Retail Strategy Dr Parveen Nagpal Retail Strategy A
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Retail Strategy Dr. Parveen Nagpal
Retail Strategy: A statement identifying (i) the retailer’s target market, (ii) the format the retailer plans to use to satisfy the target market’s needs, and (iii) the bases on which the retailer plans to build a sustainable competitive advantage. Retailers formulate merchandise strategy, promotion strategy, location strategy, branding strategy and so on.
Retail Strategy • Target Market is the market segment toward which the retailer plans to focus its resources and retail mix. • Retail Format describes the nature of retailer’s operations—its retail mix (type of merchandise and services offered, pricing policy, advertising and promotion programs, store design and visual merchandising, locations, and customer services)—that it will use to satisfy the needs of its target market. • Sustainable Competitive Advantage is an advantage the retailer has over its competitors that is not easily copied and thus can be maintained over a long period of time.
Retail Strategy Three approaches for developing a sustainable competitive advantage are (1) building strong relationships with customers Customer Loyalty – brand image, positioning, unique merchandise, customer service, CRM programs. (2) building strong relationships with suppliers – vendor relations (3) achieving efficient internal operations - Larger retailers have more bargaining power with vendors and thus can buy merchandise at lower costs, invest in developing sophisticated systems, better human resource management and information and supply chain management systems. Each of these approaches involves developing an asset—loyal customers, strong vendor relationships, committed effective human resources and efficient systems, and attractive locations—that is not easily duplicated by competitors.
Retail Strategy – Growth Strategy Growth strategies are basically about decisions related to allocating available resources among different target markets and retail formats, transferring resources from one set of merchandise to others and managing and nurturing the firm’s portfolio in such a way that the overall organizations objectives are obtained.
Retail Strategy – Growth Strategy Four types of growth opportunities that retailers may pursue -
Retail Strategy – Growth Strategy 1. Market Penetration • A market penetration growth opportunity is a growth opportunity directed toward existing customers using the retailer’s present retailing format. • Such opportunities involve either attracting new consumers from the retailer’s current target market who don’t patronize the retailer currently or devising approaches that get current customers to visit the retailer more often or buy more merchandise on each visit. • Market penetration approaches include opening more stores in the target market and/or keeping existing stores open for longer hours. • Other approaches involve displaying merchandise to increase impulse purchases and training salespeople to cross-sell. (Cross-selling means that sales associates in one department attempt to sell complementary merchandise from other departments to their customers)
Retail Strategy – Growth Strategy 2. Market Expansion • A market expansion growth opportunity involves using the retailer’s existing retail format in new market segments. • A market expansion opportunity exists when a retailer sells the same product range with no/some alteration in the new market. • It means that merchandise will remain the same but will be marketed to a new customer group. • Retailers can expand the markets by entering a new market to sell, either by exporting or by entering into a totally new market.
Retail Strategy – Growth Strategy 3. Retail Format Development • A retail format development growth opportunity is an opportunity in which a retailer develops a new retail format - a format with a different retail mix for the same target market. For example, Amazon. com began selling electronic items such as CDs, videos, pen drives and other electronic items in addition to books and literature. • These stores are located close to where customers live and work.
Retail Strategy – Growth Strategy 4. Diversification A diversification growth opportunity is one in which a retailer introduces a new retail format directed towards a market segment that is not currently served by the retailer. Diversification opportunities are either related or unrelated • Related Diversification Growth Opportunity – Here, the retailer’s present target market or retail format shares something in common with the new opportunity. This commonality might necessitate purchasing from the same vendors, operating in similar locations, using the same distribution or management information system, or advertising in the same newspapers to similar target markets. • Unrelated Diversification Growth Opportunity - This has little commonality between the retailer’s present business and the new growth opportunity.
Retail Strategy – Growth Strategy • Vertical Integration This describes diversification by retailers into wholesaling or manufacturing. For example, some retailers go beyond designing their private-label merchandise to owning factories that manufacture the merchandise. When retailers integrate backward and manufacture products, they are making risky investments because the requisite skills to make products are different from those associated with retailing them. In addition, retailers and manufacturers have different customers. The immediate customers for a manufacturer’s products are retailers, while a retailer’s customers are consumers. Thus, a manufacturer’s marketing activities are very different from those of a retailer. However, designing private-label merchandise is a related diversification because it builds on the retailer’s knowledge of its customers, but actually making the merchandise is an unrelated diversification.
Retail Strategy – Growth Strategy Retailers have the greatest competitive advantage and most success when they engage in opportunities that are similar to their present retail operations and markets. Market penetration growth opportunities have the greatest chances of succeeding because they build on the retailer’s present bases of advantage and don’t involve entering new, unfamiliar markets or operating new, unfamiliar retail formats. When retailers pursue market expansion opportunities, they build on their advantages in operating a retail format and apply this competitive advantage in a new market. A retail format development opportunity builds on the retailer’s relationships and loyalty of present customers. Even if a retailer doesn’t have experience and skills in operating the new format, it hopes to attract its loyal customers to it. Retailers have the least opportunity to exploit a competitive advantage when they pursue diversification opportunities.
Global Growth Opportunities • By expanding internationally, retailers can increase their sales, leverage their knowledge and systems across a greater sales base, and gain more bargaining power with vendors. • International expansion is risky, because retailers must deal with different government regulations, cultural traditions, consumer preferences, supply chains, languages etc. • The two factors that are often used to determine the attractiveness of different international opportunities are: 1. the potential size of the retail market in the country 2. the degree to which the country does and can support the entry of foreign retailers (political stability, urban population, better infrastructure, ease of doing business etc. )
Global Growth Opportunities • The most attractive countries are those with large and growing potential sales as indicated by the level and growth rate of present retail sales and the amount of money people have in the country to spend on services and merchandise • Most retailers considering entry into foreign markets are successful retailers that use sophisticated management practices. Thus they would find countries that support modern retailing, have more advanced infrastructure, and have significant urban population to be more attractive. • The emerging international markets that receive the most attention from global retailers are India, China, Russia, and Brazil, collectively referred to as “the BRIC” (Brazil, Russia, India, China) countries. China and India are by far the largest retail markets in emerging economies.
Global Growth Opportunities The characteristics of retailers that have successfully exploited international growth opportunities are: 1. Globally Sustainable Competitive Advantage Entry into non-domestic markets is most successful when the expansion opportunity builds on the retailer’s core bases of competitive advantage. For example, Walmart has a significant cost advantage and is most successful in international markets in which price plays an important role in consumer decision making. It also has a distribution infrastructure that enables these firms to exploit their logistical capabilities. In contrast, H&M and Zara are more successful in international markets that value lower-priced, fashionable merchandise.
Global Growth Opportunities 2. Adaptability - Although successful global retailers build on their core competencies, they also recognize cultural differences and adapt their core strategy to the needs of local markets. 3. Global Culture - It is not sufficient to transplant a home-country culture and infrastructure to another country. Big retailers encourage the rapid development of local management and retain few expatriates in its overseas operations. They have a global management structure of regional committees, which meet regularly, advance the awareness and implementation of global best practices. 4. Financial Resources - Expansion into international markets requires a longterm commitment and considerable planning. Large firms are in a strong financial position and therefore have the ability to keep investing in projects long enough to become successful.
Entry Strategies in Global Market 1. Direct Investment • Direct Investment occurs when a retail firm invests in and owns a retail operation in a foreign country. • This entry strategy requires the highest level of investment and exposes the retailer to the greatest risks, but it also has the highest potential returns. • A key advantage of direct investment is that the retailer has complete control of the operations. • For example, Mc. Donald’s chose this entry strategy for the U. K. market, building a plant to produce buns when local suppliers could not meet its specifications.
Entry Strategies in Global Market 2. Joint Venture • A joint venture is formed when the entering retailer pools its resources with a local retailer to form a new company in which ownership, control, and profits are shared. • A joint-venture entry strategy reduces the entrant’s risks. • In addition to sharing the financial burden, the local partner provides an understanding of the market and has access to local resources, such as vendors and real estate. • Many foreign countries, such as India, require that foreign entrants partner with domestic firms. • Problems with this entry approach can arise if the partners disagree or the government places restrictions.
Entry Strategies in Global Market 3. Strategic Alliance • It is a collaborative relationship between independent firms. • For example, a retailer might enter an international market through direct investment but use independent firms to facilitate its local logistical and warehousing activities. 4. Franchising • It offers the lowest risk and requires the least investment. • However, the retailer has limited control over the retail operations in the foreign country, its potential profit is reduced, and the risk of assisting in the creation of a local domestic competitor increases.
Strategic Retail Planning • Strategic retail planning process is the set of steps a retailer goes through to develop a strategy and plan. • It describes how retailers select target market segments, determine the appropriate retail format, and build sustainable competitive advantage. • The planning process can be used to formulate strategic plans at different levels within a retail corporation
Stages in Strategic Retail Planning
Stages in Strategic Retail Planning 1. Define Business Mission • Mission statement is a broad description of a retailer’s objectives and the scope of activities it plans to undertake. • In developing the mission statement, managers need to answer five questions: (1) What business are we in? (2) What should our business be in the future? (3) Who are our customers? (4) What are our capabilities? (5) What do we want to accomplish?
Stages in Strategic Retail Planning Examples - Business Mission: 1. Café Coffee Day To be the best Cafe chain by offering a world class coffee experience at affordable prices. 2. Amazon “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices. ” 3. D – Mart At DMart, we research, identify and make available new products and categories that suit the everyday needs of the Indian family. Our mission is to provide the best value possible for our customers, so that every rupee they spend on shopping with us gives them more value for money than they would get anywhere else.
Stages in Strategic Retail Planning 2. Conduct a Situation Audit An analysis of the opportunities and threats in the retail environment and the strengths and weaknesses of the retail business relative to its competitors. It may include SWOT Analysis, PESTLE Analysis. Elements in Situation Audit
Stages in Strategic Retail Planning I. Market Factors Market size, measured in retail sales rupees, is important because it indicates a retailer’s opportunity to generate revenues to cover its investment. Growing markets are more attractive than mature or declining markets. The return on investment may be higher in growing markets because competition is less intense than in mature markets. Because new customers are just beginning to patronize stores in growing markets, they may not have developed strong store loyalties and thus might be easier to attract to new retail offerings. Retail markets for merchandise that is affected by economic conditions (such as cars and major appliances) are less attractive than retail markets that are less affected by economic conditions (such as food). Markets with highly seasonal sales are unattractive because a lot of resources are needed to accommodate the peak season and then the resources go underutilized the rest of the year.
Stages in Strategic Retail Planning II. Competitive Factors The nature of the competition in retail markets is affected by barriers to entry, the bargaining power of vendors, and competitive rivalry. Barriers to entry - Conditions in a retail market that make it difficult for other firms to enter the market. Some of these conditions are – Scale economies: Cost advantages due to a retailer’s size. Markets dominated by large competitors with scale economies are typically unattractive because the dominant firms have sustainable cost advantages Customer loyalty: Retail markets dominated by a well-established retailer that has developed a loyal group of customers also are unattractive. Availability of good locations
Stages in Strategic Retail Planning Bargaining Power of Vendors Markets are less attractive when only a few vendors control the merchandise sold in the market. In such situations, vendors have the opportunity to dictate prices and other terms (like delivery dates), reducing the retailer’s profits Competitive Rivalry Frequency and intensity of reactions to actions undertaken by competitors. When rivalry is high, price wars erupt, advertising and promotion expenses increase, and profit potential falls. Conditions that may lead to intense rivalry include - large number of competitors that are all about the same size, slow growth, high fixed costs, and lack of perceived differences between competing retailers.
Stages in Strategic Retail Planning III. Environmental Factors - include technological, economic, regulatory, and social changes (trends in demographics, lifestyles, attitudes etc. ). IV. Analysis of Strength and Weaknesses - indicates how well the business can seize opportunities and avoid harm from threats in the environment
Stages in Strategic Retail Planning 3. Identify Strategic Opportunities After completing the situation audit, the next step is to identify opportunities for increasing retail sales. E. g. : Increase assortments, Increase the size of stores… 4. Evaluate Strategic Opportunities It determines the retailer’s potential to establish a sustainable competitive advantage and reap long-term profits from the opportunities being evaluated. Retailer must focus on opportunities that utilize its strengths and its competitive advantage. Market attractiveness and the strengths and weaknesses of the retailer need to be considered in evaluating strategic opportunities and investments should be made in market opportunities for which the retailer has a strong competitive position.
Stages in Strategic Retail Planning 5. Establish Specific Objectives and Allocate Resources The retailer’s overall objective is included in the mission statement; specific objectives are goals against which progress towards the overall objective can be measured. Specific objectives have three components: (i) the performance sought (ii) Time frame within which the goal is to be achieved (iii) Level of investment needed to achieve the objective. 6. Develop a Retail Mix to Implement the Strategy Next retailers should develop a retail mix for each opportunity in which an investment will be made and control and evaluate performance
Stages in Strategic Retail Planning 7. Evaluate Performance and Make Adjustments The final step in the planning process is to evaluate the results of the strategy and implementation program. If the retailer is meeting or exceeding its objectives, changes are not needed. But if the retailer fails to meet its objectives, reanalysis is required. Reanalysis starts with reviewing the implementation programs, but it may indicate that the strategy (or even the mission statement) needs to be reconsidered. This conclusion would result in starting a new planning process, including a new situation audit.
References 1. Michael Levy & Barton A Weitz, “Retailing Management”, 8 th Edition, Tata Mc Graw Hill. 2. Swapna Pradhan, “Retailing Management – Text and Cases”, 5 th Edition, Tata Mc Graw Hill. 3. Nagpal, Sharma “Retail Management”, TYBMS, Sheth Publishers 4. Nagpal, Sharma “Retail Management”, M. Com, Vipul Prakashan.
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