Retail Institutions by Ownership

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Chapter 4

• Retail Institutions by Ownership

RETAIL MANAGEMENT A STRATEGIC APPROACH, 10th
Edition
BERMAN EVANS
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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
II Store-Based Retail Strategy Mix
III Nonstore-Based Retail Strategy Mix
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Ownership Forms

• Independent
• Chain
• Franchise
• Leased department
• Vertical marketing system
• Consumer cooperative

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Independent Retailers

• 2.2 million independent U.S. retailers
• 70 of these are run by owners and their families
• Account for 35 of total stores and 3 of U.S.
  store sales
• Why 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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Chain Retailers

• Operate multiple outlets under common ownership
• Engage in some level of centralized or
  coordinated purchasing and decision making
• In the U.S., there are roughly 110,000 retail
  chains operating about 800,000 establishments

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Competitive State of Chains

• Advantages
• 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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Nonstore-Based Retail Strategy Mixes and
Nontraditional Retailing

• Direct marketing
• Direct selling
• Vending machines
• World Wide Web
• Other emerging retail formats

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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

• Business Format
• Franchisee receives assistance location, quality
  control, accounting systems, startup practices,
  management training
• Common for restaurants, real-estate

• 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

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Figure 4-5 Business Qualifications Sought by
McDonalds for Potential Franchisees
Financial resources
Experience
Strong credit
Growth capability
Ideal Franchisee
Customer and employee focus
Planning ability
Willingness to complete training
Ability to manage finances
Full-time commitment
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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 Franchise and Business Opportunities
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Competitive State of Franchising

• Advantages
• Low capital required
• Acquire well-known names
• Operating/ management skills taught
• Cooperative marketing possible
• Exclusive 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 Franchisors 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 4-8a Vertical Marketing Systems
Independent Channel System Functions
Manufacturing Wholesaling Retailing Ownership I
ndependent Manufacturer Independent
Wholesaler Independent Retailer
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Figure 4-8b Vertical Marketing Systems
Partially Integrated Channel System Functions
Manufacturing Wholesaling Retailing Ownership T
wo channel members own all facilities and perform
all functions
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Figure 4.8c Vertical Marketing Systems
Fully Integrated Channel System Functions
Manufacturing Wholesaling Retailing Ownership A
ll production and distribution functions are
performed by one channel member
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Figure 4-9 Sherwin-Williams Dual Vertical
Marketing System