Principles of Marketing (activebook 2.0 )
 
 
   
 

  
The Home Depot story provides many insights into the workings of one of today's most successful retailers. This chapter looks at retailing and wholesaling. In the first section, we look at the nature and importance of retailing, major types of store and nonstore retailers, the decisions retailers make, and the future of retailing. In the second section, we discuss these same topics as they relate to wholesalers.
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Retailing

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What is retailing? We all know that Wal-Mart, Home, and Target are retailers, but so are Avon representatives, Amazon.com, the local Holiday Inn, and a doctor seeing patients. Retailing includes all the activities involved in selling products or services directly to final consumers for their personal, nonbusiness use. Many institutions—manufacturers, wholesalers, and retailers—do retailing. But most retailing is done by retailers: businesses whose sales come primarily from retailing.
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Although most retailing is done in retail stores, in recent years nonstore retailing has been growing much faster than has store retailing. Nonstore retailing includes selling to final consumers through direct mail, catalogs, telephone, the Internet, TV home shopping shows, home and office parties, door-to-door contact, vending machines, and other direct-selling approaches. We discuss such direct-marketing approaches in detail in Chapter 17. In this chapter, we focus on store retailing.
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Types of Retailers

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Retail stores come in all shapes and sizes, and new retail types keep emerging. The most important types of retail stores are described in Table 14.1 and discussed in the following sections. They can be classified in terms of several characteristics, including the amount of service they offer, the breadth and depth of their product lines, the relative prices they charge, and how they are organized.
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Amount of Service

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Different products require different amounts of service, and customer service preferences vary. Retailers may offer one of three levels of service—self-service, limited service, and full service.
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Self-service retailers serve customers who are willing to perform their own "locate-compare-select" process to save money. Self-service is the basis of all discount operations and is typically used by sellers of convenience goods (such as supermarkets) and nationally branded, fast-moving shopping goods (such as Best Buy).
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 TABLE 14.1 Major Store Retailer Types 
Specialty Stores: Carry a narrow product line with a deep assortment, such as apparel stores, sporting-goods stores, furniture stores, florists, and bookstores. A clothing store would be a single-line store, a men's clothing store would be a limited-line store, and a men's custom-shirt store would be a superspecialty store. Examples: The Body Shop, Gap, The Athlete's Foot.

Department Stores: Carry several product lines—typically clothing, home furnishings, and household goods—with each line operated as a separate department managed by specialist buyers or merchandisers. Examples: Sears, Macy's, Marshall Field's.

Supermarkets: A relatively large, low-cost, low-margin, high-volume, self-service operation designed to serve the consumer's total needs for food and household products. Examples: Kroger, Vons, A&P, Food Lion.

Convenience Stores: Relatively small stores located near residential areas, open long hours seven days a week, and carrying a limited line of high-turnover convenience products at slightly higher prices. Examples: 7-Eleven, Stop-N-Go, Circle K.

Discount Stores: Carry standard merchandise sold at lower prices with lower margins and higher volumes. Examples: General—Wal-Mart, Target, Kmart, Specialty—Circuit City.

Off-Price Retailers: Sell merchandise bought at less-than-regular wholesale prices and sold at less than retail: often leftover goods, overruns, and irregulars obtained at reduced prices from manufacturers or other retailers. These include factory outlets owned and operated by manufacturers (example: Mikasa); independent off-price retailers owned and run by entrepreneurs or by divisions of larger retail corporations (example: TJ Maxx); and warehouse (or wholesale) clubs selling a limited selection of brand-name groceries, appliances, clothing, other goods at deep discounts to consumers who pay membership fees (examples: Costco, Sam's, BJ's Wholesale Club).

Superstores: Very large stores traditionally aimed at meeting consumers' total needs for routinely purchased food and nonfood items. Includes category killers, which carry a deep assortment in a particular category and have a knowledgeable staff (examples: Circuit City, Petsmart, Staples); supercenters, combined supermarket and discount stores (examples: Wal-Mart Supercenters, SuperTarget, Super Kmart Center); and hypermarkets with up to 220,000 square feet of space combining supermarket, discount, and warehouse retailing (examples: Carrefour [France], Pyrca [Spain]).
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Limited-service retailers, such as Sears or J.C. Penney, provide more sales assistance because they carry more shopping goods about which customers need information. Their increased operating costs result in higher prices. In full-service retailers, such as specialty stores and first-class department stores, salespeople assist customers in every phase of the shopping process. Full-service stores usually carry more specialty goods for which customers like to be "waited on." They provide more services, resulting in much higher operating costs, which are passed along to customers as higher prices.
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Product Line

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Retailers also can be classified by the length and breadth of their product assortments. Some retailers, such as specialty stores, carry narrow product lines with deep assortments within those lines. Today, specialty stores are flourishing. The increasing use of market segmentation, market targeting, and product specialization has resulted in a greater need for stores that focus on specific products and segments.
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In contrast, department stores carry a wide variety of product lines. In recent years, department stores have been squeezed between more focused and flexible specialty stores on the one hand, and more efficient, lower-priced discounters on the other. In response, many have added promotional pricing to meet the discount threat. Others have stepped up the use of store brands and single-brand "designer shops" to compete with specialty stores. Still others are trying mail-order, telephone, and Web selling. Service remains the key differentiating factor. Department stores such as Nordstrom, Saks, Neiman Marcus, and other high-end department stores are doing well by emphasizing high-quality service.
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Supermarkets are the most frequently shopped type of retail store. Today, however, they are facing slow sales growth because of slower population growth and an increase in competition from convenience stores, discount food stores, and superstores. Supermarkets also have been hit hard by the rapid growth of out-of-home eating.
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Thus, most supermarkets are making improvements to attract more customers. In the battle for "share of stomachs," many large supermarkets have moved upscale, providing from-scratch bakeries, gourmet deli counters, and fresh seafood departments. Others are cutting costs, establishing more efficient operations, and lowering prices in order to compete more effectively with food discounters. Finally, a few have added Web-based sales. Forrester Research estimates that 18 percent of the nation's household will be good prospects for online grocery buying and that the number buying online will increase from 4.5 million households last year to more that 14 million by 2006.2
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Convenience stores are small stores that carry a limited line of high-turnover convenience goods. Some 125,000 U.S. convenience stores posted sales last year of $283 billion. More than 60 percent of convenience store revenues come from sales of gasoline; more the 50 percent of in-store revenues are from cigarette and beverage sales.3
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In recent years, the convenience store industry has suffered from overcapacity as its primary market of young, blue-collar men has shrunk. As a result, many chains are redesigning their stores to attract female shoppers. They are shedding the image of a "truck stop" where men go to buy beer, cigarettes, and magazines, and instead offer fresh prepared foods and cleaner, safer environments. Many are also applying micromarketing—tailoring each store's merchandise to the specific needs of its surrounding neighborhood. For example, a Stop-N-Go in an affluent neighborhood carries fresh produce, gourmet pasta sauces, chilled Evian water, and expensive wines. Stop-N-Go stores in Hispanic neighborhoods carry Spanish-language magazines and other goods catering to the specific needs of Hispanic consumers.
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Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, nonfood items, and services. Wal-Mart, Kmart, Target, and other discount retailers offer supercenters, combination food and discount stores that emphasize cross-merchandising. Toasters are above the fresh-baked bread, kitchen gadgets are across from produce, and infant centers carry everything from baby food to clothing. Supercenters are growing in the United States at an annual rate of 25 percent, compared with a supermarket industry growth rate of only 1 percent. Wal-Mart, which opened its first supercenter in 1988, now has more than 1,100, capturing more than 70 percent of all supercenter volume.4
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Recent years have also seen the explosive growth of superstores that are actually giant specialty stores, the so-called category killers. They feature stores the size of airplane hangars and carry a very deep assortment of a particular line with a knowledgeable staff. Category killers are prevalent in a wide range of categories, including books, baby gear, toys, electronics, home improvement products, linens and towels, party goods, sporting goods, even pet supplies. Another superstore variation, the hypermarket, is a huge superstore, perhaps as large as six football fields. Although hypermarkets have been very successful in Europe and other world markets, they have met with little success in the United States.
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Finally, for some retailers, the product line is actually a service. Service retailers include hotels and motels, banks, airlines, colleges, hospitals, movie theaters, tennis clubs, bowling alleys, restaurants, repair services, hair care shops, and dry cleaners. Service retailers in the United States are growing faster than product retailers.
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Relative Prices

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Retailers can also be classified according to the prices they charge (see Table 14.1). Most retailers charge regular prices and offer normal-quality goods and customer service. Others offer higher-quality goods and service at higher prices. The retailers that feature low prices are discount stores and "off-price" retailers.
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DISCOUNT STORES    A discount store sells standard merchandise at lower prices by accepting lower margins and selling higher volume. The early discount stores cut expenses by offering few services and operating in warehouselike facilities in low-rent, heavily traveled districts. In recent years, facing intense competition from other discounters and department stores, many discount retailers have "traded up." They have improved décor, added new lines and services, and expanding regionally and nationally, leading to higher costs and prices.
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OFF-PRICE RETAILERS    When the major discount stores traded up, a new wave of off-price retailers moved in to fill the low-price, high-volume gap. Ordinary discounters buy at regular wholesale prices and accept lower margins to keep prices down. In contrast, off-price retailers buy at less-than-regular wholesale prices and charge consumers less than retail. Off-price retailers can be found in all areas, from food, clothing, and electronics to no-frills banking and discount brokerages.
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The three main types of off-price retailers are independents, factory outlets, and warehouse clubs. Independent off-price retailers either are owned and run by entrepreneurs or are divisions of larger retail corporations. Although many off-price operations are run by smaller independents, most large off-price retailer operations are owned by bigger retail chains. Examples include store retailers such as TJ Maxx and Marshall's, owned by TJX Companies, and Web sellers such as RetailExchange.com, Redtag.com, and CloseOutNow.com.
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Factory outlets—such as the Manhattan's Brand Name Fashion Outlet and the factory outlets of Liz Claiborne, Carters, Levi Strauss, and other manufacturers—sometimes group together in factory outlet malls and value-retail centers, where dozens of outlet stores offer prices as low as 50 percent below retail on a wide range of items. Whereas outlet malls consist primarily of manufacturers' outlets, value-retail centers combine manufacturers' outlets with off-price retail stores and department store clearance outlets. Factory outlet malls have become one of the hottest growth areas in retailing.
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The malls now are moving upscale—and even dropping "factory" from their descriptions—narrowing the gap between factory outlet and more traditional forms of retailers. As the gap narrows, the discounts offered by outlets are getting smaller. However, a growing number of outlet malls now feature brands such as Coach, Polo Ralph Lauren, Dolce & Gabbana, Giorgio Armani, Gucci, and Versace, causing department stores to protest to the manufacturers of these brands. Given their higher costs, the department stores have to charge more than the off-price outlets. Manufacturers counter that they send last year's merchandise and seconds to the factory outlet malls, not the new merchandise that they supply to the department stores. The malls are also located far from urban areas, making travel to them more difficult. Still, the department stores are concerned about the growing number of shoppers willing to make weekend trips to stock up on branded merchandise at substantial savings.5
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Warehouse clubs (or wholesale clubs or membership warehouses), such as Sam's Club, Costco, and BJ's, operate in huge, drafty, warehouselike facilities and offer few frills. Customers themselves must wrestle furniture, heavy appliances, and other large items to the checkout line. Such clubs make no home deliveries and often accept no credit cards. However, they do offer ultralow prices and surprise deals on selected branded merchandise. Whereas a weakening economy has slowed the growth of many traditional retailers, warehouse club sales have soared recently. These days, "consumers are laser-beam-focused on finding the best value," says an industry analyst, "and the absolute best value is at a club."6
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Organizational Approach

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Although many retail stores are independently owned, an increasing number are banding together under some form of corporate or contractual organization. The major types of retail organizations—corporate chains, voluntary chains, retailer cooperatives, franchise organizations, and merchandising conglomerates—are described in Table 14.2.
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 TABLE 14.2 Major Types of Retail Organizations 
Type Description Examples
Corporate chain stores Two or more outlets that are commonly owned and controlled, employ central buying and merchandising, and sell similar lines of merchandise. Corporate chains appear in all types of retailing, but they are strongest in department stores, variety stores, food stores, drugstores, shoe stores, and women's clothing stores. Tower Records, Fayva (shoes), Pottery Barn (dinnerware and home furnishings)
Voluntary chains Wholesaler-sponsored groups of independent retailers engaged in bulk buying and common merchandising Independent Grocers Alliance (IGA), Sentry Hardwares, Western Auto,True Value
Retailer cooperatives Groups of independent retailers who set up a central buying organization and conduct joint promotion efforts. Associated Grocers (groceries), Ace (hardware)
Franchise organizations Contractual association between a franchiser (a manufacturer, wholesales, or service organization) and franchisees (independent businesspeople who buy the right to own and operate one or more units in the franchise system). Franchise organizations are normally based on some unique product, service, or method of doing business, or on a trade name or patent, or on goodwill that the franchiser had developed. McDonald's, Subway, Pizza Hut, Jiffy Lube, Meineke Mufflers, 7-Eleven
Merchandising conglomerates A free-form corporation that combines several diversified retailing lines and forms under central ownership, along with some integration of their distribution and management functions. Target Corporation
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Chain stores are two or more outlets that are commonly owned and controlled. They have many advantages over independents. Their size allows them to buy in large quantities at lower prices and gain promotional economies. They can hire specialists to deal with areas such as pricing, promotion, merchandising, inventory control, and sales forecasting.
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The great success of corporate chains caused many independents to band together in one of two forms of contractual associations. One is the voluntary chain—a wholesaler-sponsored group of independent retailers that engages in group buying and common merchandising—which we discussed in Chapter 11. Examples include Western Auto and Do it Best hardwares. The other form of contractual association is the retailer cooperative—a group of independent retailers that bands together to set up a jointly owned, central wholesale operation and conducts joint merchandising and promotion efforts. Examples are Associated Grocers and Ace Hardware. These organizations give independents the buying and promotion economies they need to meet the prices of corporate chains.
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Another form of contractual retail organization is a franchise. The main difference between franchise organizations and other contractual systems (voluntary chains and retail cooperatives) is that franchise systems are normally based on some unique product or service; on a method of doing business; or on the trade name, goodwill, or patent that the franchiser has developed. Franchising has been prominent in fast foods, video stores, health and fitness centers, haircutting, auto rentals, motels, travel agencies, real estate, and dozens of other product and service areas.
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Once considered upstarts among independent businesses, franchises now command 35 percent of all retail sales in the United States. These days, it's nearly impossible to stroll down a city block or drive on a suburban street without seeing a McDonald's, Subway, Jiffy Lube, or Holiday Inn. One of the best-known and most successful franchisers, McDonald's, now has 30,000 stores in 120 countries serving more than 46 million customers a day and racking up more than $40 billion in systemwide sales. More than 70 percent of McDonald's restaurants worldwide are owned and operated by franchisees. Gaining fast is Subway Sandwiches and Salads, one of the fastest-growing franchises, with more than 16,000 shops in 74 countries, including some 13,250 in the United States. Franchising is even moving into new areas such as education. For example, LearnRight Corporation franchises its methods for teaching students thinking skills.7
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Finally, merchandising conglomerates are corporations that combine several different retailing forms under central ownership. An example is Target Corporation, which operates Marshall Fields (upscale department stores), Target (upscale discount stores), Mervyn's (middle-market apparel and home soft goods), and Target.direct (online retailing and direct marketing). Diversified retailing, similar to a multibranding strategy, provides superior management systems and economies that benefit all the separate retail operations, and is likely to increase.
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Retailer Marketing Decisions

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Retailers are always searching for new marketing strategies to attract and hold customers. In the past, retailers attracted customers with unique products, more or better services than their competitors offered, or credit cards. Today, national-brand manufacturers, in their drive for volume, have placed their branded goods everywhere. National brands are found not only in department stores but also in mass-merchandise discount stores, off-price discount stores, and on the Web. As a result, retail assortments are looking more and more alike.
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Service differentiation among retailers has also eroded. Many department stores have trimmed their services, whereas discounters have increased theirs. Customers have become smarter and more price sensitive. They see no reason to pay more for identical brands, especially when service differences are shrinking. For all these reasons, many retailers today are rethinking their marketing strategies.
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As shown in Figure 14.1, retailers face major marketing decisions about their target market and positioning, product assortment and services, price, promotion, and place.
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Target Market and Positioning Decision

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Retailers first must define their target markets and then decide how they will position themselves in these markets. Should the store focus on upscale, midscale, or downscale shoppers? Do target shoppers want variety, depth of assortment, convenience, or low prices? Until they define and profile their markets, retailers cannot make consistent decisions about product assortment, services, pricing, advertising, store décor, or any of the other decisions that must support their positions.
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figure
 ACTIVE
FIGURE 14.1 
Retailer marketing decisions 
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Too many retailers fail to define their target markets and positions clearly. They try to have "something for everyone" and end up satisfying no market well. In contrast, successful retailers define their target markets well and position themselves strongly. Even large stores such as Wal-Mart, Sears, and Target must define their major target markets in order to design effective marketing strategies. In fact, in recent years, thanks to strong targeting and positioning, Wal-Mart has become not just the world's largest retailer, but the world's largest company
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How can any discounter hope to compete with the likes of huge and dominating Wal-Mart? Again, the answer is good targeting and positioning. For example, rather than facing Wal-Mart head-on, Target aims for a seemingly oxymoronic niche—the "upscale discount" segment.
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Target—or Tar-zhay as many fans call it—has developed its own distinct targeting and positioning. "Going to Target is a cool experience, and everybody now considers it cool to save money," says one retailing consultant. "On the other hand, is it cool to save at Kmart, at Wal-Mart? I don't think so." Target isn't Wal-Mart, the giant that wooed suburbia with its acres of guns and gummy bears. And it definitely isn't Kmart, which still seems downscale despite its Martha Stewart tea-towel sets. Target's aim is more subtle: Stick to low prices, of course, but rise above the discount fray with upmarket style and design and higher-grade service. Target's ability to position itself as an upscale alternative really separates it from its mass-merchant peers. "We have a very clear strategy and a very clear brand," says Target vice chairman Jerry Storch. And it's all based on a clearly defined customer. Target's "expect more, pay less" positioning appeals to more-affluent consumers. Its average customer is typically female, 40, and college educated, with a household income approaching $50,000. On average, Target customers spend $40 a visit, almost twice that of other mass merchants. "The higher-income, better educated guest is in our stores," says Storch. "As your income rises, you love Target more and more." Target's upscale discount niche has helped insulate it from giant competitor Wal-Mart. "Wal-Mart is the greatest retailer that ever was," says Storch. "Very few have been able to compete with them and survive." Now 1,100 stores strong, more than survive, Target has thrived. "People used to say, ‘Ooh, a Nordstrom's coming to town,'" says the consultant. "Those same people now say, ‘Ooh, we're getting a Target!'"8

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Product Assortment and Services Decision

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Retailers must decide on three major product variables: product assortment, services mix, and store atmosphere.
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The retailer's product assortment should differentiate the retailer while matching target shoppers' expectations. One strategy is to offer merchandise that no other competitor carries, such as private brands or national brands on which it holds exclusives. For example, Saks gets exclusive rights to carry a well-known designer's labels. The retailer can feature blockbuster merchandising events—Bloomingdale's is known for running spectacular shows featuring goods from a certain country, such as India or China. Or the retailer can offer surprise merchandise, as when Costco offers surprise assortments of seconds, overstocks, and closeouts. Finally, the retailer can differentiate itself by offering a highly targeted product assortment—Lane Bryant carries goods in larger sizes; Brookstone offers an unusual assortment of gadgets in what amounts to an adult toy store.
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photo
Target—or Tar-zhay as many fans call it—has developed its own distinct positioning as an "upscale discounter." As this ad suggests, Target is not your usual discount store.
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The services mix can also help set one retailer apart from another. For example, some retailers invite customers to ask questions or consult service representatives in person or via phone or keyboard. Home Depot offers a diverse mix of services to do-it-yourselfers, from "how-to" classes to a proprietary credit card.
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The store's atmosphere is another element in the reseller's product arsenal. Every store has a physical layout that makes moving around in it either hard or easy. Each store has a "feel"; one store is cluttered, another cheerful, a third plush, a fourth somber. The store must plan an atmosphere that suits the target market and moves customers to buy. For example, outdoor equipment retailer REI practices "experiential retailing": Consumers can try out climbing equipment on a huge wall in the store, and they can test Gore-Tex raincoats by going under a simulated rain shower. And many retailers add fragrances in their stores to stimulate certain moods in shoppers. London's Heathrow Airport sprays the scent of pine needles because it evokes the sense of holidays and weekend walks. Automobile dealers will spray a "leather" scent in used cars to make them smell "new."
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Increasingly, retailers are turning their stores into theaters that transport customers into unusual, exciting shopping environments. For example, Barnes & Noble uses atmospherics to turn shopping for books into entertainment. It has found that "to consumers, shopping is a social activity. They do it to mingle with others in a prosperous-feeling crowd, to see what's new, to enjoy the theatrical dazzle of the display, to treat themselves to something interesting or unexpected." Thus, Barnes & Noble stores are designed with "enough woody, traditional, soft-colored library to please book lovers; enough sophisticated modern architecture and graphics, sweeping vistas, and stylish displays to satisfy fans of the theater of consumption. And for everyone, plenty of space, where they can meet other people and feel at home. . . . [Customers can sip a cup of Starbucks coffee and] settle in at heavy chairs and tables to browse through piles of books; they fill the cafes [designed] to increase the festivities. . . ." As one Barnes & Noble executive notes: "The feel-good part of the store, the quality-of-life contribution, is a big part of the success."9
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Perhaps the most dramatic conversion of stores into theater is the Mall of America near Minneapolis. Containing more than 520 specialty stores and 49 restaurants, the mall is a veritable playground. Under a single roof, it shelters a seven-acre Camp Snoopy amusement park featuring 25 rides and attractions, an ice-skating rink, an Underwater World featuring hundreds of marine specimens and a dolphin show, and a two-story miniature golf course. One of the stores, Oshman Supersports USA, features a basketball court, a boxing gym, a baseball batting cage, a 50-foot archery range, and a simulated ski slope.10
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All of this confirms that retail stores are much more than simply assortments of goods. They are environments to be experienced by the people who shop in them. Store atmospheres offer a powerful tool by which retailers can differentiate their stores from those of competitors.
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Price Decision

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A retailer's price policy must fit its target market and positioning, product and service assortment, and competition. All retailers would like to charge high markups and achieve high volume, but the two seldom go together. Most retailers seek either high markups on lower volume (most specialty stores) or low markups on higher volume (mass merchandisers and discount stores).
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Thus, Bijan's boutique on Rodeo Drive in Beverly Hills sells $375 silk ties and $19,000 ostrich-skin vests. Its "by appointment only" policy is designed to make its wealthy, high-profile clients comfortable with these prices. (Says Mr. Bijan, "If a man is going to spend $400,000 on his visit, don't you think it's only fair that he have my full attention?")11 Bijan's sells a low volume but makes hefty profits on each sale. At the other extreme, T.J. Maxx sells brand-name clothing at discount prices, settling for a lower margin on each sale but selling at a much higher volume.
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Promotion Decision

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Retailers use any or all of the promotion tools—advertising, personal selling, sales promotion, public relations, and direct marketing—to reach consumers. They advertise in newspapers, magazines, radio, television, and on the Internet. Advertising may be supported by newspaper inserts and direct mail. Personal selling requires careful training of salespeople in how to greet customers, meet their needs, and handle their complaints. Sales promotions may include in-store demonstrations, displays, contests, and visiting celebrities. Public relations activities, such as press conferences and speeches, store openings, special events, newsletters, magazines, and public service activities, are always available to retailers. Most retailers have also set up Web sites, offering customers information and other features and often selling merchandise directly.
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Place Decision

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Retailers often point to three critical factors in retailing success: location, location, and location! It's very important that retailers select locations that are accessible to the target market in areas that are consistent with the retailer's positioning. Small retailers may have to settle for whatever locations they can find or afford. Large retailers, however, usually employ specialists who select locations using advanced methods.
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Two of the savviest location experts in recent years have been the off-price retailer TJ Maxx and toy-store giant Toys "R" Us. Both put the majority of their new locations in rapidly growing areas where the population closely matches their customer base. The undisputed winner in the "place race" has been Wal-Mart, whose strategy of being the first mass merchandiser to locate in small and rural markets was one of the key factors in its phenomenal early success.
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Most stores today cluster together to increase their customer pulling power and to give consumers the convenience of one-stop shopping. Central business districts were the main form of retail cluster until the 1950s. Every large city and town had a central business district with department stores, specialty stores, banks, and movie theaters. When people began to move to the suburbs, however, these central business districts, with their traffic, parking, and crime problems, began to lose business. Downtown merchants opened branches in suburban shopping centers, and the decline of the central business districts continued. In recent years, many cities have joined with merchants to try to revive downtown shopping areas by building malls and providing underground parking.
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A shopping center is a group of retail businesses planned, developed, owned, and managed as a unit. A regional shopping center, or regional shopping mall, the largest and most dramatic shopping center, contains from 40 to over 200 stores. It is like a covered mini-downtown and attracts customers from a wide area. A community shopping center contains between 15 and 40 retail stores. It normally contains a branch of a department store or variety store, a supermarket, specialty stores, professional offices, and sometimes a bank. Most shopping centers are neighborhood shopping centers or strip malls that generally contain between 5 and 15 stores. They are close and convenient for consumers. They usually contain a supermarket, perhaps a discount store, and several service stores—dry cleaner, self-service laundry, drugstore, video-rental outlet, barber or beauty shop, hardware store, or other stores.
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A recent addition to the shopping center scene is the so-called power center. These huge unenclosed shopping centers consist of a long strip of retail stores, including large, freestanding anchors such as Wal-Mart, Home Depot, Best Buy, Michaels, OfficeMax, and CompUSA. Each store has its own entrance with parking directly in front for shoppers who wish to visit only one store. Power centers have increased rapidly during the past few years to challenge traditional indoor malls.
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Combined, all shopping centers now account for about one-third of all retail sales. The average American makes 3.2 trips to the mall per month, shopping for an average of 75 minutes per trip and spending about $71. However, many experts suggest that America is now "over-malled." There are now 20 square feet of retail space per person in the United States, up from 15 square feet in 1986. During the 1990s, shopping space grew at about twice the rate of population growth. As a result, as many as 20 percent of America's regional malls are in danger of going out of business. There "is a glut of retail space," says one retail analyst. "There's going to have to be a shakeout," concludes another.12
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Thus, despite the recent development of many new "megamalls," such as the spectacular Mall of America, the current trend is toward value-oriented outlet malls and power centers on the one hand, and smaller malls on the other. Many shoppers now prefer to shop at "lifestyle centers," smaller malls with upscale stores, convenient locations, and expensive atmospheres. "Think of lifestyle centers as part Main Street and part Fifth Avenue," comments one industry observer. "The idea is to combine the hominess and community of an old-time village square with the cachet of fashionable urban stores; the smell and feel of a neighborhood park with the brute convenience of a strip center."13
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figure
Shopping centers: The spectacular Mall of America contains more than 520 specialty stores, 49 restaurants, a 7-acre indoor theme park, an Underwater World featuring hundreds of marine specimens and a dolphin show, and a two-story miniature golf course.
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The Future of Retailing

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Retailers operate in a harsh and fast-changing environment, which offers threats as well as opportunities. For example, the industry suffers from chronic overcapacity, resulting in fierce competition for customer dollars. Consumer demographics, lifestyles, and shopping patterns are changing rapidly, as are retailing technologies. To be successful, then, retailers will have to choose target segments carefully and position themselves strongly. They will have to take the following retailing developments into account as they plan and execute their competitive strategies.
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New Retail Forms and Shortening Retail Life Cycles

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New retail forms continue to emerge to meet new situations and consumer needs, but the life cycle of new retail forms is getting shorter. Department stores took about 100 years to reach the mature stage of the life cycle; more recent forms, such as warehouse stores, reached maturity in about 10 years. In such an environment, seemingly solid retail positions can crumble quickly. Of the top 10 discount retailers in 1962 (the year that Wal-Mart and Kmart began), not one still exists today.
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Consider the Price Club, the original warehouse store chain. When Sol Price opened his first warehouse store outside San Diego in 1976, he launched a retailing revolution. Selling everything from tires and office supplies to five-pound tubs of peanut butter at superlow prices, his store chain was generating $2.6 billion a year in sales within 10 years. But Price refused to expand beyond its California base. And as the industry quickly matured, Price ran headlong into wholesale clubs run by such retail giants as Wal-Mart and Kmart. Only 17 years later, in a stunning reversal of fortune, a faltering Price sold out to competitor Costco. Price's rapid rise and fall "serves as a stark reminder to mass-market retailers that past success means little in a fiercely competitive and rapidly changing industry."14 Thus, retailers can no longer sit back with a successful formula. To remain successful, they must keep adapting.
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Many retailing innovations are partially explained by the wheel-of-retailing concept.15 According to this concept, many new types of retailing forms begin as low-margin, low-price, low-status operations. They challenge established retailers that have become "fat" by letting their costs and margins increase. The new retailers' success leads them to upgrade their facilities and offer more services. In turn, their costs increase, forcing them to increase their prices. Eventually, the new retailers become like the conventional retailers they replaced. The cycle begins again when still newer types of retailers evolve with lower costs and prices. The wheel-of-retailing concept seems to explain the initial success and later troubles of department stores, supermarkets, and discount stores, and the recent success of off-price retailers.
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Growth of Nonstore Retailing

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Although most retailing still takes place the old-fashioned way across countertops in stores, consumers now have an array of alternatives, including mail-order, television, phone, and online shopping . Americans are increasingly avoiding the hassles and crowds at malls by doing more of their shopping by phone or computer. Although such retailing advances may threaten some traditional retailers, they offer exciting opportunities for others. Most store retailers have now developed direct retailing channels. In fact, more online retailing is conducted by "click-and-brick" retailers than by "click-only" retailers. For example, office-supply retailer Office Depot is now the world's biggest online retailer after Amazon.com.16
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Retail Convergence

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Today's retailers are increasingly selling the same products at the same prices to the same consumers in competition with a wider variety of other retailers. For example, any consumer can buy CDs at about the same price from any or all of a dozen different types of retailers—specialty music stores, discount music stores, electronics superstores, general merchandise discount stores, video-rental outlets, and any of dozens of Web sites. You can buy books at outlets ranging from independent local bookstores to discount stores such as Wal-Mart, superstores such as Barnes & Noble or Borders, or Web sites such as Amazon.com. And when it comes to brand-name appliances, department stores, discount stores, off-price retailers, electronics superstores, and a slew of Web sites all compete for the same customers.
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This merging of consumers, products, prices, and retailers is called retail convergence:
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Retail convergence is the coming together of shoppers, goods, and prices. Customers of all income levels are shopping at the same stores, often for the same goods. Old distinctions such as discount store, specialty store, and department store are losing significance: The successful store must match a host of rivals on selection, service, and price.

The American consumer's road map for where products can be found has shifted from a segmented approach to a consolidation that is almost a throwback to the 1800s, when a general store was the place to shop for everything from coffee to a coffeepot. In the 1900s, shoppers migrated from the Sears catalog to the department store, and then to the shopping mall and specialty stores. A few years ago, the coffeepot customer may have gone to Williams-Sonoma or even Starbucks. Today, it could be Target or Wal-Mart.

Where you go for what you want—that has created the biggest challenge facing retailers. Consider fashion. Once the exclusive domain of the wealthy, fashion now moves quickly from the runways of New York and Paris to retailers at all levels. Ralph Lauren sells in department stores and in the Marshall's at the strip mall. Designer Stephen Sprouse, fresh off a limited edition of Louis Vuitton handbags and luggage, has designed a summer line of clothing and other products for Target.17

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Such convergence means greater competition for retailers and greater difficulty in differentiating offerings. The competition between chain superstores and smaller, independently owned stores has become particularly heated. Because of their bulk-buying power and high sales volume, chains can buy at lower costs and thrive on smaller margins. The arrival of a superstore can quickly force nearby independents out of business. For example, the decision by electronics superstore Best Buy to sell CDs as loss leaders at rock-bottom prices pushed a number of specialty record store chains into bankruptcy. And Wal-Mart has been accused of destroying independents in countless small towns around the country.
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Yet the news is not all bad for smaller companies. Many small, independent retailers are thriving. They are finding that sheer size and marketing muscle are often no match for the personal touch small stores can provide or the specialty niches that small stores fill for a devoted customer base.
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The Rise of Megaretailers

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The rise of huge mass merchandisers and specialty superstores, the formation of vertical marketing systems and buying alliances, and a rash of retail mergers and acquisitions have created a core of superpower megaretailers. Through their superior information systems and buying power, these giant retailers are able to offer better merchandise selections, good service, and strong price savings to consumers. As a result, they grow even larger by squeezing out their smaller, weaker competitors.
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The megaretailers are also shifting the balance of power between retailers and producers. A relative handful of retailers now controls access to enormous numbers of consumers, giving them the upper hand in their dealings with manufacturers. For example, in the United States, Wal-Mart's revenues are more than five times those of Procter & Gamble, and Wal-Mart generates more than 20 percent of P&G's revenues. Wal-Mart can, and often does, use this power to wring concessions from P&G and other suppliers.18
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The Growing Importance of Retail Technology

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Retail technologies are becoming critically important as competitive tools. Progressive retailers are using advanced information technology and software systems to produce better forecasts, control inventory costs, order electronically from suppliers, send e-mail between stores, and even sell to customers within stores. They are adopting checkout scanning systems, online transaction processing, electronic funds transfer, electronic data interchange, in-store television, and improved merchandise-handling systems.
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Perhaps the most startling advances in retailing technology concern the ways in which today's retailers are connecting with customers:
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In the past, life was simple. Retailers connected with their customers through stores, through their salespeople, through the brands and packages they sold, and through direct mail and advertising in the mass media. But today, life is more complex. There are dozens of new ways to attract and engage consumers. . . . Indeed, even if one omits the obvious—the Web—retailers are still surrounded by technical innovations that promise to redefine the way they and manufacturers interact with customers. Consider, as just a sampling, touch-screen kiosks, electronic shelf labels and signs, handheld shopping assistants, smart cards, self-scanning systems, virtual reality displays, and intelligent agents. So, if we ask the question, Will technology change the way [retailers] interface with customers in the future? the answer has got to be yes.19
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Global Expansion of Major Retailers

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Retailers with unique formats and strong brand positioning are increasingly moving into other countries. Many are expanding internationally to escape mature and saturated home markets. Over the years, several giant U.S. retailers—McDonald's, Gap, Toys "R" Us—have become globally prominent as a result of their great marketing prowess. Others, such as Wal-Mart and Kmart, are rapidly establishing a global presence. Wal-Mart, which now operates more than 1,200 stores in nine countries abroad, sees exciting global potential. Its international division last year racked up sales of more than $35 billion, an increase of 11 percent over the previous year. Here's what happened when it opened two new stores in Shenzhen, China:
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[Customers came] by the hundreds of thousands—up to 175,000 on Saturdays alone—to China's first Wal-Mart Supercenter and Sam's Club. They broke the display glass to snatch out chickens at one store and carted off all the big-screen TVs before the other store had been open an hour. The two outlets . . . were packed on Day One and have been bustling ever since.20
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However, U.S retailers are still significantly behind Europe and Asia when it comes to global expansion. Only 18 percent of the top U.S. retailers operate globally, compared to 40 percent of European retailers and 31 percent of Asian retailers. Among foreign retailers that have gone global are France's Carrefour, Britain's Marks and Spencer, Italy's Benetton, Sweden's IKEA home furnishings stores, and Japan's Yaohan supermarkets.21
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Marks and Spencer, which started out as a penny bazaar in 1884, grew into a chain of variety stores over the decades and now has a thriving string of 150 franchised stores around the world, which sell mainly its private-label clothes, including Brooks Brothers. It also runs a major food business. IKEA's well-constructed but fairly inexpensive furniture has proven very popular in the United States, where shoppers often spend an entire day in an IKEA store. And French discount retailer Carrefour, the world's second largest retailer after Wal-Mart, has embarked on an aggressive mission to extend its role as a leading international retailer:
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Carrefour now operates more than 5,300 discount stores in 30 countries in Europe, Asia, and the Americas, including 657 hypermarkets. By purchasing or merging with a variety of retailers, Carrefour has accelerated its hold over the European market, where it now claims retail dominance in four leading markets: France, Spain, Belgium, and Greece; it's the number two retailer in Italy. But one of the retailer's greatest strengths is its market position outside of France and Europe. In South America, for instance, Carrefour is the market leader in Brazil and Argentina, where it operates more than 300 stores. By comparison, Wal-Mart has only 25 units in those two countries. In China, the land of more than a billion consumers, Carrefour operates 22 hypermarkets to Wal-Mart's five supercenters and one Sam's Club. In the Pacific Rim, excluding China, Carrefour operates 33 hypermarkets in five countries to Wal-Mart's five units in South Korea alone. Carrefour is also on track to beat the competition into the Japanese market, the world's second largest nation in terms of consumption. In the all-important emerging markets of China, South America, and the Pacific Rim, Carrefour outpaces Wal-Mart five-to-one in actual revenue. In short, Carrefour is bounding ahead of Wal-Mart in most markets outside North America. The only question: Can the French titan hold its lead? While no one retailer can rightly claim to be in the same league with Wal-Mart as an overall retail presence, Carrefour stands a better chance than most to dominate global retailing.22

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Retail Stores as "Communities" or "Hangouts"

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With the rise in the number of people living alone, working at home, or living in isolated and sprawling suburbs, there has been a resurgence of establishments that, regardless of the product or service they offer, also provide a place for people to get together. These places include cafes, tea shops, juice bars, bookshops, superstores, children's play spaces, brew pubs, and urban greenmarkets. Brew pubs such as New York's Zip City Brewing and Seattle's Trolleyman Pub (run by Red Hook Brewery) offer tastings and a place to pass the time. And today's bookstores have become part bookstore, part library, and part living room.
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Welcome to today's bookstore. The one featuring not only shelves and cash registers but also cushy chairs and coffee bars. It's where backpack-toting high school students come to do homework, where retirees thumb through the gardening books, and parents read aloud to their toddlers. If no one actually buys books, that's just fine, say bookstore owners and managers. They're offering something grander than ink and paper, anyway. They're selling comfort, relaxation, community.23
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Brick-and-mortar retailers are not the only ones creating community. Others have also built virtual communities on the Internet.
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Sony Computer Entertainment America (SCEA) actively builds community among its Playstation®2 customers. Its recent Playstation.com campaign created message boards where its game players could post messages to one another. The boards are incredibly active, discussing techie topics but also providing the opportunity for members, fiercely competitive and opinionated, to vote on lifestyle issues, such as music and personal taste, no matter how trivial. Although SCEA is laissez-faire about the boards and does not feed them messages, the company sees the value in having its customers' adamant conversations occur directly on its site. "Our customers are our evangelists. They are a very vocal and loyal fan base," says an SCEA spokesperson. "There are things we can learn from them."24
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