercials are TV programs, typically 30 minutes long that mix entertainment with product
demonstrations and then solicit orders placed by telephone. The major advantage of TV home
shopping compared with catalog retailing is that consumers can see the merchandise
demonstrated on their TV screen.
Vending Machine Retailing
Vending machine retailing is a non-store format in which merchandise or services are stored in a
machine and dispensed to customers when they deposit cash or use a credit card. Vending
machines are placed at convenience, high-traffic locations, such as in the workplace or on
university campuses, and primarily contain snacks and drinks. Due to increasing labor and
gasoline costs, vending machine operators are increasing their prices and retrofitting machines to
accept higher denomination bills. Technological developments in vending machine design may
result in long-term sales growth. Some retailers are experimenting with vending machines as
another channel to service their customers.

Page 11
Retail marketing Chapter one

Types of Ownership
Independent, Franchise, Leased department, corporate chains
Independent Retailers-Retailing is one of the few sectors in our economy in which
entrepreneurial activity is extensive. Many of these retail start-ups are owner managed, which
means management has direct contact with customers and can respond quickly to their needs.
Small retailers are also very flexible and can therefore react quickly to market changes and
customer needs. Corporate chains can more effectively negotiate lower prices for merchandise
and advertising due to their larger size. To better compete against corporate chains, some
independent retailers join a wholesale-sponsored voluntary cooperative group, which is an
organization operated by a wholesaler offering a merchandising program to small, independent
retailers on a voluntary basis.
In addition to buying, warehousing, and distribution, these groups offer members services such
as advice on store design, and layout, site selection, bookkeeping and inventory management
systems, and employee training programs.
Corporate Retail Chains
A retail chain is a company that operates multiple retail units under common ownership and
usually has centralized purchasing and decision making for defining and implementing its
strategy.
Franchising
Franchising is a contractual agreement between a franchisor and a franchisee that allows the
franchisee to operate a retail outlet using a name and format developed and supported by the
franchisor. In a franchise contract, the franchisee pays a lump sum plus a royalty on all sales for
the right to operate a store in a specific location. The franchisee also agrees to operate the outlet
in accordance with procedures prescribed by the franchisor. The franchisor provides assistance in
locating and building the store, developing the products or services sold, training managers, and
advertising. To maintain each franchisee’s reputation, the franchisor also makes sure that all
outlets provide the same quality of services and products.
The franchise ownership attempts to combine the advantage of owner-managed businesses with
efficiencies of centralized decision making of chain store operations. Franchisees are motivated
to make their store successful because they receive the profits (after royalty is paid). The

Page 12
Retail marketing Chapter one

franchisor is motivated to develop new products and systems and to promote the franchise
because it receives a royalty on all sales. Advertising, product development, and system
development are efficiently done by the franchisor, with costs shared by all franchisees.
Leased department-A leased department is a department in a retail store – usually a department,
discount, or specialty store – that is rented to outside party. The leased department proprietor is
responsible for all aspects of its business & normally pays a percentage of sales as rent. The store
sets operating restrictions for the leased department to ensure overall consistency &
coordination.

Service Retailing
Service retailers are firms selling primarily services rather than merchandise are a large and
growing part of the retail industry. There are several trends that suggest considerable future
growth in services retailing. Many organizations such as banks, hospitals, health spas, legal
clinics, entertainment firms, and universities that offer services to consumers traditionally
haven’t considered themselves retailers. Due to increased competition, these organizations are
adopting retailing principles to attract customers and satisfy their needs. All retailers provide
goods and services for their customers.
Differences between Services and Merchandise Retailers
Intangibility
Services are generally intangible – customers cannot see, touch, or feel them. They are
performances or actions rather than objects. Due to the intangibility of their offering, service
retailers often use tangible symbols to inform customers about the quality of their services.
Services retailers also have difficulty evaluating the quality of services they are providing. To
evaluate the quality of their offering, services retailers often solicit customer evaluations and
complaints.
Simultaneous Production and Consumption
Products are typically made in a factory, stored and sold by a retailer, and then sued by
consumers in their homes. Services providers, however, create and deliver the service as the
customer is consuming it. The simultaneity of production and consumption also creates some
special problems for service retailers.

Page 13
Retail marketing Chapter one

First, the customers are present when the service is produced, may even have an opportunity to
see it produced, and in some cases may be part of the production process, as in making their own
salad at a salad bar.
Second, other customers consuming the service at the same time can affect the quality of the
service provided.
Third, the service retailer often does not get a second chance to satisfy the needs of its customers.
Because services are produced and consumed at the same time, it is difficult to reduce costs
through mass production. Most service retailers are small, local firms.
Perishability
Because the creation and consumption of services are inseparable, services are perishable. They
can’t be saved, stored, or resold. Due to the perishability of services, an important aspect of
services retailing is matching supply and demand. Thus, services retailers often have times when
their services are underutilized and other times when they have to turn customers away because
they can’t accommodate them. Services retailers use a variety of programs to match demand and
supply.
Inconsistency
Products can be produced by machines with very tight quality control so customers are
reasonably assured that all boxes of cheerios will be identical; because services are performances
produced by people (employees and customers), no two services will be identical.
Thus, an important challenge for services retailers is providing consistently high-quality services.
Many factors that determine service quality are beyond the control of the retailers; however,
services retailers expend considerable time and effort selecting, training, managing, and
motivating their service providers.

Page 14