Download - Chapter 02 - Retail Institutions
Retail Institutions
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Objectives of the Chapter
Theories of Institutional Change Wheel of Retailing Dialectic Process Retail Accordion Natural Selection
Classification of Retailers Store-Based Retailer Non Store Retailer
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Introduction
Varied Retail store formats Reasons for the diversity in store formats Retail format influences the entire retail business
model Retail format plays a key role in the retail strategies
being formulated New retail formats are getting framed around different
pricing and service strategies. This chapter covers the various theories explaining
the reasons for institutional change and also examines the classification of retailers.
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Theories of Institutional Change
Wheel of Retailing
Dialectic process
Retail accordion
Natural selection
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Wheel of Retailing
Proposed by Malcolm. P. McNair This theory states that in a retail institution
changes take place in a cyclical manner.
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Wheel of Retailing
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Wheel of Retailing
Entry Phase Trading Up phase Vulnerability Phase
Positioning of Store Low status – Low price format
Higher status – Higher price format
Declining ROI
Size of Store Small Bigger
Type of products provided
High Demand Customer convenience not necessarily high demand
Service to customers Minimal Maximum
Shopping Atmosphere Modest Posh
Store Location Low rental area High cost, more accessible to customers
Product Mix Minimal Differentiated
Type of retailer Innovative retailer Traditional retailer Conservatism
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Dialectic Process
“Melting pot” theory Two institutional forms with different advantages
modify their formats till they develop a format that combines the advantages of both formats.
Thomas. J. Maronick and Bruce J. Walker in "The Dialectic Evolution of Retailing."
Implies that retailers mutually adapt in the face of competition from "opposites." Thus, when challenged by a competitor with a differential advantage, an established institution will adopt strategies and tactics in the direction of that advantage.
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The Dialectic Process
•High margin •Low turnover •High price •Full service •Downtown location •Plush facilities
•Low margin •High turnover •Low price •Self service •Low Rent location •Spartan (basic) facilities
•Average margin •Average turnover •Modest price •Suburban Location •Model facilities
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Retail Accordion
The theory of 'retail institutional change' states that institutions evolve over time from outlets offering a wide variety of merchandise to stores offering specialized products, and then eventually these stores begin to offer a wide variety of merchandise.
The merchandise mix strategies of retailers change, while the retail prices and margins remain the same.
Strategies ranging from stores that offer multiple merchandise categories with a shallow assortment of goods and service to others that offer limited merchandise with a deep assortment of goods and services.
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The Retail Accordion Theory
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Natural Selection
Based on Darwin's theory of evolution. According to this theory, a firm or retail
institution should be flexible enough to adapt to the changing environment and should adapt its behavior.
Success depends on the degree of flexibility enjoyed by the firm.
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Classification of Retailers
Store based retailers Ownership Strategy Mix Service Vs Goods retail mix
Non – Store based retailer Traditional Non – traditional
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Types of Retailers
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Based on Ownership
Independent Stores Chain Stores Franchise Stores Leased Department Stores Vertical Marketing System Consumer Cooperatives
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Independent Store
A store, which is owned by a single retailer. This retailer does not own any other store.
The entry barriers are low Licensing procedures are simple Low initial investment.
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Independent Store - Advantages
Freedom to select a convenient location and suitable store format.
Can concentrate on a small target market to achieve its business objectives.
Decide on the timing, product assortment and price based on target market.
The cost of setting up an independent store is low. Employ a few people, have modest fixtures and do not
carry much merchandise. No excess stock or duplication of store functions. Reduced time lag in Decision making. Specialization is possible as focus is on a particular
consumer segment.
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Independent Store – Disadvantages
Bargaining power is less. Reduced ability of retailers to negotiate with
suppliers Productivity is low Lack exposure to modern tools and
techniques for managing various retail functions
Increased operational costs Cannot promote their product aggressively in
the media.
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Chain Stores
Chain stores have two or more retail outlets that are commonly owned and controlled.
Have a centralized buying and merchandising system and sell similar lines of merchandise.
Eg: Musicworld, Titan, Tanishq, etc
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Chain Stores – Advantages
Low costs because of bulk purchases High Bargaining power Efficiency is more because of centralized
decision making system and use of latest technology
Can afford aggressive and expensive promotion
Full time experts employed for long term planning
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Chain Stores - Disadvantages
Cannot customize strategies for every location
High cost of establishment Requires multiple stores with additional
fixtures, product assortments and a large number of store personnel.
Difficult to control Centralized management is difficult No personal interest in management of stores
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Franchise Store
A store based on a contractual arrangement between a franchiser (manufacturer) and a franchisee, which allows the franchisee to conduct a given form of business under an established name and according to a given pattern of business. Eg: McDonalds
Franchising is of two types – Product / Trademark franchising Business format franchising
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Franchising Models
Master Franchising System
Area Development Franchising System
Exclusive Showrooms
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Product / Trademark Franchising
Franchised dealers acquire the identities of their suppliers by agreeing to sell the latter's products and/or operate under the suppliers name.
In this format, franchisees are relatively independent from their suppliers.
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Business format Franchising
The franchiser, gives the right to sell goods and services, and also helps franchisees in various aspects of store management.
Under this type of ownership pattern, the franchiser and its franchisees work together like a chain store.
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Franchising - Advantages
Franchiser Can own and operate retail businesses with relatively
small capital investment
Franchisees Get well- known brands and goods / service lines Exposure to standard operating procedures Benefit from the nation-wide promotional activities Enjoy exclusive rights to sell the franchiser's products Better bargain per unit purchase
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Franchising – Disadvantages
Over saturation Franchisers projects higher returns on investment Restrictions on purchase of raw materials or goods
only from their franchiser Termination of the franchisee license Royalty payable is linked to gross sales Have to renew their franchisee rights when the
contract expires.
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Leased Department
A department in a retail store that is rented to an outside party is called a leased department.
The volume of sale depends on the existing store's customer base and store's reliability.
The lessee is accountable for all the activities of the leased department.
The lessee pays a part of the sales turnover to the store as rent. should ensure that the merchandise of the leased department
does not cannibalize the sales of the store. Operations of the leased department should be in line with the
image and overall strategy. Objective is to add variety to the merchandise offered. Leased departments offer products/services that complement the
primary product/service offering of the store.
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Cannibalization
Cannibalization refers to a reduction in the sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer.
For example, if Coca Cola were to introduce a similar product (say, Diet Coke or Cherry Coke), this new product could take some of the sales away from the original Coke.
A second common case of cannibalization is when companies, particularly retail companies, open outlets too close to each other. Much of the market for the new outlet could have come from the old outlet.
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Leased Department - Advantages
Advantage to Lessor Reduce their cost by leasing departments. Shortcomings in handling certain goods and
specialized services can be overcome. Regular monthly income in the form of rent.
Advantages to Lessee Increase in customer traffic be of the established
name of lessor. The initial cost of establishing an outlet is reduced
as a result of leasing is less
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Leased Department - Disadvantages
Disadvantages to Lessor Disputes may badly affect the image of the established store. Customer will blame the store for any disputes/deficiencies. Leased department may not attract additional customers.
Disadvantages to Lessee Has to function within working hours and operating pattern of
the store. Restriction on the goods and service lines offered by the leased
departments. The store may increase the rent if the leased department is
successful. The in-store location of the leased department may negatively
affect its sales.
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Vertical Marketing System
A vertical marketing system is a distribution system in which the producers, wholesalers, and retailers act in a unified manner to facilitate the smooth flow of goods and services from producer to end-user. One channel member owns the others or has contracts with them, or has the power to control them.
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Types of Vertical Marketing System
Independent Vertical Marketing System: Consists of independent businesses like
manufacturers, wholesalers and retailers. Required when customers are scattered, Manufacturers and retailers are small, Product sales are high, and Products require extensive distribution. used by stationery stores, gift shops, hardware
stores, food stores, drug stores etc.
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Types of VMS
Partially integrated vertical marketing system: Only two independent business units in a
distribution channel work together. These units take care of all the production and
distribution functions, A manufacturer and a retailer alone manage
the shipping, warehousing and distribution functions without the help of a wholesaler.
Generally used in furniture stores, appliance stores, restaurants, computer retailers etc.
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Types of VMS
Fully integrated vertical marketing system: Only one player manages all the activities In this system, several channel members at
different levels in the channel are owned by the same company.
The company/store exercises full control over channel operations like production, wholesaling and retailing.
The initial cost of setting up a fully integrated marketing system is very high.
The company owning the entire marketing system may have difficulty handling some specialized channel activities.
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Consumer Cooperatives
Consumer cooperatives are retail operations owned and managed by its customer members.
In many cases, consumer cooperatives are started by the residents of an area.
These residents believe that the existing retailers in that area are not serving them well (either charging too much or providing poor-quality goods/services).
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Consumer Cooperatives
The consumer cooperative structure in the country has four tiers, with the National Cooperative Consumers Federation of India Limited (NCCF) at the national level. Thirty State Cooperative Consumers Organisations are affiliated to the NCCF. At the Central/Wholesale level, there are 800 Consumer Cooperative Stores. At the primary level, there are 25,759 primary stores. In the rural areas, there are about 44,418-village level Primary Agricultural Credit Societies and Marketing Societies undertaking the distribution of consumer goods along with their normal business. In the urban and semi-urban areas the consumer cooperative societies are operating about 37,226 retail outlets to meet the requirements of the consumers. The NCCF besides undertaking distribution of consumer articles, also has a Consultancy and Promotional Cell for strengthening consumer cooperative societies engaged in retailing activities. The NCCF with its Head Office at New Delhi has 32 branches/sub-branches located in various parts of the country. The sales turnover achieved by the NCCF during the year 2003-04 was Rs 626.11 crore as against the sales turnover of Rs 674.06 crore last year. It has earned a net profit of Rs 8.31 crore as against the profit of Rs 4.19 crore achieved during the previous year. The accumulated losses of the NCCF in 2003-04 were Rs 16.92 crore.
The government with the help of NCCF, launched the scheme called Sarvpriya in July 2000. The scheme envisages distribution of eleven selected commodities of daily use to the consumers through the existing PDS Retail Outlets and the Retail Outlets of the State Consumers' Cooperative Federations, State Civil Supplies Corporations and the Consumer Cooperative Societies in the States. The Scheme is voluntary involving no subsidy.
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Retailers based on Strategic Mix -- 1
Food Oriented Retailers Convenience Stores Conventional Supermarket Food-based supermarket Combination Store Box (limited-line) store Warehouse stores
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Convenience Store
Relatively small stores located near residential areas. Open long hours, seven days a week and carry a
variety of products with limited assortment of merchandise. They generally carry high-turnover convenience products.
Charge relatively high prices and operate in a 3000 to 8000 square foot area.
Cater to customers who prefer 'convenience of buying or shopping'.
May not carry all the items that are available in supermarkets, but they are very conveniently located for customers.
Customers can get their products billed faster
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Conventional Supermarket
Focus on food and household maintenance products.
Earn very limited revenues from the sale of non-food or general merchandise goods.
Self-service operation. Self-service enhances impulse buying.
Every day low price (EDLP) policy may be followed.
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Food based supermarket
Larger and more diversified than a conventional supermarket, but smaller and less diversified than a combination store.
The size of the store ranges from 25,000 to 50,000 square feet and the store earns 20 to 25 percent of its revenue from general merchandise goods
It provides the full range of grocery items.
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Combination Store
A blend of a super market and a general merchandise store,
Maintains the identity of both a food store and drug store.
Size of a combination store ranges from 30,000 to 100,000 square feet.
Designed to allow customers to have a one-stop shopping experience.
Prices are less than those in a general merchandise store.
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Box (limited-line) Store
A food-based discount store that concentrates on a small selection of goods.
Has limited shopping hours, limited services, and limited stocks.
Offers a limited number of national brands. Prices are displayed on the shelf or on overhead
signs. Customers have to serve themselves and are not
allowed to examine products. Sells private label brands, priced 20 to 30 percent
below market prices.
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Warehouse Stores
Warehouse stores are discount food retailers with an average size of 100,000 square feet.
They cater to customers who look for low price deals.
Merchandise is often displayed in cut boxes or shipping pallets and services are limited.
Availability of the goods assured as the warehouse retailer's buy only deep price or quantity discount is offered.
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Types of Warehouse Stores
Depending on their functioning style Warehouse showroom Catalog showroom Hypermarket Warehouse club
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Warehouse Showroom
Owned by a single-line hard-good retailer. Usually sell well-known brands of furniture
and appliances As soon as a customer makes the selection
and places an order, the goods are shipped from the nearest warehouse.
offers different services like credit, delivery and installation for extra charge.
located in freestanding sites that are adjacent to busy roads.
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Catalog Showrooms
Discount operations that offer merchandise through a catalog or a showroom.
Catalog showrooms generally offer hard goods like house ware, jewelry, consumer electronics etc.
Customer orders by mentioning the corresponding number of product in the showroom or catalog.
Delivery a few days after the order is placed. Retailers compete on price. Concentrate on high margin merchandise
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Hyper Market
A large retail store that offers products at a low price.
A combination of a discount store and a food based supermarket.
Big Bazaar is a large hypermarket format with store size ranging from 30,000-50,000 sq. ft, selling everything from home needs, utensils, luggage, white goods, electronics, cosmetics, jewellery, pharmacy, optician to grocery items at a discount.
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Warehouse Club
A general merchandise retailer who offers a limited merchandise assortment with limited service at low prices to consumers as well as small businesses.
Store is located in remote locations in an area of 100,000 sft.
Interiors are simple and services are limited. Warehouse clubs operating on a membership
basis are known as membership clubs.
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Retailers based on Strategic Mix -- 2
General Merchandise RetailersClassified based on location, merchandise, price, store atmosphere, service and promotion mix: Specialty Stores Variety Stores Department stores Off price retailer Membership Club Flea Market
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Specialty Stores
A type of general merchandise store Sells limited lines of closely related products or
services to a select group of customers. Types - Single line specialty stores and Limited line
specialty stores. Major variable in a specialty store's strategy is the
merchandise assortment. Both high margin and low margin operators can be
found in the specialty store category. The size of the specialty store varies based on the
nature of merchandise and mode of operation. Specialty stores are located in high traffic areas like
shopping centers, downtown malls etc.
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"Reliance TimeOut“- Specialty Store
Reliance Retail Limited (RRL) announced the launch of a new specialty store "Reliance TimeOut" on Cunningham Road in Bangalore. This store houses Books, Music, Stationery, Toys and Gifts.
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Specialty Store
Category killer: It offers enormous selection in a product category at relatively low prices. A category killer offers not only low price but also variety within a narrow product line.
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Variety Stores
Variety stores offer a deep assortment of inexpensive and popular goods like stationery, gift items, women's accessories, house wares etc.
Also called 5 and 10-cent stores
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Department Stores
Department stores are large retail units that offer wide variety and a deep assortment of goods and services.
Organized into separate departments
Provide a one-stop shopping experience to customers.
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Criterion for classification as Department Storei. A department store should employ a minimum of fifty people.
ii. The store should generate at least 20 percent of its total revenue from the sale of apparel and soft goods.
iii. The store should have the following product lines: furniture and home furnishings; appliances, radio and TV sets; a general line of apparel for the family; household products and dry goods.
iv. The annual sales of the department store should be under $10 million, where no single product line should contribute more than 80 percent of the total sales.
-- U S Bureau of Census
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Types of Department Stores
A traditional department store offers merchandise of average quality priced above average, with minimum customer service.
A full-line discount department store offers a broad merchandise assortment at less than prevailing prices. Full-line discount department stores are popular because they offer well-known brands at competitive prices.
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Features of a Full – Line Department Store High volume, low cost, fast turnover outlet
with a wide merchandise assortment. Centralized checkout service Self-service store A low cost model Offers private brands for non-durables and
well-known brands for durables.
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Off-price Retailer
Offer an inconsistent assortment of branded fashion-oriented soft goods at low prices.
Purchases from manufacturers who have excess inventory
Off-price retailers get special prices from manufactures by agreeing to order goods in the off-season.
Off price retailers sell unsuccessful samples and products.
Off-price chains do not carry out many promotional activities.
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Classification of Off-price retailers
Outlet stores
Close outlet stores
Single-price retailers
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Membership Club
Cater to price conscious customers.
Customers pay an annual fee to become members
Very large and located in isolated areas.
Characterized by little or no advertising, plain fixtures, wide aisles, concrete floors, limited or no delivery services, little or no credit, and very low prices.
Get merchandise directly from manufacturers.
Also known as wholesale clubs, warehouse clubs and wholesale centers.
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Flea Market
The term "flea market" is a literal translation of the French marche aux puces, an outdoor bazaar in Paris, France.
A flea market is an outdoor or indoor facility that rents out space to vendors
Entrepreneurs can start business with low investment.
Consists of many retail vendors offering a variety of products at discount prices.
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Service Vs Goods retail mix
Entertainment firms, hospitals and banks initially had no intention of becoming retail institutions. As competition increased, these organizations started operating like retailers to attract customers.
Service retailing consists of the sale or rental of an intangible activity, which usually cannot be stored or transported, but satisfies the need of the user/ customer.
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Types of Services
Two types: Services along with goods,
Rental Goods Service Owned Goods Service Non goods Service
Services without any goods (pure service). Services that are provided without any physical
product or good are called pure services.
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Non – Store Retailer Differ in the retailing methods from store retailers. Reach customers and market merchandise using
various methods like "infomercials," direct-response advertising, paper and electronic catalogs, door-to-door selling, in-home demonstrations, portable stalls (street vendors), and vending machines.
Non store retailing takes place in two ways: Traditional Non traditional
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Traditional non store retailers
Direct Marketing Direct Selling Vending Machines Catalog marketing Telemarketing TV Home shopping
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Direct Marketing
"Interactive marketing system that uses one or more advertising media to yield a measurable response and/or transaction at any location".
-- Direct Marketing Association (DMA) Customer is informed about the product through non
personal media and the customer places an order through the mail or phone.
In direct marketing, responses can be measured. Company can concentrate its promotional activities
on potential customers.
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Direct Marketing - Advantages
The initial cost or investment for direct marketers is comparatively less
A wide geographic area is covered by the direct marketer's promotional activities.
This form of shopping allows the customer to make purchases without having to look for a parking place or waiting in line at the cash register.
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Direct Marketing - Disadvantages
Customers do not have the opportunity to see and feel the goods before purchasing them.
Cost of developing, printing and mailing these catalogs can be very high.
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Direct Selling
"Marketing and retailing consumer goods directly to the consumer that relies neither on direct mail, product advertising nor fixed retail outlets".
-- Direct Selling Association
Encourages convenience shopping as well as personal touch or feel of a product.
Can also be called door- to- door selling
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Types of Direct Selling
Person to Person Multilevel (network) marketing Party plan Direct selling benefits both consumers and
sellers. From the consumers' point of view goods are
available at their convenience. Direct selling is advantageous for retailers as it
is an effective, low cost channel.
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Vending Machines
Involves coin or card-operated dispensing of products.
Eliminates the use of sales personnel and facilitates round-the- clock sales.
Vending machines help customers avoid the inconvenience of shopping in a store.
High Installation costs Also called Automatic Merchandising.
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Catalog Marketing
Catalog marketing refers to sales made through catalogs mailed to a select list of customers or made available in a store.
Basic product and pricing information is given along with instructions for placing an order.
The kind of delivery (mail, express service, parcel post) that the customer wants can be mentioned in the order
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Telemarketing
Provide more convenience and service satisfaction to customers,
Useful for customers who want to avoid traffic congestion and parking problems.
Allows retailers to provide customers information on new merchandise and upcoming sales events.
Deliver merchandise to the customers' residence or hold it till it is picked up by the customer at a later date.
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TV Home Shopping
TV home shopping works in the following manner: The merchandise items are displayed,
described and demonstrated on television. Using the toll-free number provided,
customers can place orders. Payments are done through credit cards. The goods are delivered by courier service
along with a guarantee.
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Non-traditional non store based retailers – World Wide Web Retailers' websites allow customers to order
with a click of the mouse. To attract potential customers, retailers also
send details of new products through email to customers.
Use of Internet as a medium for promoting their goods and services all over the globe at minimum cost.
Can conduct research also on customers Internet reduces the costs of retailers
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Non-traditional non store based retailers – Video Kiosk The term kiosk is derived from a Turkish word
which means open summer house or pavilion.
Kiosks are often placed near the entrances of shopping malls.
A video kiosk is a freestanding interactive computer terminal that displays product and related information on a video screen
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Non-traditional non store based retailers – Video Catalog A video catalog is a retail catalog on a CD-
ROM disk to be viewed on a computer monitor.
After viewing the catalog, the consumer can call up the retailer to order the goods.
The disk allows the customer to quickly gather information about the retailer's products.
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Summary
Theories of Institutional Change Wheel of Retailing Dialectic Process Retail Accordion Natural Selection
Classification of Retailers Store-Based Retailer Non Store Retailer