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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