Theories of Retail

Development

 Retail development can also be

looked at from the theoretical
perspective. No single theory can be
universally applicable or acceptable.
The application of each theory varies
from market to market, depending on
the level of maturity and the socioeconomic conditions in that market.

1. Environmental where a change in

retail is attributed to the change in
the environment in which the
retailers operate.
2. Cyclical- where change follows a
pattern and phases can have
definite
identifiable
attributes
associated with them.
3. Conflictual where the competition
or conflict between two opposite
types of retailers, leads to a new
format being developed.

Environmental Theory
Darwins theory of natural selection has
been popularized by the phrase survival
of the fittest.
Retail institutions are economic entities
and retailers confront an environment
which is made up of customers,
competitors and changing technology.
This
environment
can
alter
the
profitability of a single retail store as well
as of clusters and centers.

 The birth, success or decline of different forms of

retail enterprises is many a times attributed to the
business environment.
Ex decline of departmental stores in the western
markets is attributed to the general inability of
those retailers to react quickly and positively to
environmental change.
The retail institutions that are keenly aware of their
operating environment and which react without
delay, gain from the change.
Darwinian approach of survival of the fittest, those
retailers that successfully adapt technological,
economic, demographic and legal changes are the
ones that are most likely to grow and prosper.
The ability to adapt change, successfully is at the
core of this theory.

Cyclical Theory
The most well known theory of retail
evolution is The wheel of Retailing theory.
This theory described by Mc Nair, helps us
understand retail changes.
This theory suggest that retail innovators
often first appear as low price operators
with a low cost structure and low profit
margin requirements, offering some real
advantages, such as specific merchandise,
which enables them to take customers
away from established competitors.

 As they prosper, they develop their

businesses, offering a greater range
or
acquiring
more
expensive
facilities, but this can mean that they
loose the focus that was so important
when they entered the market.
This in turn, leaves room for others to
enter and repeat the process. They
then become vulnerable to new
discounters and low cost structures
that take their place along the wheel.

Cyclical Theory

Wheel of Retailing
Stage 1:Low Price, Low Service, limited product

offerings.
Stage 2: Improve merchandise offering, better
service, higher prices
Stage 3: Conservatism, declining ROI, increased
competition

The Wheel of Retailing

Vulnerability
Phase

Entry Phase

Trading-up
Phase
Source: http://www.emeraldinsight.com/fig/0701030703001.png

Conflict Theory
Conflict always exists between operators
of similar formats or within broad retail
categories.
It is believed that retail innovation does
not necessarily reduce the number of
formats available to the consumer;
instead, it leads to the development of
more formats.
Retailing thus evolves through a dialectic
process, i.e., the blending of two
opposites to create a new format.

 Thesis Individual retailers

Antithesis Department
(opposite of thesis)

stores

Synthesis

Supermarkets
&
Hypermarkets (blending of thesis &
antithesis)

CONFLICTUAL THEORY

Anti-thesis

Thesis

Department Stores

Individual retailers

Synthesis

Hypermarkets and
Supermarkets
Retailing evolves through blending of two opposites to create
a new format.

Retail Life Cycle

Retail organizations pass through identifiable
stages of innovation, development, maturity
and decline.
Stages of Retail Life Cycle:
Innovation
Accelerated Growth
Maturity
Decline

Innovation
Differentiated services, product and
format.
Few competitors
Rapid growth
Moderate profit

Accelerated Growth

Increase in sales
Emergence of competitors
Organization try to attain leadership
Higher investment
Cost pressure

Maturity
Increased competition
Decrease in growth rate
Repositioning: strategy, format &
merchandise mix

Decline

Loses Competitive edge

Negative rate of growth
Profitability decline
Cost run higher

Retail Life Cycle

Stages in the Buying Process

4-17

 The
buying
process
(the
steps
consumers go through when buying a
product or service) begins when
customers recognize an unsatisfied need.
The process ends when customers make a
purchase, use the product, and then decide
whether the product satisfies their needs
during the post purchase evaluation stage.
Retailers attempt to influence consumers as
they go through the buying process to
encourage them to buy the retailers
merchandise and services.

 Customers may not go through the

stages in the same order as
presented. The amount of time spent
at each stage may differ depending
on the type of decision being made.

Need Recognition
The buying process is triggered when
people recognize they have an
unsatisfied need.
Unsatisfied needs arise when a
customer's
desired
level
of
satisfaction differs from his or her
present level of satisfaction.
Visiting stores, surfing the Internet,
and
purchasing
products
are
approaches to satisfying different
types of needs.

Types of Needs
The needs motivating customers to
go
shopping
and
purchase
merchandise can be classified as
utilitarian or hedonic.
Utilitarian needs are focused on
accomplishing a specific task.
Hedonic needs are consumers
needs
for
an
entertaining,
emotional
and
recreational
experience.

 Successful
retailers
attempt
to
satisfy both the utilitarian and
hedonic needs of their customers.
For utilitarian shoppers, retailers
make the shopping experience easy
and effortless. For hedonic shoppers,
retailers attempt to provide a more
stimulating and social experience.

Conflicting Needs
Most customers have multiple needs. Moreover,
these needs often conflict. Typically customers
make tradeoffs between their conflicting needs.
Because needs cannot be satisfied in one store
or by one product, consumers may appear
inconsistent in their shopping behavior.
The pattern of buying both premium and lowpriced merchandise or patronizing expensive,
status-oriented retailers and price-oriented
retailers is called cross shopping.

Stimulating Need
Recognition
Customers must recognize unsatisfied needs before they
are motivated to visit a store and buy merchandise.
Sometimes these needs are stimulated by an event in a
persons life.
Retailers use a variety of approaches to stimulate problem
recognition and motivate customers to visit their stores and
buy merchandise.
Advertising, direct mail, publicity, and special events
communicate the availability of merchandise or special
prices.
Within the store, visual merchandising and salespeople can
stimulate problem recognition.
One of the oldest methods for stimulating needs and
attracting customers is still one of the most effective using
store displays facing high traffic sides of the store.

Information Search
Once customers identify a need, they
may seek information about retailers
and/or products to help them satisfy
the need.

1.Amount of Information Searched

In general, the amount of information sought depends on the value
customers feel they'll gain from searching versus the cost of
searching.
The value of the search is how it improves the customer's purchase
decision. The cost of the search includes both time and money.
Factors influencing the amount of information searched for include
(1) the nature and use of the product being purchased,
(2) characteristics of the individual customer, and
(3) aspects of the market and buying situation in which the
purchase is made.
Marketplace and situational factors affecting information search
include
(1) the number of competing brands and retail outlets, and
(2) the time pressure under which the purchase must be made.
When competition is greater and there are more alternatives to
consider, the amount of information searched for may increase. The
amount decreases as time pressure increases.

2. Sources of Information
Customers
have
two
sources
of
information: internal and external.
Internal sources, are information in
a customers memory such as the
names, images, and past experiences
with different stores.
External sources are information
provided by ads and other people.
When customers feel that their internal
information is inadequate, they turn to
external information sources.

3. Reducing the Information Search

The retailer's objective at this stage of the buying
process is to limit the customer's information
search to its store or website. Each element of the
retailing mix can be used to achieve this objective.
First, retailers must provide a good selection of
merchandise so customers can find something to
satisfy their needs within the store.
Services provided by retailers can also limit the
search.
Everyday low pricing is another way retailers
increase the chance that customers will buy in their
store and not search for a better price elsewhere.

Evaluation of Alternatives: The Multiattribute Model

The multi-attribute attitude model provides
a useful way for summarizing how
customers use the information they have
about alternative products, evaluate the
alternatives, and select the one that best
satisfies their needs.
The model is designed to predict a
customer's evaluation of a product or
retailer based on (1) its performance on
relevant attributes and (2) the importance
of those attributes to the customer.

Purchasing the
Merchandise
Customers don't always purchase a brand or item of
merchandise with the highest overall evaluation. The item
offering the greatest benefits may not be available in the
store or the customer may feel that the risks outweigh the
potential benefits.
Some of steps that retailers take to increase the chances
that customers can easily convert their positive
merchandise evaluations into purchases are: (1) have a
complete assortment for customers to buy; (2) reduce the
risk of purchasing by offering liberal return policies or
refunds if the same merchandise is available at a lower
price from another retailer; (3) offer credit; (4) make it easy
to purchase merchandise by having convenient checkout
terminals; and (5) reduce the actual waiting time in lines at
checkout terminals.

Post-purchase
Evaluation
The buying process does not end when a customer
purchases a product. After making a purchase, the
customer consumes or uses the product and then
evaluates the experience to determine whether it
was satisfactory or unsatisfactory.
Satisfaction is a post-consumption evaluation of
how well a store or product meets or exceeds
customer expectations.
The post-purchase evaluation becomes part of the
customers internal information that affects future
store and product decisions.
Consistently high levels of satisfaction build store
loyalty an important source of competitive
advantage for retailers.

Types Of Buying Decisions

Three types of customer decisionmaking processes are extended

problem solving, limited problem
solving
and
habitual
decisionmaking.

Extended Problem Solving

Extended problem solving is a purchase
decision process in which customers devote
considerable time and effort to analyzing
alternatives. Customers typically engage in
extended problem solving when the purchase
decision involves a lot of risk and uncertainty.
There are many types of risks, which include
financial risk, physical risks, or social risks.
Consumers engage in extended problem
solving when they are making buying decisions
to satisfy an important need or when they have
little knowledge about the product or service.

Extended Problem Solving

Consumers devote time and effort analyzing
alternatives
Financial risks purchasing expensive products or
services
Physical risks purchases that will affect consumers
health and safety
Social risks consumers will believe product will
affect how others view them

4-34

What Retailers Need to do for Customers Engaged in

Extended Problem Solving

Provide a Lot Information
-Use Salespeople rather than advertising to
communication
with customers

Reduce the Risks

-Offer Guarantees
-Return Privileges
Royalty-Free/CORBIS

4-35

Limited Problem Solving

Limited problem solving is a purchase decision process
involving a moderate amount of effort and time. Customers
engage in this type of buying process when they have had
some prior experience with the product or service and their
risk is moderate.
In these situations, customers tend to rely more on personal
knowledge than on external information. They usually choose a
retailer they have shopped with before and select merchandise
they have bought in the past.
The majority of customer decision making involves limited
problem solving.
One common type of limited problem solving is impulse
buying, which is a buying decision made by customers on
the spot after seeing the merchandise.
Retailers encourage impulse buying behavior by using
prominent displays to attract customer attention and stimulate
a purchase decision based on little analysis.

Limited Problem Solving

urchase decisions process involving moderate amount of effort and time

Customers engage in
this when they have had
prior experience with
products or services
Customers rely more on
personal knowledge
Majority of customer
decisions involve limited
problem solving
4-37

(c) Brand X Pictures/PunchStock

What do Retailers Need to do for Customers Engaged in

Limited Problem Solving?

It depends
If the Customer Is Coming to You, Provide a
Positive Experience and Create Loyalty
Make Sure Customer is Satisfied
Provide Good Service, Assortments,
value
Offer Rewards to Convert to Loyal
Customer
If the Customer Goes to Your Competitors
Store, Change Behavior
Offer More Convenient Locations, Better
Service and Assortments

4-38

Encouraging Impulse Buying

4-39

PhotoLink/Getty Images

Have Salespeople Suggest

Add-ons
Have Complementary
Merchandise Displayed Near
Product of Interest
Put Merchandise Where
Customers Are Waiting

Habitual Decision Making

Habitual decision making is a purchase
decision process involving little or no conscious
effort. This decision process is used when
decisions arent very important to customers and
involve familiar merchandise they have bought
in the past.
Brand loyalty and store loyalty are examples of
habitual decision making. Brand loyalty occurs
when customers like and consistently buy a
specific brand in a product category.
Store loyalty means that customers like
and habitually visit the same store to purchase a
type of merchandise.

Customer Loyalty
Brand Loyalty
Committed to a Specific Brand
Reluctant to Switch to a Different Brand
May Switch Retailers to Buy Brand

Store Loyalty
Committed to a Specific Retailer
Reluctant to Switch Retailers

4-41

What Retailers Need to do for Customers to

Engage in Habitual Decision Making

If the customer habitually comes to you,

reinforce behavior
Make sure merchandise in stock
Provide good service
Offer rewards to loyal customer
If the customer goes to your competitors
store, break the habit
Offer special promotions

4-42

Social Factors Influencing Buying

Decisions
Buying decisions are affected by the
customers social environment the
customers family, reference groups,
and culture.

Family
Many purchase decisions are made for products that
the entire family will consume or use. Retailers must
understand how families make purchase decisions and
how various family members influence these decisions.
When families make purchase decisions, they often
consider the needs of all family members. In some
situations, all family members may participate in the
decisionmaking process. In others, one member of the
family may assume the role of making the purchase
decision.
Children play an important role in family buying
decisions.
Retailers can attract consumers who shop with other
family members by satisfying the needs of all family
members.

Reference Groups
A reference group is one or more
people that a person uses as a basis of
comparison for their beliefs, feelings,
and behaviors. A consumer might have
a number of different reference groups,
although the most important reference
group is the family.
By identifying and affiliating with
reference groups, customers create,
enhance, and maintain their self-image.

Culture
Culture is the beliefs, morals, and values
shared by most members of a society.
As retailers expand beyond their domestic
markets, they need to be sensitive to how
cultural values affect customer needs and
shopping behavior.
Subcultures are distinctive groups of
people within a culture. Members of a
subculture share some customs and norms with
the overall society but also have some unique
perspectives. Subcultures can be based on
geography, age, ethnicity, or lifestyle.

RETAIL MARKET
STRATEGY

A retail strategy is a statement

identifying
1) the retailer's target market
2) the format the retailer plans to use
to satisfy the target market's needs,
and
3) the bases upon which the retailer
plans
to
build
a
sustainable
competitive advantage.

 The target market is the market

segments(s) toward which the retailer
plans to focus its resources and retail mix.
A retail format is the retailer's type
of retail mix (nature of merchandise and
services
offered,
pricing
policy,
advertising and promotion programs,
approach to store design and visual
merchandising, and typical location).
A sustainable competitive advantage
is an advantage over competition that
can be maintained over a long time.

Target Market and Retail Format

The retailing concept is a management

orientation that focuses a retailer on
determining the needs of its target market
and satisfying those needs more effectively
and efficiently than its competitors.
The selection of a target market focuses
the retailer on a group of consumers whose
needs it will attempt to satisfy.
The selection of a retail format outlines the
retail mix to be used to satisfy needs of
customers in the target market.

Building a Sustainable Competitive Advantage

The final element in a retail strategy is the retailer's
approach to building sustainable competitive advantage.
Some advantages are sustainable over a long period of
time while others can be duplicated by competitors
almost
immediately.
Establishing
a
competitive
advantage means that a retailer builds a wall around its
position in the retail market.
Over time, all advantages will be eroded due to these
competitive forces.
Seven important opportunities for retailers to develop
sustainable competitive advantages are (1) customer
loyalty, (2) location, (3) human resource management,
(4) distribution and information systems, (5) Unique
Merchandise, (6) Vendor Relations and (7) customer
service.

Growth Strategies
Four types of growth opportunities
that retailers may pursue are: market
penetration, market expansion, retail
format
development,
and
diversification.

Market Penetration
A market penetration opportunity involves
directing
investments
toward
existing
customers using the present retailing format.
Approaches for increasing market penetration
include attracting new customers by opening
more stores in the target market or opening the
stores for longer hours.
Cross-selling means that sales associates
in
one
department
attempt
to
sell
complementary
merchandise
from
other
departments to their customers. More cross
selling increases sales from existing customers.

Market Expansion
A market expansion opportunity
employs
the
existing
retailing
format in new market segments.

Retail Format Development

A retail format development opportunity
involves offering customers a new retail
format--a format involving a different retail
mix--to the same target market.
Adjusting the type of merchandise or services
offered typically involves a small investment,
while providing an entirely different format,
such as a store-based retailer going into
electronic retailing, require a much larger and
riskier investment.

Diversification
A diversification opportunity involves a new
retail format directed toward a market segment that
is not presently being served.
1. Related versus unrelated diversification.
2. Vertical integration
Vertical integration is diversification by retailers
into wholesaling or manufacturing.
When a retailer integrates by purchasing or
otherwise
partnering
with
distribution
or
manufacturing concerns, it is engaging in backward
integration.
Some manufacturers and designers forwardintegrate into retailing.

Global Growth Opportunities

International expansion is one form of a
market expansion strategy. The most
commonly targeted regions are Mexico,
Latin America, Europe, China, and Japan.
International expansion is risky because
retailers using this growth strategy must
deal with differences in government
regulations, cultural traditions, different
supply
chain
considerations,
and
language.

Keys to Success
Four characteristics of retailers that
have
successfully
exploited
international growth opportunities
are:
(1)
globally
sustainable
competitive
advantage,
(2)
adaptability, (3) global culture, and
(4) deep pockets.

1. Globally sustainable competitive

advantage

Entry into nondomestic markets is

most successful when the expansion
opportunity is consistent with the
retailer's core bases of competitive
advantage.

2. Adaptability
While successful global retailers build on
their core competencies, they also recognize
cultural differences and adapt their core
strategy to the needs of local markets.
Government regulations and cultural values
also
affect
store
operations.
Some
differences, such as holidays, hours of
operations, and regulations governing part
time employees and terminations are easy to
identify. Other factors require a deeper
understanding.

3. Global Culture
To be global, one has to think global.
It is not sufficient to transplant a
home-country
culture
and
infrastructure into another country.

4. Deep Pockets
Expansion into international markets
requires a long-term commitment
and considerable up front planning.

The Strategic Retail Planning Process

The strategic retail planning

process is the set of steps that a
retailer goes through to develop a
strategic retail plan.
It describes how retailers select
target market segments, determine
the appropriate retail format, and
build
sustainable
competitive
advantages.

Step 1: Define the Business Mission

The mission statement is a broad
description of a retailer's objectives and the
scope of activities it plans to undertake. It
should define the general nature of the target
segments and retail formats that the firm will
consider.
In developing the mission statement, managers
must answer five questions: (1) What business
are we in? (2) What should be our business in
the future? (3) Who are our customers? (4)
What are our capabilities? (5) What do we want
to accomplish?

Step 2: Conduct a
Situation Audit

A situation audit is an analysis of

the opportunities and threats in the
retail environment and the strengths
and weaknesses of the retail
business relative to its competitors.
A situation audit is composed of
three
elements:
market
attractiveness analysis, competitor
analysis, and self-analysis.

Step 3: Identify Strategic Opportunities

After completing the situation audit,

the next step is to identify
opportunities for increasing retail
sales. The strategic alternatives are
defined in terms of the squares in the
retail market matrix.

Step 4: Evaluate Strategic Opportunities

The evaluation of strategic opportunities identified
in the situation audit determines the retailer's
potential to establish a sustainable competitive
advantage and reap long-term profits from the
opportunities under evaluation.
Thus, a retailer must focus on opportunities that
utilize its strengths and its area of competitive
advantage.
Both the market attractiveness and the strengths
and weaknesses of the retailer need to be
considered in evaluating strategic opportunities.
The greatest investments should be made in
market opportunities where the retailer has a
strong competitive position.

Step 5: Establish Specific

Objectives and
Allocate Resources

The retailer's overall objective is included in the

mission statement. The specific objectives are goals
against which progress toward the overall objective
can be measured.
Specific objectives have three components:
(1) the performance sought, including a numerical index
against which progress may be measured,
(2) a time frame within which the goal is to be
achieved, and
(3) the level of investment needed to achieve the
objective.
Typically, the performance levels are financial criteria
such as return on investment, sales, or profits.

Step 6: Develop a Retail Mix to

Implement Strategy
The next step is to develop a retail
mix for each opportunity in which
investment will be made and to
control and evaluate performance.

Step 7: Evaluate Performance

and Make Adjustments
The final step in the planning process is
evaluating the results of the strategy and
implementation program.
If the retailer fails to meet its objectives,
reanalysis is needed. This reanalysis starts
with reviewing the implementation programs;
but it may indicate that the strategy (or even
the
mission
statement)
needs
to
be
reconsidered. This conclusion would result in
starting a new planning process, including a
new situation audit.