Chapter 4 Retail Institutions by Ownership RETAIL MANAGEMENT

Chapter 4 Retail Institutions by Ownership RETAIL MANAGEMENT: A STRATEGIC APPROACH, 10 th Edition BERMAN EVANS

Chapter Objectives þ To show the ways in which retail institutions can be classified þ To study retailers on the basis of ownership type and examine the characteristics of each þ To explore the methods used by manufacturers, wholesalers, and retailers to exert influence in the distribution channel 4 -2

Figure 4 -1: A Classification Method for Retail Institutions I Ownership II Store-Based Retail Strategy Mix III Nonstore-Based Retail Strategy Mix 4 -3

Ownership Forms ¯ Independent ¯ Chain ¯ Franchise ¯ Leased department ¯ Vertical marketing system ¯ Consumer cooperative 4 -4

Independent Retailers ¯ 2. 2 million independent U. S. retailers ¯ 70% of these are run by owners and their families ¯ Why so many? Ease of entry 4 -5

Competitive State of Independents Advantages ¯ Flexibility in formats, locations, and strategy ¯ Control over investment costs and personnel functions, strategies, responsibility is clear ¯ Personal image it’s a personable retailer ¯ Consistency and independence only one store ¯ Strong entrepreneurial leadership owner operator 4 -6 Disadvantages ¯ Lack of bargaining power ¯ Labor intensive operations ¯ Over-dependence on owner ¯ Limited long-run planning Family problems

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 800, 000 establishments 4 -7

Competitive State of Chains Advantages ¯ Bargaining power ¯ Cost efficiencies ¯ Efficiency from computerization, sharing warehouse and other functions ¯ Defined management philosophy clear rules and responsibilities ¯ Considerable efforts in long-run planning 4 -8 Disadvantages ¯ Limited flexibility ¯ Higher investment costs ¯ Complex managerial control ¯ Limited independence among personnel several layer of management

Figure 4 -3: The Body Shop 4 -9

Franchising ¯ A contractual agreement between a franchisor and a retail franchisee, which 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 4 -10

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 gasoline services stations 4 -11 Business Format ¯ Franchisee receives assistance: location, quality control, accounting systems, startup practices, management training ¯ Common for restaurants, realestate Mc. Donald

Figure 4 -5: Business Qualifications Sought by Mc. Donald’s for Potential Franchisees Experience Financial resources Growth capability Planning ability Strong credit Ideal Franchisee Ability to manage finances Willingness to complete training Full-time commitment 4 -12 Customer and employee focus

Figure 4 -6: Structural Arrangements in Retail Franchising 4 -13

Wholesaler-Retailer Structural Arrangements ¯ Voluntary: A wholesaler sets up a franchise system and grants franchises to individual retailers Radio shake ¯ Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a wholesaling organization ACE Hardware 4 -14

Competitive State of Franchising Advantages ¯ Low capital required ¯ Acquire well-known names ¯ Operating/ management skills taught ¯ Cooperative marketing possible ¯ Exclusive rights 4 -15 Disadvantages ¯ Oversaturation could occur in one area ¯ Franchisors may overstate potential ¯ Agreements may be cancelled or voided ¯ Royalties are based on sales, not profits

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 4 -16

Competitive State of Leased Departments Benefits ¯ Provides one-stop shopping to customers ¯ Lessees handle management ¯ Reduces store costs ¯ Provides a stream of revenue 4 -17 Potential Pitfalls ¯ Lessees may negate store image ¯ Procedures may conflict with department store ¯ Problems may be blamed on department store rather than lessee by customers

Figure 4 -8 a: Vertical Marketing Systems Independent Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Independent Manufacturer Independent Wholesaler Independent Retailer 4 -18

Figure 4 -8 b: Vertical Marketing Systems Partially Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: Two channel members own all facilities and perform all functions 4 -19

Figure 4. 8 c: Vertical Marketing Systems Fully Integrated Channel System Functions: Manufacturing Wholesaling Retailing Ownership: All production and distribution functions are performed by one channel member 4 -20

Store-Based Retail Strategy Mixes ¯ Convenience store ¯ Conventional supermarket ¯ Food-based superstore ¯ Combination store ¯ Box store ¯ Warehouse store ¯ Specialty store 4 -21 ¯ Variety store ¯ Traditional department store ¯ Full-line discount store ¯ Off-price chain ¯ Factory outlet ¯ Membership club ¯ Flea market

Nonstore-Based Retail Strategy Mixes and Nontraditional Retailing ¯ Direct marketing Exposed products and services through impersonal medium ¯ Direct selling personal sales to home ¯ Vending machines through electronic machine ¯ World Wide Web Amazon 4 -22