Retailer Classification

What you'll learn to do: list the classification characteristics of various types of retailers by ownership

A retailer is the last step of the supply chain. It is where consumers go to obtain goods and services. Without retailers, consumers cannot get what they want, where they want it, and when they want it. To best meet consumers' needs, there are many types of retail formats, reflecting different scopes and strategies. We will cover these formats more in this section.

Structural Organization of Retailers

Think about a can of soup. It's a common item, but its path to a consumer's pantry is long and involved.

The can of soup's journey begins at a manufacturing facility, where it is produced, packaged, placed on a pallet, and warehoused. Once it is ordered by a retailer, it will be shipped to a distribution center, where it will be bundled with other items to be trucked to an individual store.

Before we can send it to an individual store, however, we should figure out what type of store will sell the soup. Will the soup be sold at a grocery store? At a mass merchandiser like Target? At a club store like Sam's Club? At a convenience, drug, or discount store?

All of these retailer formats may stock soup in their inventory, and each format uses different strategies, objectives, and resources to sell items to consumers.

One way to categorize retailers is by their ownership structure. There are five primary ownership types within the retail industry:

1. Corporate chain
2. Independent
3. Wholesaler
4. Franchise
5. Co-op

There is a sixth structure, authorized dealerships, but they are not generally present in food retailing. Instead, they are more frequently seen in home or durable goods, e.g. Hunter-Douglas, Pella Windows, Harley-Davidson, and so on. We will concentrate on items 1–5.

1. Corporate chain

Corporate chains generally have multiple stores, central ownership, and consistent standards for execution. Some national chains have multiple regional banners under which they operate their stores.

For example, The Kroger Company operates Kroger stores, but it also operates under different names in different states: Dillons Food Stores (Kansas), Fred Meyer (Oregon, Washington, Idaho, and Alaska), Fry’s Food & Drug (Arizona), King Sooper (Colorado), Ralph’s (Southern California), Roundy’s (Wisconsin and Illinois) and many others. Despite acquisition by The Kroger Company and later standardization, these stores have retained their names to maintain a connection with their history and local communities.

Corporate chains benefit from operating on a large scale, which allows them to standardize their operations in buying, advertising, and promoting.



Because of this standardization, they typically offer lower prices than independents do, although that ability is fully dependent upon their individual strategies. National chains with which you might be familiar include Wal-Mart, Kroger, and Albertson’s. Examples of prominent regional chains are include H-E-B in Texas, Publix in the Southeast, specifically Florida and Georgia, and Meijer in the Midwest.

2. Independent store

As the name implies, independent stores are independently owned and operated. Owners may have multiple stores and operate similarly, but they do not benefit from the significant scale. Because of their size, independent stores buy product through wholesalers, which apply an upcharge (typically 6%) for warehousing and handling product. This means that independent stores are buying their goods at slightly higher costs than corporate chains get with direct buying. Thus, independent stores are not generally able to compete with lower prices. Instead, they may market themselves as "local,” advertising their place in the community and customizing their product assortment to reflect local tastes, brands, or customs.

3. Wholesaler

As noted above, wholesalers are product distributors focused primarily on supply chain and logistics. However, some wholesalers also own stores and/or license their store brands to independent stores as part of franchise agreements. Those agreements often include clauses saying that the wholesaler will be the exclusive supplier of the independent store. SuperValu Inc. is a prime example of this type of agreement, as they have corporate stores and serve franchised stores under several names, including Cub and Shoppers.

Wholesalers purchase product directly from manufacturers and growers. They re-sell this product to independent grocers, adding an upcharge for warehousing and shipping. Typically, the upcharge is 6%. Wholesalers may also coordinate some advertising and promotion for their customers in an effort to encourage more purchases by independent stores. However, wholesalers are far less efficient than corporate chains because they cannot set pricing or require participation.

4. Franchise

To the consumer, a franchise may look like a corporate chain, as the marketing and available products is usually consistent between franchise stores. The key difference is that while corporate chains are centrally owned, franchise stores are owned by individual business owners who have contracted with a larger company. In exchange for paying a royalty fee for the larger company's trademark, training fees, and a percentage of sales, a franchise owner can run a store under a larger company's brand, thus tapping into that company's customer base. This model is particularly common for large restaurant companies—for example, most Subway and McDonald's stores are franchises. Convenience stores often also follow this model. Popular convenience store franchises include 7-Eleven and Casey's General Store.

5. Co-op

Co-ops occur when several independent retailers join together to consolidate their purchases. This increases their buying power and might result in lower costs from manufacturers and growers. Typically, each member of the co-op has an equal voting right, regardless of the number of stores they own or the size of their business. Co-op members may also work together to purchase advertising and store infrastructure like shelving or software. Wakefern, which operates Shop-Rite stores in New Jersey, is a notable co-op.

Some exceptions to the above ownership structure exist. For example, the IGA, formerly the Independent Grocers Alliance, blurs many of the above distinctions. Like a wholesaler, IGA provides a logistical network to support distribution and the supply chain to independently owned franchise stores under the IGA brand.

Regardless of whether a retailer is a corporate chain, independent store, wholesaler, franchisee, or co-op, the important thing to know is that the ownership structure creates real opportunities and real constraints on the store, affecting how it competes. For example, corporate chains have scale, which allows them to standardize their operations and offer lower prices. However, they do not typically have the same level of service or connection to the local community that independent grocers enjoy. And, co-ops, while working together to reduce their Cost of Goods (COGs) have agreements that give each business a single vote, so members of the co-op with multiple stores are under-represented, reducing their influence and flexibility.

In the next section, we’ll evaluate how specific retailers go to market.

Advantages and Disadvantages of Retailer Types

Consider the number of formats within the retail industry selling food:

• club and warehouse
• mass merchandisers / supercenters / superstores
• convenience and drug
• dollar and discount
• natural and organic
• specialty
• .com and at-home delivery
• traditional grocers

Each of these formats and the retailers within them are targeting a distinct consumer or shopping occasion. They've developed their retail environment to reflect that, in order to provide value. Consider the differences described below.

Club and Warehouse Stores

Club and warehouse stores like BJ’s, Costco, and Sam’s Club offer the lowest price per unit, or the lowest sales price for the number of pieces in a package. Club and warehouse stores accomplish this by offering a limited assortment of products and offering them in bulk sizes, passing savings from the manufacturing and logistical efficiency to their shoppers.

Think about the can of soup we discussed earlier in this module. If the soup is a popular flavor from a leading manufacturer, it might be offered at a club or warehouse store. However, each can won’t be available as a single unit. Instead, the soup will be sold in a multipack, with several cans in the same package. By doing this, the retailer helps the manufacturer by selling products that can be manufactured in the most efficient way, i.e. selling the most popular items in large quantities. By selling in high-count multipacks, the manufacturer reduces its manufacturing and packing costs. These savings are passed through to the retailer and on to the consumer.

Thus, warehouse and club stores are able to offer the lowest “cost per piece,” though they usually have high prices for individual items because they’re selling in bulk. Consider granola bars for example:

• $14.79: Retail price for granola bars
• 49 individual packages
• $0.302 per individual unit

Compare to a grocery store:

• $2.79 retail price for granola bars
• 6 individual packages
• $0.465 per individual unit

That is, each individual granola bar at a warehouse and club store is cheaper than what can generally be found in other channels, but the price for the total multipack is relatively high.

Generally, club and warehouse stores carry only about 10% of the total number of products available in a typical grocery store (~4,000 vs. ~40,000).^[2] However, they prioritize the strongest brands and best-selling items. Furthermore, club and warehouse stores also rotate new products into distribution frequently to create a treasure-hunt-like experience for shoppers, rewarding their loyalty.

Members pay an annual membership fee for the opportunity to shop in warehouse and club stores. In fact, most club and warehouse stores do not earn any profit from the sale of products. Instead, they generate profit through the sale of memberships. Costco is an example of this. Their leadership requires that the profit margin on all products be capped at 14%, covering only the cost of operations. Memberships provide all profits for the company.

Mass Merchandisers / Supercenters

Mass merchandise retailers, or supercenters like Wal-Mart, Target, and Kmart, provide shoppers with a one-stop shop by offering multiple categories, a broad selection, and deep inventory. This creates contact efficiency, allowing shoppers to buy what they want with a smaller number of store visits and transactions. This contact efficiency reflects adaptations to consumer behavior and the resulting market forces. Consumers want to maximize their time and minimize their work. Historically, mass merchandisers have benefited from higher shopping traffic due to the breadth of the categories and services they offer. However, this traffic has slowed since 2014. We will discuss this trend in greater depth in a coming section.

The scale of mass merchandisers allows them to negotiate aggressively with suppliers, passing discounts to shoppers through promotions and lower everyday prices. Please note, however, that the Federal Trade Commission requires that manufacturers be “fair and equitable” in their pricing across all channels. They cannot pass discounts to specific retailers, in the form of favorable pricing, unless there are real efficiencies realized in doing business with that retailer.

Thus, the everyday low pricing (EDLP) many mass merchandisers offer is not a reflection of better pricing from the manufacturer. Instead, mass merchandisers have adopted a strategy where they bundle all discounts and apply them across the projected annual sales volume so they can discount each item everyday. Consider the following:

• $2.40/unit—wholesale price of item X
• $2.00/unit—wholesale price of item X when on sale
• $0.40/unit—wholesale discount of unit when item X when on sale
• 40/60 Mix—percent of total manufacturer volume sold when item X is not on sale ("Off-Promotion") or on sale ("On-Promotion")

Thus, a mass merchandiser with an EDLP strategy would likely be offered item X at $2.16 per unit on every order:

• $0.40 discount per unit x 60% of volume sold “On-Promotion” = $0.24 discount per unit
• $2.40 - $0.24 = $2.16 per unit

This means that the mass merchandiser is buying the product at $2.16/unit and potentially pricing it on-shelf at $2.99 with 27.8% margins.

• $2.99 - $2.16 = $0.83
• $0.83/ $2.99 = 27.8%

By comparison, a competitor in another channel will purchase the product at $2.40, which means that their shelf price, assuming a 27.1% margin, will be $3.29. However, the $0.30 difference in price ($3.29 - $2.99) is made up when the competitor is able to put the item on sale. Then, the mass merchandiser might offer the item at $2.79 at a better 28.3% margin.

Convenience and Drug Stores

Convenience and drug stores are opportunistic food retailers, offering single-serve portions, smaller package sizes, and high velocity items for fill-in shopping trips. Generally, they stock very limited items and quantities, predominantly sticking to staples like milk or shelf-stable snacks, meal replacements, and beverages. Shoppers in these formats pay higher prices for convenience. Thinking back to our soup example, it’s very likely that our item might be replaced on-shelf with a comparable item with more convenience, such as a product that can be microwaved or a product that is a full meal replacement.

Discount and Dollar Stores

Discount and dollar stores, such as Aldi’s, Dollar General, and Dollar Tree, are no-frills value formats that primarily stock shelf-stable, packaged foods. Because their shoppers are particularly value-oriented, discount and dollar stores typically offer private label products or items from secondary and tertiary brands. When offering products from leading national brands, these items are generally "close-dated," meaning that they're approaching their expiration date and were likely purchased at a significant discount. Staffing is minimal at these stores, and units on shelf are frequently presented in their shipping case, unlike the cleaner and more attractive presentation at other retailers.

Natural and Organic Stores

Natural and organic Stores, e.g. Whole Foods, Sprouts and Trader Joe’s, cater to health-conscious shoppers. While all-natural and organic foods have become more mainstream, they are generally priced at a significant premium to traditional grocery products. Some retailers in this space do offer traditional items, such as Cheerios at Whole Foods, while others limit their assortment exclusively to items certified as organic or all-natural. Again, thinking of our soup example, it is possible that the soup would be shelved in some natural or organic stores. However, it would not likely have the same shelf presence or focus that it warrants in other channels, especially traditional grocery.

Specialty Retailers

Specialty retailers are on the rise as an alternative to mass merchandisers and online retailers. Their focus is on customization and customer service. Examples of this are butchers and bakers. Ethnic grocers, which shelve unique products not generally found in other outlets, are also specialty retailers. Generally, these retailers command higher prices to offset high input and labor costs.

Online Retailers

There are many retailers who have developed their .com capabilities to complement their brick and mortar stores. Wal-Mart, for example, is in the midst of expanding at-home delivery for orders through their website, sending the product from their nearest location. There has also been an emergence of direct-to-consumer at-home delivery services like Boxed.com, Graze, and NatureBox. These companies have similar models, sending an assortment of products to the shopper’s home at a set interval. Similarly, companies like Blue Apron, Hello Fresh, Sun Basket and Plated send meal preparation kits to their subscribers. These players are particularly noteworthy because they reflect a new trend within retail, fulfilling a consumer need for convenience by skipping the shopping trip entirely.

Traditional Grocers

Traditional Grocers are the primary retail outlet for food sales, including grocery stores and supermarkets. Many of these stores are undergoing change to increase perimeter departments, reflecting consumer interest in fresh and specialty items. These areas have higher labor costs, but are potentially areas of differentiation for the retailer.

Typically, grocery stores operate with a high-low promotional model, meaning that they advertise weekly specials to drive traffic. They pulse discounts on and off to encourage consumers to take advantage of the offer now, making consumers increase their number of purchases. As we showed earlier, a typical item may have a cost structure like this:

• $2.40/unit—wholesale price of item X
• $2.00/unit—wholesale price of item X when on sale
• $0.40/unit—wholesale discount of unit when item X when on sale
• 40/60 Mix—percent of total manufacturer volume sold when item X is not on sale ("Off-Promotion") or on sale ("On-Promotion")

Thus, a traditional grocer will purchase ~40% of their annual inventory at $2.40, while buying ~60% at $2.00. This means that their weighted average cost of goods is $2.16. (You should note that this is the same price as the discounted rate the mass merchandise retailers receive “everyday.”)

• $2.40 x 40% = $0.96
• $2.00 x 60% = $1.20
• Weighted cost = $2.16

As such, a traditional grocer will likely offer the item on-shelf at $3.29, assuming a 27.1% margin, every day UNLESS they have a sale promotion. During the sale period, they’ll offer the item at $2.79 with 28.3% margins. Given the scope of products offered in a traditional grocery store (approximately 40,000 products), these retailers are able to consistently pulse promotions weekly to drive traffic to their stores.

As you can see, each of these formats provides unique value to the consumer. For example:

• Warehouse and club stores offer the greatest value, but they require annual memberships and have relatively high item prices.
• Mass merchandisers offer everyday low prices, but the breadth of items they carry, up to 150,000, make their stores busy and difficult to shop at. Furthermore, traditional grocery stores will offer better prices on promoted items during sales.
• Convenience and drug Stores offer convenience, but have very limited selection.
• Discount and dollar stores offer low prices, but generally offer no-frills shopping environments and less well-known brands.
• Natural/organic and specialty retailers offer an array of unique items, though they generally have higher prices.
• Traditional grocers carry a wide assortment of foodstuffs and have competitive pricing. But, they do not offer the lowest prices (like club and warehouse stores) or most convenience (like mass merchandisers).

Thus, each format targets specific consumers and types of shopping trips. In order to provide value, their retail environments and strategies reflect this.

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