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Unformatted text preview: Chapter 4
Evaluating the Competition in Retailing Learning Objectives
1. Explain the various models of retail competition. 2. Distinguish between various types of retail competition. 3. Describe the four theories used to explain the evolution of retail competition. 4. Describe the changes that could effect retail competition. Models of Retail Competition
The Competitive Marketplace Market Structure The Demand Side of Retailing Nonprice Decisions Competitive Actions Suppliers as Partners and Competitors LO 1 Models of Retail Competition Highprofit retailers want to develop strategic plans that provide a differential advantage that competitors can overcome only with a substantial investment of time and money. LO 1 The Competitive Marketplace
Retailers compete on 5 major fronts: The price for benefits offered Service level Product selection Location or access: the overall convenience of the retailer Customer experience LO 1 Market Structure Pure Competition: Occurs when a market has homogenous products and many buyers and sellers, all having perfect knowledge of the market, and ease of entry for both buyers and sellers. LO 1 Pure Competition: Numerous small firms & customers Market Structure Homogeneity of product, so customers don't care where they buy so competition is more powerful Freedom of entry & exit Perfect information buyer and seller know if one supplier is selling at a lower price The firm is a price taker it has to accept the price of the market LO 1 Market Structure Pure Monopoly: Occurs when there is only one seller for a product or service. LO 1 Market Structure Pure Monopoly: Only 1 firm may exist in the industry. No close substitutes for the monopolist's product may exist There must be some reason why entry and survival of potential competitors is extremely unlikely. LO 1 Market Structure Pure Monopoly Barriers to entry Legal Restrictions Post Office Patents Pharma Control of scarce resource S.Africa diamonds Deliberately erected barriers lawsuits Large sunk costs Boeing Technical superiority Microsoft software Economy of Scale Whole Foods/Wild Oats LO 1 Market Structure Monopolistic Competition: Occurs when the products offered are different, yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products. LO 1 Market Structure Monopolistic Competition: Numerous participants (buyers and sellers), all of whom are small Freedom of entry and exit Perfect information Heterogeneous products from the buyer's perspective, each seller's product differs from every other seller's product (see competition) LO 1 Market Structure Oligopolistic Competition: Occurs when relatively few sellers, or many small firms who follow the lead of a few larger firms, offer essentially homogeneous products and any action by one seller is expected to be noticed and reacted to by the other sellers. LO 1 Market Structure Oligopolistic Competition: Synonymous with "big business" Has a group of giant firms, each of which keeps its eye on the actions of others Rivalry among firms takes its most direct and active form Unlike competition, firm managers do not just accept prices dictated by market forces LO 1 The Relationship of Price Versus Nonprice Actions and Demand Curve Price Price Quantity
Pricing Actions move the consumer up and down the current demand curve Quantity
Non-price Actions seek to shift the demand curve to the right and make it more inelastic (price change results in less demand change) LO 1 Nonprice Decisions Store Positioning: Is when a retailer identifies a welldefined market segment using demographic or lifestyle variables and appeals to this segment with a clearly differentiated approach. LO 1 Nonprice Decisions The retailer can offer private label merchandise that has unique features or offers better value than competitors. The retailer could provide other benefits to the customer. LO 1 Nonprice Decisions The retailer could master stockkeeping with its basic merchandise assortment. LO 1 Nonprice Decisions A variation is to become a "destination" store for certain products. LO 1 Intratype and Intertype Competition
Supermarkets offering Home Meal Replacements (HMR) compete with fast-food restaurants Albertson's Supermarket Intratype Competition Intertype Competition McDonald's Safeway Supermarket LO 2 Types of Competition Divertive Competition: Occurs when retailers intercept or divert customers from competing retailers. Examples: pharmacies, Home Depot, supermarkets LO 2 Evolution of Retail Competition
The Wheel of Retailing Retail Accordion Retail Life Cycle ResourceAdvantage Theory LO 3 Evolution of Retail Competition The Wheel of Retailing Theory: Describes how new types of retailers enter the market as lowstatus, lowmargin, lowprice operators; however, as they meet with success, these new retailers gradually acquire more sophisticated and elaborate facilities, and thus become vulnerable to new types of lowmargin retail competitors who progress through the same pattern. LO 3 Evolution of Retail Competition The Wheel of Retailing Theory: Says that retailers tend to emerge at the low end of the market and win at the outset by offering customers low prices made possible by highly efficient operations which WalMart did in the 1970s through the 1990s in spades. But over time, these retailers become increasingly "fat" by letting their costs and margins increase. The new retailers' success leads them to upgrade their facilities and offer more services, increasing their costs and forcing them to raise prices. Eventually the new retailers become like the conventional ones they replaced, and the cycle begins again when still newer types of retail forms evolve with lower costs and prices. WalMart's pattern as it tries to move into higher end apparel, electronics, and organics, with limited success? It let its inventory growth get out of control in 2004 2006, negatively impacting profitability. LO 3 The Retail Accordion Retail Accordion: Describes how retail institutions evolve from outlets that offer wide assortments to specialized stores and continue repeatedly through the pattern. LO 3 The Retail Accordion
Wide Assortment Time Narrow Assortment Wide Assortment LO 3 The Retail Life Cycle Retail Life Cycle: Describes four distinct stages that a retail institution progresses through: Introduction Growth Maturity Decline LO 3 The Retail Life Cycle Introduction: Begins with an aggressive, bold entrepreneur who is willing and able to develop a different approach to retailing of certain products. During this stage profits are low, despite increasing sales levels. LO 3 The Retail Life Cycle Growth: Sales and profits explode. New retailers enter the market and begin to copy the retailers idea. Late in this stage both market share and profitability approach their maximum levels. LO 3 The Retail Life Cycle Maturity: Market share stabilizes and profits decline. Shift in type of establishment Overexpansion Competition LO 3 The Retail Life Cycle Decline: The once promising idea is no longer needed in the marketplace. As a result, market share and profits fall. LO 3 The Retail Life Cycle Whole Foods Was once the only game in town for organics, natural foods, supplements, natural body care, etc. Mackey acknowledges competition from supermarkets, Walmart. These put the pinch on supply. Margins are shrinking. He tries to compete by buying Wild Oats. LO 3 Retail Institutions in the Various Stages of the Retail Life Cycle Exhibit 4.4 LO 3 Resource-Advantage Theory Resourceadvantage theory Is based on the idea that all firms seek superior performance in an everchanging environment. LO 3 Resource-Advantage Theory Superior performance at any point in time is a result of achieving a competitive advantage in the market place as a result of some tangible or intangible entity ("resource"). All retailers cannot achieve superior results at the same time. LO 3 Future Changes in Retail Competition
Nonstore Retailing New Retailing Formats Heightened Global Competition Integration of Technology Increasing Use of Private Labels LO 4 ...
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- Spring '08