Chapter 1

• Retailing is the set of business activities that adds value to products and services sold to
consumers for their personal or family use.
• retailing also involves the sale of services such as overnight lodging in a motel, a doctor’s exam,
a haircut, or a home-delivered pizza.
• Not all retailing is done in stores.

The 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 add value and are more efficient at adding this value than manufacturers or
wholesalers.

Retailers Create Value

• Providing Assortments Conventional supermarkets typically carry about 30,000 different items
made by more than 500 companies. Offering an assortment enables customers to choose from a
wide selection of products, brands, sizes, and prices at one location.
• Manufacturers
specialize in producing specific types of products. For example, Frito-Lay makes snacks, Yoplait
makes yogurt, Skippy makes peanut butter, and Heinz makes ketchup.
• If each of these manufacturers had its own stores that sold only its own products, consumers
would have to go to many different stores to buy the groceries needed to prepare a single meal.

• 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—an activity called breaking bulk.
• Breaking bulk is important to both manufacturers and consumers. It allows manufacturers to
produce and ship merchandise efficiently and in larger quantities at one time, but it enables
consumers to purchase the specific merchandise they want in smaller, more useful quantities.

• Holding Inventory A major value-providing activity performed by retailers is holding inventory so

that products will be available when consumers want them.

• Providing Services Retailers provide services that make it easier for customers to buy and use
products. For example, retailers offer credit so that consumers can have a product now and pay
for it later. They display products so that consumers can see and test them before buying. Some
 retailers employ salespeople in stores or maintain websites to answer questions and provide
additional information about the products they sell.

Costs of Channel Activities

• If retailers did not provide these benefits, wholesalers or manufacturers would have to provide
them, and they would typically not be as efficient as retailers in providing these benefits.
• Retailers provide services and it results in increment of cost of the product.

Retailers Perform Wholesaling and Production

Activities

• Wholesalers buy and store merchandise in large quantities from manufacturers and then resell
the merchandise (usually in smaller quantities) to retailers.

• Vertical integration means that a firm performs more than one set of activities in the channel, as
occurs when a retailer engages in wholesaling activities by operating its own distribution centers
to supply its stores.

• Backward integration arises when a retailer performs

some wholesaling and manufacturing activities, such as operating warehouses
or designing private-label merchandise.

• Forward integration occurs when a

manufacturer undertakes retailing and wholesaling activities, such as Apple
operating its own retail stores.

Differences in Distribution Channels around the

World
• The U.S. retail industry has the greatest retail density (retail stores per person) and concentration
of large retail firms.
• retailers often operate large stores in lightly populated areas. Many U.S. retailers have stores
with more than 20,000 square feet. Due to their size, they have the scale economies to operate
their own warehouses.
 Role in Developing Economies—The Bottom of the
Pyramid
• Consumers in this low-income consumer segment, referred to as the base of the pyramid or
bottom of the pyramid (BoP),

Role in Society
• stakeholders, which are the broad set of people whomight be affected by a firm’s actions, from
current and prospective customers, to supply chain partners, to employees, to shareholders, to
government agencies, to members of the communities in which the firm operates, and to a
general view of society.
• corporate social responsibility (CSR), which involves an organization voluntarily engaging in
business practices that meet or exceed the ethical and legal expectations of its stakeholders.

• Conscious marketingentails a sense of purpose for the firm higher than simply making a profit
by selling products and services. It encompasses four overriding principles

Understanding the World of Retailing

Competitors The retailer’s microenvironment focuses specifically on its

competitors and customers. At first glance, identifying competitors appears
easy: A retailer’s primary competitors are other retailers that use the same
retail approach. Thus, department stores compete against other department
stores, and supermarkets compete with other supermarkets. This competition
between the same type of retailers is called intratype competition.
When retailers offer merchandise not typically associated with their type of store,
such as clothing in a drugstore, the result is scrambled merchandising.
Scrambled merchandising increases intertype competition, or competition
among retailers that sell similar merchandise using different types of retail
outlets, such as drugstores and department stores.

Retail Strategy The retail strategy identifies (1) the target market, or
markets, toward which the retailer will direct its efforts; (2) the nature of the
merchandise and services the retailer will offer to satisfy the needs of the
target market; and (3) how the retailer will develop unique assets that enable
it to achieve long-term advantage over its competitors.
 Chapter -2

Type of Merchandise

• The United States, Canada, and Mexico have developed a classification scheme, called the North
American Industry Classification System (NAICS), to collect data on business activity in each
country.

• Every business is assigned a hierarchical, six-digit code based on the type of products and
services it sells. The first two digits identify the firm’s business sector, and the remaining four
digits identify various subsectors.

Variety and Assortment

Variety (also called breadth) is the number of merchandise categories a retailer offers.
Assortment (also called depth) is the number of different items offered in a merchandise
category.
Each different item of merchandise is called a stock-keeping unit (SKU).
 Services Offered
Retailers also differ in the services they offer customers.
Customers expect almost all retailers to provide certain services: displaying
merchandise, accepting credit cards, providing parking, and being open at
convenient hours. Some retailers charge customers for other services, such as
home delivery and gift wrapping. However, retailers may differ on other
services. For example, Wheelworks offers assistance in selecting the
appropriate bicycle, as well as repairs. Walmart does not provide these
services.

• To make a profit, retailers that offer broader variety, deeper assortments,

and/or additional services need to charge higher prices. For example,
department stores have higher prices than discount stores partially because of
their higher costs.
• Department stores stock more fashionable merchandise and have to reduce prices when they
make a mistake in guessing what the popular styles will be.
• They also provide more personal sales service and have more expensive mall locations. In
contrast, discount stores appeal to customers who are looking for lower prices.
These consumers are less interested in the costly services provided by department stores.

FOOD RETAILERS
• The food retailing landscape is changing dramatically. Twenty years ago,
consumers purchased food primarily at conventional supermarkets. Now
conventional supermarkets account for less than 65 percent of food sales.

• Online sales of groceries have grown by 14.1 percent annually for the past five years.6 Full-line
discount stores like Walmart and Target offer full assortments of grocery items in their
superstores, while traditional supermarkets are carrying more nonfood items.

• The world’s largest food retailer, Walmart, attains more than $485 billion

• most of Walmart’s food sales are generated from its supercenter format,
 Supermarkets
• A conventional supermarket is a large, self-service retail food store offering groceries, meat,
and produce, as well as some nonfood items such as healthand beauty aids and general
merchandise
• Limited assortment supermarkets, or extreme-value food retailers, stock only about 1,500
SKUs.
• The two largest limited-assortment supermarket chains in the United States are Save-A-Lot and
ALDI.

Trends in Supermarket Retailing

conventional supermarkets are differentiating their offerings by (1)
emphasizing fresh perishables; (2) targeting green, ethnic, and Millennial
consumers; (3) providing better value with private-label merchandise; (4)
adding new value-added services such as online ordering; and (5) providing a
better shopping experience, such as by adding restaurant options or hosting
social events.

Fresh Merchandise Fresh-merchandise categories are located in the areas around the outer
walls of a supermarket, known as the power perimeter, and include the dairy, bakery, meat,
florist, produce, deli, and coffee bar.

Green Merchandise Conventional supermarkets are offering more fair trade, natural, organic,
and locally sourced foods for the growing segment of consumers who are health and
environmentally conscious.

Fair trade is the practice of purchasing from suppliers that pay workers a living wage,
considerably more than the prevailing minimum wage, and offer other benefits such as onsite
medical treatment.
The locavore movement focuses on reducing the carbon footprint caused by the transportation
of food throughout
the world.

Ethnic Merchandise Hispanics, who now constitute approximately 17 percent of the U.S.
population, have significantly different shopping and eating patterns from those of the general
population.21 They are more likely to prepare meals from scratch, spend more on groceries,
prefer stores with bilingual staff and signage, and place importance on fresh food. In addition to
adding more ethnic merchandise in conventional supermarkets, retailers are opening
supermarkets targeting Hispanic consumers. For example, Northgate Markets in California cater
to just Hispanic consumers. The chain’s 42 stores, each approximately 50,000 square
feet,feature both domestic and imported Latin American grocery items. Furthermore, they
contain dedicated tortilleria (where tortillas are made), prepared foods, and a well-stocked and
staffed meat department.

Private-Label Merchandise Conventional supermarket chains are leveraging their quality

reputation to offer more private-label merchandise.

Supercenters

Supercenters are large stores (160,000 to 200,000 square feet) that combine
a supermarket with a full-line discount store.

Hypermarkets are also large, about the same size as supercenters. hypermarkets carry a larger
proportion of food items than do supercenters and have a greater emphasis on perishables—
produce, meat, fish, and bakery items. Supercenters, in contrast, 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
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 can offer low prices because they use low-cost locations, have inexpensive
store designs, and offer little customer service; they further keep inventory holding costs low by
carrying a limited assortment of fast-selling items. In addition, they buy merchandise
opportunistically.

Convenience Stores
Convenience stores provide a limited variety and assortment of merchandise
at a convenient location in 3,000- to 5,000-square-foot stores with speedy
checkout. Convenience stores enable consumers to make purchases quickly,
without having to search through a large store and wait in a long checkout
line.

Convenience stores generally charge higher prices than supermarkets for similar products like
milk, eggs, and bread.

Department stores are retailers that carry a broad variety and deep
assortment, offer customer services, and organize their stores into distinct
departments for displaying merchandise. The largest department store chains
in the United States include Sears, Macy’s, Kohl’s, JCPenney, and Nordstrom

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 traditional department stores, in which retailers sell more modestly priced
merchandise with less customer service.

The value-oriented third tier—Sears, JCPenney, and Kohl’s—caters to more price-conscious

consumers.

Full-Line Discount Stores

Full-line discount stores are retailers that offer a broad variety of
merchandise, limited service, and low prices. Discount stores offer both
private labels and national brands. The largest full-line discount store chains
are Walmart, Target, and Kmart (Sears Holding). However, these full-line
 discount stores confront intense competition from category specialists that
focus on a single category of merchandise, such as Staples, Best Buy, Bed
Bath & Beyond, Sports Authority, and Lowe’s.

Category Specialists
Category specialists are big-box stores that offer a deep assortment but
narrow variety of merchandise.

• By offering a complete assortment in a category, category specialists can “kill” a category of

merchandise for other retailers and thus are frequently called category killers

Resale stores are retailers that sell secondhand or used

merchandise. A special type of resale store is the thrift store,
where merchandise is donated and proceeds go to charity. Another type of
resale store is the consignment shop, a store that accepts used merchandise
from people and pays them after it is sold.

Drugstores
Drugstores are specialty stores that concentrate on health and beauty care
(HBC) products. Many drugstores have steadily increased the space devoted
to cosmetics, but prescription pharmaceuticals still represent a substantial and
growing portion of drugstore sales

Extreme-Value Retailers
Extreme-value retailers, also called dollar stores, are small discount stores
that offer a broad variety but shallow assortment of household goods, health
and beauty care (HBC) products, and groceries. The largest extreme-value
retailers are Dollar General and Dollar Tree.

Off-price retailers offer an inconsistent assortment of brand-name merchandise at a significant

discount off the manufacturer’s suggested retail price (MSRP).
Off-price retailers are able to sell brand-name and even designer-label
merchandise at 20 to 60 percent lower than the manufacturer’s suggested
retail price because of their unique buying and merchandising practices.

They also buy excess inventory from other retailers. Closeouts are end-of-season merchandise
that will not be used in following seasons. Irregulars are merchandise with minor mistakes in
construction.

The retail firms discussed in the previous sections sell products to consumers.
However, service retailers, or firms that primarily sell services rather than
merchandise, are a large and growing part of the retail industry.

Differences between Service and Merchandise Retailers

Intangibility Services are less tangible than product customers cannot see or touch them. They
are performances or actions rather than objects.

Simultaneous Production and Consumption Products are typically

made in a factory, stored and sold by a retailer, and then used by consumers
in their homes. Service providers, however, create and deliver the service as
the customer is consuming it. For example, when you eat at a restaurant, the
meal is prepared and consumed almost at the same time.

Perishability Services are perishable. They cannot be saved, stored, or

resold. Once an airplane takes off with an empty seat, the sale is lost forever.
In contrast, merchandise can be held in inventory until a customer is ready to
buy it.

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.

TYPES OF OWNERSHIP
The major classifications of
retail ownership are
(1) independent, single-store establishments,
(2) corporate chains, and (3) franchising.