Chapter 44Retail Institutions by Ownership

RETAIL MANAGEMENT:

A STRATEGICAPPROACH,

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Chapter Objectives

To show the ways in which retail institutions can be classified

To study retailers on the basis of ownership type and examine the characteristics of each

To explore the methods used by manufacturers, wholesalers, and retailers to exert influence in the distribution channel

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Figure 4.1 A Classification Method for Retail Institutions

I Ownership

IIStore-based

Retail Strategy MixIII

Nonstore-based Retail Strategy Mix

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Ownership Forms

IndependentChainFranchiseLeased departmentVertical marketing systemConsumer cooperative

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Independent Retailers

2.1 million independent U.S. retailers50% of these are run by owners and their

familiesAccount for 40% of total stores and 3% of

U.S. store salesWhy so many? Ease of entry

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Competitive State of Independents

Advantages Flexibility in formats,

locations, and strategy Control over investment

costs and personnel functions, strategies

Personal image Consistency and

independence Strong entrepreneurial

leadership

Disadvantages Lack of bargaining

power Lack of economies of

scale Labor intensive

operations Over-dependence on

owner Limited long-run

planning

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Figure 4.2 Useful Online Publications for Small Retailers

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Store-based Retail Strategy Mix

Convenience store Conventional

supermarket Food-based

superstore Combination store Box store Warehouse store Specialty store

Variety store Traditional

department store Full-line discount

store Off-price chain Factory outlet Membership club Flea market

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Chain Retailers

Operates multiple outlets under common ownership

Engages in some level of centralized or coordinated purchasing and decision making

In the U.S., there are roughly 100,000 retail chains operating about 750,000 establishments

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Competitive State of ChainsAdvantages Bargaining power Cost efficiencies Efficiency from

computerization, sharing warehouse and other functions

Defined management philosophy

Considerable efforts in long-run planning

Disadvantages Limited flexibility Higher investment

costs Complex managerial

control Limited

independence among personnel

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Figure 4.3 Carrefour: The Largest Foreign-Based Retailer in the World

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Nonstore-based Retail Strategy Mix and Nontraditional Retailing

Direct marketingDirect sellingVending machineWorld Wide WebOther emerging retail formats

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Figure 4.4 MasterCuts: A Well-Defined Management Philosophy

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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

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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

2/3 of retail franchising sales

Business Format franchisee receives

assistance: location, quality control, accounting systems, start-up practices, management training

common for restaurants, real estate

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Figure 4.5 Business Qualifications Sought by McDonald’s for Potential Franchisees

Personal Integrity

Willingness to complete training

Financialresources

Willingness to devote time

Ability to manage finances

Ability to motivateand train

EntrepreneurialSpirit

IdealFranchisee

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Figure 4.6 Structural Arrangements in Retail Franchising

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Wholesaler-Retailer Structural Arrangements

Voluntary: A wholesaler sets up a franchise system and grants franchises to individual retailers

Cooperative: A group of retailers sets up a franchise system and shares the ownership and operations of a wholesaling organization

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Figure 4.7 Franchises and Business Opportunities

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Competitive State of Franchising

Advantages small capital required acquire well-known

names operating/management

skills taught cooperative marketing

possible exclusive selling rights less costly per unit

Disadvantages oversaturation could

occur franchisors may

overstate potential locked into contracts agreements may be

cancelled or voided royalties are based

on sales, not profits

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From the Franchisor’s Perspective

Benefits national or global

presence possible qualifications for

franchisee/ operations are set and enforced

money obtained at delivery

royalties represent revenue stream

Potential Problems potential for harm to

reputation lack of uniformity may

affect customer loyalty ineffective franchised

units may damage resale value, profitability

potential limits to franchisor rules

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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

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Competitive State of Leased Departments

Benefits provides one-stop

shopping to customers

lessees handle management

reduces store costs provides a stream of

revenue

Potential Pitfalls lessees may negate

store image procedures may

conflict with department store

problems may be blamed on department store rather than lessee

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Figure 4.8 Vertical Marketing Systems

Independent Channel SystemFunctions:

ManufacturingWholesaling

Retailing

Ownership:Independent ManufacturerIndependent Wholesaler

Independent Retailer

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Figure 4.8 Vertical Marketing Systems

Partially Integrated Channel SystemFunctions:

ManufacturingWholesaling

Retailing

Ownership:Two channel members own all facilities and

perform all functions

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Figure 4.8 Vertical Marketing Systems

Fully Integrated Channel SystemFunctions:

ManufacturingWholesaling

Retailing

Ownership:All production and distribution functions

are performed by one channel member

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Figure 4.9 Sherwin-Williams’ Dual Vertical Marketing System

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Web-Based Exercise

Subway is one of the largest retail franchisors in the world

Based on the information found under Franchise Opportunities on the Subway website, would you be interested in becoming a Subway franchisee?