Voluntary chains are normally based on one unique product or a specific trade name.

Download Chapter 13: Retailing and Wholesaling...

Chapter 13: Retailing and Wholesaling What's Ahead Retailing Types of Retailers Amount of Service Product Line Relative Prices Retail Organizations Retailer Marketing Decisions Target Market and Positioning Decision Product Assortment and Services Decision Price Decision Promotion Decision Place Decision The Future of Retailing New Retail Forms and Shortening Retail Life Cycles Growth of Nonstore Retailing Increasing Intertype Competition The Rise of Megaretailers Growing Importance of Retail Technology Global Expansion of Major Retailers Retail Stores as "Communities" or "Hangouts" Wholesaling Types of Wholesalers Wholesaler Marketing Decisions Target Market and Positioning Decision Marketing Mix Decisions Trends in Wholesaling Chapter Wrap-Up

What's Ahead Home Depot, the giant do-it-yourself home improvement retail chain, is one of the world's hottest retailers. It's one of a breed of retailers called category killers—giant retailers that offer a huge selection of merchandise in a single product category at such low prices that they destroy the competition. At first glance, a cavernous Home Depot store doesn't look like much. With its cement floors and drafty, warehouselike interior, the store offers all the atmosphere of an airplane hangar. But

the chances are good that you'll find exactly what you're looking for, priced to make it a real value. Home Depot carries a huge assortment of more than 35,000 items—anything and everything related to home improvement. Its prices run 20 to 30 percent below those of local hardware stores.

Home Depot provides more than the right products at the right prices, however. Perhaps the best part of shopping at Home Depot is the high quality of its customer service. Home Depot is more than just customer driven—it's customer obsessed. In the words of cofounder and chief executive Bernie Marcus, "All of our people understand what the Holy Grail is. It's not the bottom line. It's an almost blind, passionate commitment to taking care of customers." Arthur Blank, Home Depot's other cofounder and president, gives all new store managers the following six pieces of advice: "Serve the customer, serve the customer, serve the customer, serve the customer, serve the customer. And number 6, kick [butt]." Bernie Marcus and Arthur Blank founded Home Depot with the simple mission of helping customers solve their home improvement problems. Their goal: "To take ham-handed homeowners who lack the confidence to do more than screw in a lightbulb and transform them into Mr. and Ms. Fixits." Accomplishing this mission takes more than simply peddling the store's products and taking the customers' money. It means building lasting customer relationships. Bernie and Arthur understand the importance of customer satisfaction. They calculate that a satisfied customer is worth more than $25,000 in customer lifetime value ($38 per store visit, times 30 visits per year, times about 22 years of patronage). Customer satisfaction, in turn, results from interactions with well-trained, highly motivated employees who consistently provide good value and high-quality service. "The most important part of our formula," says Arthur, "is the quality of caring that takes place in our stores between the employee and the customer." Thus, at Home Depot, taking care of customers begins with taking care of employees. Home Depot attracts the best salespeople by paying above-average salaries; then it trains them thoroughly. All employees take regular "product knowledge" classes to gain hands-on experience with problems customers will face. When it comes to creating customer value and satisfaction, Home Depot treats its employees as partners. All full-time employees receive at least 7 percent of their annual salary in company stock. As a result, Home Depot employees take ownership in the business of serving customers. Each employee wears a bright orange apron that says, "Hello, I'm ______ , a Home Depot stockholder. Let me help you." Bernie and Arthur have become energetic crusaders in the cause of customer service. For example, four Sundays a year at 6:30 a.m., the two don their own orange aprons and air Breakfast with Bernie and Art—a good old-fashioned revival broadcast live over closed-circuit TV to the company's more

than 100,000 employees nationwide. According to one account, "Bernie regularly rouses his disciples with the following: 'Where do you go if you want a job?' They yell back: 'Sears . . . Lowe's . . . Builders Square.' 'Where do you go if you want a career?' 'HOME DEPOT!' they roar. At times, when the excitement becomes feverish, Marcus has been known to grab a resisting Blank, plant a noisy kiss on his cheek, and exclaim, 'Arthur, I love you!'" Home Depot avoids the high-pressure sales techniques used by some retailers. Instead, it encourages salespeople to build long-term relationships with customers—to spend whatever time it takes, visit after visit, to solve customer problems. Home Depot pays employees a straight salary so that they can spend as much time as necessary with customers without worrying about making the sale. Bernie Marcus declares, "The day I'm dead with an apple in my mouth is the day we'll pay commissions." In fact, rather than pushing customers to overspend, employees are trained to help customers spend less than they expected. "I love it when shoppers tell me they were prepared to spend $150 and our people showed them how to do the job for four or five bucks," says Bernie. Home Depot has also extended its high-grade relationship-building efforts to the Internet. In addition to selling goods online, the company's Web site also offers plenty of how-to tips for household projects: how to fix it, build it, grow it, decorate it, or install it. It provides useful tools, such as calculators for figuring out how much paint or wallpaper is needed to cover a given amount of space. Home Depot also sends e-mail to regular site users alerting them to how-to workshops or other events at nearby stores. Taking care of customers has made Home Depot one of today's most successful retailers. Founded in 1978, in little more than 20 years it has grown explosively to become the nation's largest do-ityourself chain, with more than 820 stores reaping more than $30 billion in sales. Home Depot sales have grown 36 percent annually over the past decade, with 10-year average annual returns to shareholders of almost 45 percent. The company's stock price has rocketed up 28,000 percent—yes, 28,000 percent—since the company went public in 1981! In fact, a current problem in some stores is too many customers—some outlets are generating an astounding $600 of sales per square foot (compared with Wal-Mart at $250 and Kmart at $150). This has created problems with clogged aisles, stock outs, too few salespeople, and long checkout lines. Although many retailers would welcome this kind of problem, it bothers Bernie and Arthur greatly, and they've quickly taken corrective action. Continued success, they know, depends on the passionate pursuit of customer satisfaction. Bernie will tell you, "Every customer has to be treated like your mother, your father, your sister, or your brother." You certainly wouldn't want to keep your mother waiting in line.1 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.

Retailing What is retailing? We all know that Wal-Mart, Sears, and Kmart 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 goods 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.

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, home TV shopping shows, home and office parties, door-to-door contact, vending machines, online services and the Internet, and other direct retailing approaches. We discuss such direct-marketing approaches in detail in Chapter 17. In this chapter, we focus on store retailing.

Types of Retailers 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 13.1 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. Table 13.1

Type

Major Types of Retailers

Description

Examples

Specialty stores

Carry a narrow product line with a deep assortment within that line: apparel stores, sporting-goods stores, furniture stores, florists, and bookstores. Specialty stores can be subclassified by the degree of narrowness in their product line. 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.

Athlete's Foot (sport shoes only), Tall Men (tall men's clothing), The Limited (women's clothing), The Body Shop (cosmetics and bath supplies)

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.

Sears, Saks Fifth Avenue, Marshall Fields, May's, JCPenney, Nordstrom, Macy's

Supermarkets

Relatively large, low-cost, low-margin, Safeway, Kroger, A&P, Winnhigh-volume, self-service operations Dixie, Publix, Food Lion, Vons, designed to serve the consumers total Jewel needs for food, laundry, and household maintenance products.

Convenience stores

Relatively small stores that are located near residential areas, open long hours seven days a week, and carry a limited line of high-turnover convenience products. Their long hours and their use by consumers mainly for "fill-in" purchases make them relatively highprice operations.

7-Eleven, Circle K, Stop-N-Go, White Hen Pantry

Superstores

Larger stores that aim at meeting consumers' total needs for routinely purchased food and nonfood items. They include supercenters, combined supermarket and discount stores, which feature cross-merchandising. They also include so-called category killers that carry a very deep assortment of a particular line. Another superstore variation is hypermarkets, huge stores that combine supermarket, discount, and warehouse retailing to sell routinely purchased goods as well as furniture, large and small appliances, clothing, and many other items.

Supercenters: Wal-Mart Supercenters, and Super Kmart Centers; Category killers: Toys "R" Us (toys), Petsmart (pet supplies), Staples (office supplies), Home Depot (home improvements), Best Buy (consumer electronics); Hypermarkets: Carrefour (France), Pyrca (Spain), Meijer's (Netherlands)

Discount stores

Sell standard merchandise at lower prices by accepting lower margins and selling higher volumes. A true discount store regularly sells its merchandise at lower prices, offering mostly national brands, not inferior goods. Discount retailers include both general merchandise and specialty merchandise stores.

General discount stores: WalMart, Kmart, Target; Specialty discount stores: Circuit City (electronics), Crown Book (books)

Off-price retailers

Sell a changing and unstable collection of higher-quality merchandise, often leftover goods, overruns, and irregulars obtained at reduced prices from manufacturers or other retailers. They buy at less-than-regular wholesale prices and charge consumers less than retail. They include three main types:

Independent off-price retailers

Owned and run either by entrepreneurs or by divisions of larger retail corporations.

T.J. Maxx, Filene's Basement, Loehmann's, Hit or Miss

Factory outlets Owned and operated by manufacturers and normally carry the manufacturer's surplus, discontinued, or irregular goods. Such outlets increasingly group together in factory outlet malls, where dozens of outlet stores offer prices as much as 50 percent below retail on a broad range of items.

Mikasa (dinnerware), Dexter (shoes), Ralph Lauren and Liz Claiborne (upscale apparel)

Warehouse clubs (or wholesale clubs)

Wal-Mart-owned Sam's Club, Costco, BJ's Wholesale Club

Sell a limited selection of brand-name grocery items, appliances, clothing, and a hodgepodge of other goods at deep discounts to members who pay $25 to $50 annual membership fees.

They serve small businesses and other club members out of huge, lowoverhead, warehouselike facilities and offer few frills or services. AMOUNT OF SERVICE 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. 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 or Service Merchandise). Limited-service retailers, such as Sears or JCPenney, 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.

Take a moment to consider the possible fate of customer service.

PRODUCT LINE 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. 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 "bargain basements" and promotional events to meet the discount threat. Others have set up store brand programs, "boutiques" and "designer shops" (such as Tommy Hilfiger or Polo shops within department stores), and other store formats that compete with specialty stores. Still others are trying mail-order, telephone, and Web site 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. 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. Thus, most supermarkets are making improvements to attract more customers. In the battle for "share of stomachs," most 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. Convenience stores are small stores that carry a limited line of high-turnover convenience goods. In the 1990s, the convenience store industry suffered from overcapacity as its primary market of young, blue-collar men shrunk. As a result, many chains have redesigned their stores with female customers in mind. They are dropping 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 convenience chains also are experimenting with 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.2 Superstores are much larger than regular supermarkets and offer a large assortment of routinely purchased food products, nonfood items, and services. Examples include Safeway's Pak 'N Pay and Pathmark Super Centers. Wal-Mart, Kmart, and other discount retailers are now opening supercenters, combination food and discount stores that emphasize cross-merchandising. For example, at a Super Kmart Center, 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, had opened more than 700 such stores by 2000, capturing almost two-thirds of all supercenter volume. By 2005, the retailing giant will likely be operating 1,200 to 1,500 supercenters.3 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 hangers that 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, hypermarkets, are huge superstores, 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. 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. RELATIVE PRICES Retailers can also be classified according to the prices they charge. 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, "off-price" retailers, and catalog showrooms (see Table 13.1). 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 decor, added new lines and services, and opened suburban branches, which have led to higher costs and prices. Off-Price Retailers When the major discount stores traded up, a new wave of off-price retailers moved in to fill the lowprice, 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. The three main types of off-price retailers are independents, factory outlets, and warehouse clubs. Independent off-price retailers are either 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 Loehmann's (owned by Associated Dry Goods, owner of Lord & Taylor), Filene's Basement (Federated Department Stores), and T.J. Maxx (TJX Cos). Factory outlets—such as the Burlington Coat Factory Warehouse, Manhattan's Brand Name Fashion Outlet, and the factory outlets of Levi-Strauss, Carters, and Ship 'n' Shore—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. The malls now are moving upscale, narrowing the gap between factory outlets and more traditional forms of retailers. As the gap narrows, the discounts offered by outlets are getting smaller. However, a growing number of factory outlets now feature brands such as Coach, Esprit, Liz Claiborne, Calvin Klein, and Nike, 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.4 Warehouse clubs (or wholesale clubs, or membership warehouses), such as Sam's Club and Costco, 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 accept no credit cards, but they do offer rock-bottom prices. Warehouse clubs took the country by storm in the 1980s, but growth slowed considerably in the 1990s as a result of growing competition among warehouse store chains and effective reactions by supermarkets and discount stores.5

Consider how firms could classify their competitors into different retail categories.

RETAIL ORGANIZATIONS 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 and retailer cooperatives, franchise organizations, and merchandising conglomerates—are described in Table 13.2. Table 13.2

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, CVS Pharmacy, 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, Tru 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, wholesaler, 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 has 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.

Dayton-Hudson, the Venator Group

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. They can afford to hire corporate-level specialists to deal with areas such as pricing, promotion, merchandising, inventory control, and sales forecasting. Corporate chains gain promotional economies because their advertising costs are spread over many stores and over a large sales volume. 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. 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. These organizations give independents the buying and promotion economies they need to meet the prices of corporate chains. 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 or fitness centers, haircutting, auto rentals, motels, travel agencies, real estate, and dozens of other product and service areas. Finally, merchandising conglomerates are corporations that combine several different retailing forms under central ownership. Examples include Dayton-Hudson, JCPenney, and the Venator Group. For example, Dayton-Hudson operates Target (upscale discount stores), Mervyn's (middle-market apparel and soft goods), and three department stores—Dayton's, Hudson's, and Marshall Fields. The Venator Group owns numerous specialty chains, including Foot Locker, Northern Reflections, Champs Sports, Afterthoughts (targeting American teenage girls), Eastbay (catalog and online sales), and a dozen others. Diversified retailing, which provides superior management systems and economies that benefit all the separate retail operations, is likely to increase in the new millennium.

Retailer Marketing Decisions Retailers are 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. Thus, stores offer more similar assortments—national brands are found not only in department stores but also in mass-merchandise and off-price discount stores. As a result, stores are looking more and more alike. 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. As shown in Figure 13.1, retailers face major marketing decisions about their target markets and positioning, product assortment and services, price, promotion, and place.

Figure 13.1

Retailer marketing decisions

TARGET MARKET AND POSITIONING DECISION 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 decor, or any of the other decisions that must support their positions. 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. For example, in 1963, Leslie H. Wexner borrowed $5,000 from his aunt to create The Limited, which started as a single store targeted to young, fashion-conscious women. All aspects of the store—clothing assortment, fixtures, music, colors, personnel—were orchestrated to match the target consumer. He continued to open more stores, but a decade later his original customers were no longer in the "young" group. To catch the new "youngs," he started the Limited Express. Over the years, he has started or acquired other highly targeted store chains, including Lane Bryant, Victoria's Secret, Lerner, Express, Structure, Bath & Body Works, and others to reach new segments. Today The Limited, Inc. operates more than 5,300 stores in several different segments of the market, with sales of almost $10 billion.6 Even large stores such as Wal-Mart, Sears, Kmart, 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 zoomed past Sears and Kmart to become the world's largest retailer. 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. Target—or Tar-zhay as many fans call it—has developed its own distinct interpretation of the discount retailing. "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." Wal-Mart and other rival "marts" achieve growth with expanded stores, inventory prowess, and rock-bottom prices. But 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. In other words, price like a discounter, but don't think like one. Target's ability to position itself as an upscale alternative really separates it from its mass-merchant peers. The payoff is that Target's "expect more, pay less" creed is appealing to more affluent consumers than those frequenting other discounters. The chain's 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. With nearly 1,000 stores nationwide, Target accounted for an impressive 75 percent of parent company Dayton-Hudson's sales and earnings. "People used to say, 'Ooh, a Nordstrom's coming to town,' " says another consultant. "Those same people now say, 'Ooh, we're getting a Target!' "7

Target—or Tar-zhay as many fans call it—has developed its own distinct positioning as an "upscale discounter." Its trendy ads appeal to more affluent consumers who spend more than twice as much per visit as those frequenting other discounters. Its familiar bulls-eye design is a registered trademark.

PRODUCT ASSORTMENT AND SERVICES DECISION Retailers must decide on three major product variables: product assortment, services mix, and store atmosphere. The retailer's product assortment should match target shoppers' expectations. In its quest to differentiate itself from competitors, a retailer can use any of several product-differentiation strategies. For one, it can offer merchandise that no other competitor carries—its own private brands or national brands on which it holds exclusives. For example, The Limited designs most of the clothes carried by its store and Saks gets exclusive rights to carry a well-known designer's labels. Second, 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 Loehmann's 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. Retailers also must decide on a services mix to offer customers. The old mom-and-pop grocery stores offered home delivery, credit, and conversation—services that today's supermarkets ignore. The services mix is one of the key tools of nonprice competition for setting one store apart from another. The store's atmosphere is another element in its 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

charming, a third plush, a fourth somber. The store must have a planned atmosphere that suits the target market and moves customers to buy.

Watch how a company approaches the issue of store layout and atmosphere.

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 touches 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] 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."8 Perhaps the most dramatic conversion of stores into theater is the Mall of America near Minneapolis. Containing more than 500 specialty stores, the mall is a veritable playground. Under a single roof, it shelters a seven-acre Knott's Berry Farm amusement park featuring 23 rides and attractions, an iceskating 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.9 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. PRICE DECISION A retailer's price policy is a crucial positioning factor and must be decided in relation to its target market, its product and service assortment, and its 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). Thus, Bijan's on Rodeo Drive in Beverly Hills prices men's suits starting at $1,000 and shoes at $400—it sells a low volume but makes a hefty profit 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. PROMOTION DECISION Retailers use the normal promotion tools—advertising, personal selling, sales promotion, public relations, and direct marketing—to reach consumers. They advertise in newspapers, magazines, radio, and television. Advertising may be supported by newspaper inserts and direct-mail pieces. 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. Many retailers have also set up Web sites, offering customers information and other features and sometimes selling merchandise directly. PLACE DECISION Retailers often cite three critical factors in retailing success: location, location, and location! A retailer's location is key to its ability to attract customers. The costs of building or leasing facilities have a major impact on the retailer's profits. Thus, site-location decisions are among the most important the retailer makes. Small retailers may have to settle for whatever locations they can find or afford. Large retailers usually employ specialists who select locations using advanced methods. Two of the savviest location experts in recent years have been the off-price retailer T.J. 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.

Take a moment to read more about retail location decisions.

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. A shopping center is a group of retail businesses planned, developed, owned, and managed as a unit. A regional shopping center, the largest and most dramatic shopping center, contains from 40 to over 200 stores. It is like a covered minidowntown 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.

Shopping centers: The spectacular Mall of America contains more than 500 stores, 45 restaurants, 7 theaters, and a 7-acre indoor theme park. It attracts more than 35 million visitors a year.

Combined, all shopping centers now account for about one-third of all retail sales, but they may have reached their saturation point. Through the past decade, on average, consumers have been going to traditional malls less often, staying a shorter period of time, and visiting fewer stores. Why are people using shopping malls less? First, with more dual-income households, people have less time to shop. "You have two workers in every family and no one has time to go to the mall for four hours anymore," observes one industry analyst. "People who used to go to the mall 20 times a year now go two or three times."10 Second, shoppers appear to be tiring of traditional malls, which are too big, too crowded, and too much alike. Today's large malls offer great selection but are less comfortable and convenient. Finally, today's consumers have many alternatives to traditional malls, ranging from online shopping to socalled power centers. These huge unenclosed shopping centers consist of a long strip of retail stores, including large, free-standing 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. "Malls have been hit hard by competition from street shopping and from recent retail innovations—especially power centers," concludes the analyst. "And . . . malls in the same city may no longer be differentiated by their anchors; they seem to have the same stores. Add to all this the emergence of Internet shopping, and the concept of the shopping mall is beginning to look dated."11 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, power centers, and smaller malls located in medium-size and smaller cities in fast-growing areas such as the Southwest.

The Future of Retailing 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. NEW RETAIL FORMS AND SHORTENING RETAIL LIFE CYCLES

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. 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. 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 massmarket retailers that past success means little in a fiercely competitive and rapidly changing industry."12 Thus, retailers can no longer sit back with a successful formula. To remain successful, they must keep adapting. Many retailing innovations are partially explained by the wheel of retailing concept.13 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 offprice retailers. GROWTH OF NONSTORE RETAILING 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. "Some Americans never face a single crowd at holiday time; they do all of their gift shopping via phone or computer. A few may never even talk to a human being; they can punch in their order and credit card numbers on a Web site and have gifts delivered to recipients. This might remove some of the personal touch from the process, but it sure saves time."14 Although such advances may threaten some traditional retailers, they offer exciting opportunities for others. Most store retailers are now actively exploring direct retailing channels. INCREASING INTERTYPE COMPETITION Today's retailers increasingly face competition from many different forms of retailers. For example, a consumer can buy CDs at specialty music stores, discount music stores, electronics superstores, general merchandise discount stores, video-rental outlets, and through dozens of Web sites. They can buy books at stores 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. When it comes to brand-name appliances, department stores, discount stores, off-price retailers, or electronics superstores all compete for the same customers. Suggests one industry expert, "What we're seeing is cross-shopping—consumers buying one item at Neiman Marcus and another at Wal-Mart or General Dollar."15 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 Best Buy, the electronics superstore, to sell CDs as loss leaders at rock-bottom prices pushed a number of specialty record store chains into bankruptcy.16 Yet the news is not all bad for smaller companies. Many small, independent retailers are thriving. Independents 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. THE RISE OF MEGARETAILERS 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. The megaretailers also are 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 three times those of Procter & Gamble. Wal-Mart can, and often does, use this power to wring concessions from P&G and other suppliers.17

Give your opinion regarding the impact of mega-retailers on other businesses.

GROWING IMPORTANCE OF RETAIL TECHNOLOGY Retail technologies are becoming critically important as competitive tools. Progressive retailers are using computers 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. One innovative scanning system now in use is the shopper scanner, a radarlike system that counts store traffic. When a New Jersey Saks Fifth Avenue used one such system, ShopperTrak, it learned that there was a shopper surge between the hours of 11 a.m. and 3 p.m. To better handle the shopper flow, the store varied lunch hours for its counter clerks. Pier One Imports uses the same system to test, among other things, the impact of newspaper ads on store traffic. By combining traffic and sales data, retailers say they can find out how well the store converts browsers into buyers.18 Perhaps the most startling advances in retailing technology concern the ways in which today's retailers are connecting with customers: 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 GLOBAL EXPANSION OF MAJOR RETAILERS 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 700 stores in 8 countries abroad, sees exciting global potential. Its international division racked up 1999 sales of more than $12 billion, an increase of 63 percent over the previous year. Here's what happened when it recently opened two new stores in Shenzhen, China:20 [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. 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 Britain's Marks and Spencer, Italy's Benetton, France's Carrefour hypermarkets, Sweden's IKEA home furnishings stores, and Japan's Yaohan supermarkets.21 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. 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.

Consider the potential challenges and rewards of global expansion.

RETAIL STORES AS "COMMUNITIES" OR "HANGOUTS" 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. The Discovery Zone, a chain of children's play spaces, offers indoor spaces where kids can go wild without breaking anything and stressed-out parents can exchange stories. Today's bookstores have become part bookstore, part library, and part living room. 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.22 Denver's two Tattered Cover Bookstores host more than 250 events annually, from folk dancing to women's meetings.

Stores as communities: Today's bookstores offer something grander than just ink and paper—they're selling comfort, relaxation, and community.

Wholesaling Wholesaling includes all activities involved in selling goods and services to those buying for resale or business use. We call wholesalers those firms engaged primarily in wholesaling activity. Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers, and other wholesalers. But why are wholesalers used at all? For example, why would a producer use wholesalers rather than selling directly to retailers or consumers? Quite simply, wholesalers are often better at performing one or more of the following channel functions: 

Selling and promoting: Wholesalers' sales forces help manufacturers reach many small customers at a low cost. The wholesaler has more contacts and is often more trusted by the buyer than the distant manufacturer.



Buying and assortment building: Wholesalers can select items and build assortments needed by their customers, thereby saving the consumers much work.



Bulk-breaking: Wholesalers save their customers money by buying in carload lots and breaking bulk (breaking large lots into small quantities).



Warehousing: Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers and customers.



Transportation: Wholesalers can provide quicker delivery to buyers because they are closer than the producers.



Financing: Wholesalers finance their customers by giving credit, and they finance their suppliers by ordering early and paying bills on time.



Risk bearing: Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage, and obsolescence.



Market information: Wholesalers give information to suppliers and customers about competitors, new products, and price developments.



Management services and advice: Wholesalers often help retailers train their salesclerks, improve store layouts and displays, and set up accounting and inventory control systems.

Types of Wholesalers Wholesalers fall into three major groups (see Table 13.3): merchant wholesalers, brokers and agents, and manufacturers' sales branches and offices. Merchant wholesalers are the largest single group of wholesalers, accounting for roughly 50 percent of all wholesaling. Merchant wholesalers include two broad types: full-service wholesalers and limited-service wholesalers. Full-service wholesalers provide a full set of services, whereas the various limited-service wholesalers offer fewer services to their suppliers and customers. The several different types of limited-service wholesalers perform varied specialized functions in the distribution channel. Table 13.3

Type

Major Types of Wholesalers

Description

Merchant wholesalers

Independently owned businesses that take title to the merchandise they handle. In different trades they are called jobbers, distributors, or mill supply houses. Include full-service wholesalers and limited-service wholesalers:

Full-service wholesalers

Provide a full line of services: carrying stock, maintaining a sales force, offering credit, making deliveries, and providing management assistance. There are two types:

Wholesale merchants

Sell primarily to retailers and provide a full range of services. Generalmerchandise wholesalers carry several merchandise lines, whereas general-line wholesalers carry one or two lines in greater depth. Specialty wholesalers specialize in carrying only part of a line. (Examples: health food wholesalers, seafood wholesalers.)

Industrial distributors

Sell to manufacturers rather than to retailers. Provide several services, such as carrying stock, offering credit, and providing delivery. May carry a broad range of merchandise, a general line, or a specialty line.

Limited-service wholesalers

Offer fewer services than full-service wholesalers. Limited-service wholesalers are of several types:

Cash-and-carry wholesalers

Carry a limited line of fast-moving goods and sell to small retailers for cash. Normally do not deliver. Example: A small fish store retailer may drive to a cash-and-carry fish wholesaler, buy fish for cash, and bring the merchandise back to the store.

Truck wholesalers (or truck jobbers)

Perform primarily a selling and delivery function. Carry a limited line of semiperishable merchandise (such as milk, bread, snack foods), which they sell for cash as they make their rounds to supermarkets, small groceries, hospitals, restaurants, factory cafeterias, and hotels.

Drop shippers

Do not carry inventory or handle the product. On receiving an order,

they select a manufacturer, who ships the merchandise directly to the customer. The drop shipper assumes title and risk from the time the order is accepted to its delivery to the customer. They operate in bulk industries, such as coal, lumber, and heavy equipment. Rack jobbers

Serve grocery and drug retailers, mostly in nonfood items. They send delivery trucks to stores, where the delivery people set up toys, paperbacks, hardware items, health and beauty aids, or other items. They price the goods, keep them fresh, set up point-of-purchase displays, and keep inventory records. Rack jobbers retain title to the goods and bill the retailers only for the goods sold to consumers.

Producers' cooperatives

Owned by farmer members and assemble farm produce to sell in local markets. The co-op's profits are distributed to members at the end of the year. They often attempt to improve product quality and promote a co-op brand name, such as Sun Maid raisins, Sunkist oranges, or Diamond walnuts.

Mail-order wholesalers

Send catalogs to retail, industrial, and institutional customers featuring jewelry, cosmetics, specialty foods, and other small items. Maintain no outside sales force. Main customers are businesses in small outlying areas. Orders are filled and sent by mail, truck, or other transportation.

Brokers and agents

Do not take title to goods. Main function is to facilitate buying and selling, for which they earn a commission on the selling price. Generally, specialize by product line or customer types.

Brokers

Chief function is bringing buyers and sellers together and assisting in negotiation. They are paid by the party who hired them, and do not carry inventory, get involved in financing, or assume risk. Examples: food brokers, real estate brokers, insurance brokers, and security brokers.

Agents

Represent either buyers or sellers on a more permanent basis than brokers do. There are several types:

Manufacturers' agents

Represent two or more manufacturers of complementary lines. A formal written agreement with each manufacturer covers pricing, territories, order handling, delivery service and warranties, and commission rates. Often used in such lines as apparel, furniture, and electrical goods. Most manufacturers' agents are small businesses, with only a few skilled salespeople as employees. They are hired by small manufacturers who cannot afford their own field sales forces, and by large manufacturers who use agents to open new territories or to cover territories that cannot support full-time salespeople.

Selling agents

Have contractual authority to sell a manufacturer's entire output. The manufacturer either is not interested in the selling function or feels unqualified. The selling agent serves as a sales department and has significant influence over prices, terms, and conditions of sale. Found in product areas such as textiles, industrial machinery and equipment, coal and coke, chemicals, and metals.

Purchasing agents

Generally have a long-term relationship with buyers and make purchases for them, often receiving, inspecting, warehousing, and shipping the

merchandise to the buyers. They provide helpful market information to clients and help them obtain the best goods and prices available. Commission merchants

Take physical possession of products and negotiate sales. Normally, they are not employed on a long-term basis. Used most often in agricultural marketing by farmers who do not want to sell their own output and do not belong to producers' cooperatives. The commission merchant takes a truckload of commodities to a central market, sells it for the best price, deducts a commission and expenses, and remits the balance to the producer.

Manufacturers' and retailers' branches and offices

Wholesaling operations conducted by sellers or buyers themselves rather than through independent wholesalers. Separate branches and offices can be dedicated to either sales or purchasing.

Sales branches and offices

Set up by manufacturers to improve inventory control, selling, and promotion. Sales branches carry inventory and are found in industries such as lumber and automotive equipment and parts. Sales offices do not carry inventory and are most prominent in dry-goods and notions industries.

Purchasing offices

Perform a role similar to that of brokers or agents but are part of the buyer's organization. Many retailers set up purchasing offices in major market centers such as New York and Chicago.

Brokers and agents differ from merchant wholesalers in two ways: They do not take title to goods, and they perform only a few functions. Like merchant wholesalers, they generally specialize by product line or customer type. A broker brings buyers and sellers together and assists in negotiation. Agents represent buyers or sellers on a more permanent basis. Manufacturers' agents (also called manufacturers' representatives) are the most common type of agent wholesaler. The third major type of wholesaling is that done in manufacturers' sales branches and offices by sellers or buyers themselves rather than through independent wholesalers.

Wholesaler Marketing Decisions Wholesalers have experienced mounting competitive pressures in recent years. They have faced new sources of competition, more demanding customers, new technologies, and more direct-buying programs on the part of large industrial, institutional, and retail buyers. As a result, they have had to improve their strategic decisions on target markets and positioning, and on the marketing mix— product assortments and services, price, promotion, and place (see Figure 13.2).

Figure 13.2

Wholesaler marketing decisions

TARGET MARKET AND POSITIONING DECISION Like retailers, wholesalers must define their target markets and position themselves effectively—they cannot serve everyone. They can choose a target group by size of customer (only large retailers), type of customer (convenience food stores only), need for service (customers who need credit), or other factors. Within the target group, they can identify the more profitable customers, design stronger offers, and build better relationships with them. They can propose automatic reordering systems, set up management-training and advising systems, or even sponsor a voluntary chain. They can discourage less profitable customers by requiring larger orders or adding service charges to smaller ones. MARKETING MIX DECISIONS Like retailers, wholesalers must decide on product assortment and services, prices, promotion, and place. The wholesaler's "product" is the assortment of products and services that it offers. Wholesalers are under great pressure to carry a full line and to stock enough for immediate delivery. But this practice can damage profits. Wholesalers today are cutting down on the number of lines they carry, choosing to carry only the more profitable ones. Wholesalers are also rethinking which services count most in building strong customer relationships and which should be dropped or charged for. The key is to find the mix of services most valued by their target customers. Price is also an important wholesaler decision. Wholesalers usually mark up the cost of goods by a standard percentage—say, 20 percent. Expenses may run 17 percent of the gross margin, leaving a profit margin of 3 percent. In grocery wholesaling, the average profit margin is often less than 2 percent. Wholesalers are trying new pricing approaches. They may cut their margin on some lines in order to win important new customers. They may ask suppliers for special price breaks when they can turn them into an increase in the supplier's sales. Although promotion can be critical to wholesaler success, most wholesalers are not promotion minded. Their use of trade advertising, sales promotion, personal selling, and public relations is largely scattered and unplanned. Many are behind the times in personal selling—they still see selling as a single salesperson talking to a single customer instead of as a team effort to sell, build, and service major accounts. Wholesalers also need to adopt some of the nonpersonal promotion techniques used by retailers. They need to develop an overall promotion strategy and to make greater use of supplier promotion materials and programs.

Finally, place is important—wholesalers must choose their locations and facilities carefully. Wholesalers typically locate in low-rent, low-tax areas and tend to invest little money in their buildings, equipment, and systems. As a result, their materials-handling and order-processing systems are often outdated. In recent years, however, large and progressive wholesalers are reacting to rising costs by investing in automated warehouses and online ordering systems. Orders are fed from the retailer's system directly into the wholesaler's computer, and the items are picked up by mechanical devices and automatically taken to a shipping platform where they are assembled. Most large wholesalers use computers to carry out accounting, billing, inventory control, and forecasting. Modern wholesalers are adapting their services to the needs of target customers and finding cost-reducing methods of doing business.

Merchant wholesalers: A typical Fleming Companies, Inc., wholesale food distribution center. The average Fleming warehouse contains 500,000 square feet of floor space (with 30-foot-high ceilings), carries 16,000 different food items, and serves 150 to 200 retailers within a 500-mile radius.

Trends in Wholesaling As the thriving wholesaling industry moves into the twenty-first century, it faces considerable challenges. The industry remains vulnerable to one of the most enduring trends of the 1990s—fierce resistance to price increases and the winnowing out of suppliers based on cost and quality. Progressive wholesalers constantly watch for better ways to meet the changing needs of their suppliers and target customers. They recognize that, in the long run, their only reason for existence comes from adding value by increasing the efficiency and effectiveness of the entire marketing channel. To achieve this goal, they must constantly improve their services and reduce their costs. McKesson HBOC, the nation's leading wholesaler of pharmaceuticals, health and beauty care, and home health care products, provides an example of progressive wholesaling. To survive, McKesson HBOC had to remain more cost-effective than manufacturers' sales branches. Thus, the company automated its 36 warehouses, established direct computer links with 225 drug manufacturers, designed a computerized accounts-receivable program for pharmacists, and provided drugstores with computer terminals for ordering inventories. Retailers can even use the McKesson HBOC computer system to maintain medical profiles on their customers. Thus, McKesson HBOC has delivered better value to both manufacturers and retail customers.

One study predicts several developments in the wholesaling industry.23 Geographic expansion will require that distributors learn how to compete effectively over wider and more diverse areas. Consolidation will significantly reduce the number of wholesaling firms. Surviving wholesalers will grow larger, primarily through acquisition, merger, and geographic expansion. The trend toward vertical integration, in which manufacturers try to control their market share by owning the intermediaries that bring their goods to market, remains strong. In health care, for instance, drug makers have purchased drug-distribution and pharmacy-management companies. This trend began in 1993 when drug-industry giant Merck acquired Medco Containment Services, a drug-benefits manager and mail-order distributor. The surviving wholesaler-distributors in this sector and in others will be bigger and will provide more services for their customers.24 The distinction between large retailers and large wholesalers continues to blur. Many retailers now operate formats such as wholesale clubs and hypermarkets that perform many wholesale functions. In return, many large wholesalers are setting up their own retailing operations. SuperValu and Flemming, both leading food wholesalers, now operate their own retail outlets. In fact, SuperValu, the nation's largest food wholesaling company, is also the country's eleventh largest food retailer. Almost 30 percent of the company's $17.4 billion in sales comes from its Bigg's, Cub Foods, Shop 'n Save, Farm Fresh, Hornbacher's, Save-A-Lot, Laneco, and Scott's supermarket operations.25

Consider how one prominent firm has successfully gone straight to the consumer.

Wholesalers will continue to increase the services they provide to retailers—retail pricing, cooperative advertising, marketing and management information reports, accounting services, online transactions, and others. Rising costs on the one hand, and the demand for increased services on the other, will put the squeeze on wholesaler profits. Wholesalers who do not find efficient ways to deliver value to their customers will soon drop by the wayside. However, the increased use of computerized, automated, and Internet systems will help wholesalers to contain the costs of ordering, shipping, and inventory holding, boosting their productivity. Finally, facing slow growth in their domestic markets and such developments as the North American Free Trade Agreement, many large wholesalers are now going global. For example, in 1991, McKesson HBOC bought out its Canadian partner, Provigo. The company now receives about 3 percent of its total revenues from Canada. Key Terms retailing All activities involved in selling goods or services directly to final consumers for their personal, nonbusiness use. retailer Business whose sales come primarily from retailing. specialty store A retail store that carries a narrow product line with a deep assortment within that line. department store

A retail organization that carries a wide variety of product lines—typically clothing, home furnishings, and household goods; each line is operated as a separate department managed by specialist buyers or merchandisers. supermarket Large, low-cost, low-margin, high-volume, self-service store that carries a wide variety of food, laundry, and household products. convenience store A small store, located near a residential area, that is open long hours seven days a week and carries a limited line of high-turnover convenience goods. superstore A store almost twice the size of a regular supermarket that carries a large assortment of routinely purchased food and nonfood items and offers services such as dry cleaning, post offices, photo finishing, check cashing, bill paying, lunch counters, car care, and pet care. category killer Giant specialty store that carries a very deep assortment of a particular line and is staffed by knowledgeable employees. discount store A retail institution that sells standard merchandise at lower prices by accepting lower margins and selling at higher volume. off-price retailer Retailer that buys at less-than-regular wholesale prices and sells at less than retail. independent off-price retailer Off-price retailer that is either owned and run by entrepreneurs or is division of larger retail corporation. factory outlet Off-price retailing operation that is owned and operated by a manufacturer and that normally carries the manufacturer's surplus, discontinued, or irregular goods. warehouse club Off-price retailer that sells a limited selection of brand name grocery items, appliances, clothing, and a hodgepodge of other goods at deep discounts to members who pay annual membership fees. chain stores Two or more outlets that are owned and controlled in common, have central buying and merchandising, and sell similar lines of merchandise. franchise A contractual association between a manufacturer, wholesaler, or service organization (a franchiser) and independent businesspeople (franchisees) who buy the right to own and operate one or more units in the franchise system. shopping center A group of retail businesses planned, developed, owned, and managed as a unit.

wheel of retailing concept A concept of retailing that states that new types of retailers usually begin as low-margin, lowprice, low-status operations but later evolve into higher-priced, higher-service operations, eventually becoming like the conventional retailers they replaced. wholesaling All activities involved in selling goods and services to those buying for resale or business use. wholesaler A firm engaged primarily in wholesaling activity. merchant wholesaler Independently owned business that takes title to the merchandise it handles. broker A wholesaler who does not take title to goods and whose function is to bring buyers and sellers together and assist in negotiation. agent A wholesaler who represents buyers or sellers on a relatively permanent basis, performs only a few functions, and does not take title to goods. manufacturer's sales branches and offices Wholesaling by sellers or buyers themselves rather than through independent wholesalers.

What are the two types of merchant wholesalers?

Which type of retailer typically carries the product assortment of narrow product lines?

What are the four broad characteristics used to classify retail stores?

Which type of retailers that can assist customers in every phase of the shopping process resulting in higher costs that are passed on to the customer as higher prices?