Retailing

What you'll learn to do: Describe retailing, the entities involved, and the impact of decisions on a retail business

Retailing is important for business students to understand for two main reasons. First, almost all product channel structures conclude with a retailer. This means that no matter where a product starts its journey, it almost always ends up at a retailer. While products may be produced by a manufacture, pass through a wholesaler, or involve transactions with brokers or agents, retailers are the connection to the consumers. Second, retail offers an immense number of job opportunities. Today in the U.S., there are 3,793,621 retail establishments that support 42 million jobs. Retail also contributes $2.6 trillion to the U.S. gross domestic product.^[1] You can view the number of jobs and retail presence in your state at the National Retail Federation (NRF).

Who are these retailers who provide so many jobs for our economy? The NRF posts an annual list of the top one hundred retailers by retail sales. The top ten are listed in the table below.

Rank	Retailer	U.S. Headquarters	2016 Retail Sales
1	Walmart Stores	Bentonville, Arkansas	$353,108,000
2	The Kroger Co.	Cincinnati, Ohio	$103,878,000
3	Costco	Issaquah, Washington	$83,545,000
4	The Home Depot	Atlanta, Georgia	$79,297,000
5	Walgreen	Deerfield, Illinois	$76,604,000
6	Target	Minneapolis, Minnesota	$73,226,000
7	CVS Caremark	Woonsocket, Rhode Island	$72,151,000
8	Amazon.com	Seatte, Washington	$61,619,000
9	Albertsons	Boise, Idaho	$58,443,000
10	Lowe's Companies	Mooresville, North Carolina	$57,486,000

In this section you’ll learn more about the retail channel and the strategies that drive its growth.

Retailing

Retailing involves all activities required to market consumer goods and services to ultimate consumers who are purchasing for individual or family needs.

By definition, B2B purchases are not included in the retail channel since they are not made for individual or family needs. In practice this can be confusing because many retail outlets do serve both consumers and business customers—like Home Depot, which has a Pro Xtra program for selling directly to builders and contractors. Generally, retailers that have a significant B2B or wholesale business report these numbers separately in their financial statements, acknowledging that they are separate lines of business within the same company. Those with a pure retail emphasis do not seek to exclude business purchasers. They simply focus their offering to appeal to individual consumers, knowing that some businesses may also choose to purchase from them.

We typically think of a store when we think of a retail sale, even though retail sales occur in other places and settings. For instance, they can be made by a Pampered Chef salesperson in someone’s home. Retail sales also happen online, through catalogs, by automatic vending machines, and in hotels and restaurants. Nonetheless, despite tremendous growth in both nontraditional retail outlets and online sales, most retail sales still take place in brick-and-mortar stores.

The Retail Industry

The term retail refers to the sale of goods and services to the public for consumption.  Retailing involves all activities required to market consumer goods and services to consumers who are purchasing for individual or family needs through a point of purchase.

The retail industry covers an enormous range of consumer needs. According to the National Retail Federation, there are sixteen major segments in the industry. As shown below, these categories are not necessarily store types, but they show the breadth of products offered through the retail chain.^[6]

Category	Sample Retailers
Auto Aftermarket	Advance Auto Parts, AutoZone, Pep Boys
Department Stores	Kohl's, Macy's, Nordstrom, Saks Fifth Avenue
Drug Stores	CVS, Rite Aid, Walgreen's
Entertainment and Consumer Electronics	AT&T, Apple, Barnes & Noble, BestBuy, GameStop, Toys R Us
Footwear	DSW, Foot Locker
General Apparel	Forever 21, Gap, H&M, Old Navy, TJ Maxx, Urban Outfitters
Health and Beauty	Bath and Body Works, Sally Beauty, Sephora, Ulta
Hobby and Craft	Michael's, Guitar Center, Jo-Ann Fabrics
Home Improvement and Hardware	Home Depot, Ikea, Pier 1 Imports, True Value, Williams-Sonoma
Jewelry and Accessories	Charming Charlie's, Coach, Piercing Pagoda, Signet, Tiffany & Co.
Mass Merchants	Amazon, Costco, Target, Walmart
Restaurants	Chipotle, KFC, McDonald's, Olive Garden, Starbucks
Small-Format Value	Big Lots, Dollar General, Dollar Tree, Family Dollar
Sporting Goods and Outdoor	Bass Pro Shops, Cabela's, Dick's, Sports Authority, REI
Supermarkets	Albertson's, Kroger, QFC, Safeway, Publix, Whole Foods
Women's Apparel	Ann Taylor, Lane Bryant, Talbot's, Victoria's Secret

The retail industry is designed to create contact efficiency—allowing shoppers to buy what they want with a smaller number of transactions. This design doesn't come from a master retail plan; it's driven by market forces. When a retailer sees an opportunity to expand its offering to increase purchases from customers in one location, it will take advantage of it. For example, when Barnes & Noble adds Starbucks coffee shops to its locations, customers visit more frequently and stay longer, increasing the likelihood of additional purchases. Costco recognized that busy holiday shoppers would rather buy a Christmas tree as part of a larger convenience purchase than have a focused (and less convenient) buying experience at a Christmas tree lot. Such opportunities cause retailers to expand their offerings, creating greater contact efficiency for consumers.

Given this logic and opportunity, why doesn't every retailer become a Walmart Super Store filled with every possible product? Like all organizations that market effectively, retailers shape their offerings to a target buyer and must consider the particular shopping experience a buyer is seeking in that moment or context. One experience isn't right for everyone at the same time; nor are all "experiences" compatible. For example, a buyer is expecting a different experience when she fills her car's gas tank and when she stays at a luxury resort.

Retailers define their target buyer segments, identify the service outputs that those segments require, and match their offerings to provide value to each target segment.

We can understand this better by looking at Zara and Forever 21. Both of these retailers offer fast fashion and appeal directly to several markets from pre-teen to young adult, ages 12-24. They generally cycle through products fairly quickly making it appealing for a customer to purchase right away or else risk missing out on the item.

Beyond the distinctions in the products they provide, there are structural differences among retailers that influence their strategies and results. One of the reasons the retail industry is so large and powerful is its diversity. Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in their ownership and management structures.

The U.S. Census Bureau indicates that 94.5 percent of retail companies have only one location or store.^[7] More than one million retail businesses in the U.S. have fewer than one hundred employees. Most retail outlets are small and have weekly sales of just a few hundred dollars. A few are extremely large, having sales of $500,000 or more on a single day. In fact, on special sale days, some stores exceed $1 million in sales.

This diversity in size and earnings is reflected in the range of different ownership and management structures, discussed below.

Department Stores

Department stores are characterized by their wide product mixes. That is, they carry many different types of merchandise, which may include hardware, clothing, and appliances. Each type of merchandise is typically displayed in a different section or department within the store. The depth of the product mix depends on the store, but department stores' primary distinction is the ability to provide a wide range of products within a single store. For example, people shopping at Macy's can buy clothing for a woman, a man, and children, as well as housewares such as dishes and luggage.

Chain Stores

The 1920s saw the evolution of the chain store movement. Because chains were so large, they were able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lowered their cost compared to costs of single unit retailers. As a result, they could set retail prices that were lower than those of their small competitors and thereby increase their share of the market. Furthermore, chains were able to attract many customers because of their convenient locations, made possible by their financial resources and expertise in selecting locations.

Supermarkets

Supermarkets evolved in the 1920s and 1930s. For example, Piggly Wiggly Food Stores, founded by Clarence Saunders around 1920, introduced self-service and customer checkout counters. Supermarkets are large, self-service stores with central checkout facilities. They carry an extensive line of food items and often nonfood products. There are 37,459 supermarkets operating in the United States, and the average store now carries nearly 44,000 products in roughly 46,500 square feet of space. The average customer visits a store just under twice a week, spending just over $30 per trip. Supermarkets' entire approach to the distribution of food and household cleaning and maintenance products is to offer large assortments these goods at each store at a minimal price.

Discount Retailers

Discount retailers, like Ross Dress for Less and Grocery Outlet, are characterized by a focus on price as their main sales appeal. Merchandise assortments are generally broad and include both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes. Traditional stores are usually large, self-service operations with long hours, free parking, and relatively simple fixtures. Online retailers such as Overstock.com have aggregated products offered them at deep discounts. Generally, customers sacrifice having a reliable assortment of products to receive discounts on the available products.

Warehouse Retailers

Warehouse retailers provide a bare-bones shopping experience at very low prices. Costco is the dominant warehouse retailer, with $79.7 billion in sales in 2014. Warehouse retailers streamline all operational aspects of their business and pass on the efficiency savings to customers. Costco generally uses a cost-plus pricing structure and provides goods in wholesale quantities.  A cost-plus pricing structure involves determining what the markup should be for an item and adding that to the cost of the item. The company must first determine the break-even point for the product by calculating all costs involved in marketing, distributing, and producing a product.

Franchises

The franchise approach brings together national chains and local ownership. An owner purchases a franchise which gives her the right to use the firm's business model and brand for a set period of time. Often, the franchise agreement includes well-defined guidance for the owner, training, and on-going support. The owner, or franchisee, builds and manages the local business. Entrepreneur magazine posts a list each year of the 500 top franchises according to an evaluation of financial strength and stability, growth rate, and size. The 2016 list is led by Jimmy John's gourmet sandwiches, Hampton by Hilton midprice hotels, Supercuts hair salon, Servpro insurance/disaster restoration and cleaning, and Subway restaurants.

Malls and Shopping Centers

Malls and shopping centers are successful because they provide customers with a wide assortment of products across many stores. If you want to buy a suit or a dress, a mall provides many alternatives in one location. Malls are larger centers that typically have one or more department stores as major tenants. Strip malls are a common string of stores along major traffic routes, while isolated locations are freestanding sites not necessarily in heavy traffic areas. Stores in isolated locations must use promotion or some other aspect of their marketing mix to attract shoppers.

Online Retailing

Online retailing is unquestionably a dominant force in the industry.  Between 2011 and 2015, online retailing is expected to grow from 7% of total retail sales to 15% by 2020. The Asia-Pacific market represents the largest share of the retail ecommerce market while North America is the second largest.  Ecommerce sales in North America continue to be fueled by increased spending using smartphones and tablets as well as growth in key categories such as grocery and apparel.

Companies like Amazon and Geico complete all or most of their sales online. Many other online sales result from online sales of traditional retailers, such as purchases made at Nordstrom.com. Online marketing plays a significant role in preparing the buyers who shop in stores. In a similar integrated approach, catalogs that are mailed to customers' homes drive online orders. In a survey on its Web site, Land's End found that 75 percent of customers who were making purchases had reviewed the catalog first.^[8]

Catalog Retailing

Catalogs have long been used as a marketing device to drive phone and in-store sales. As online retailing began to grow, it had a significant impact on catalog sales. Many retailers who depended on catalog sales—Sears, Land's End, and J.C. Penney, to name a few—suffered as online retailers and online sales from traditional retailers pulled convenience shoppers away from catalog sales. Catalog mailings peaked in 2009 and saw a significant decrease through 2012. In 2013, there was a small increase in catalog mailings. Industry experts note that catalogs are changing, as is their role in the retail marketing process. Despite significant declines, U.S. households still receive 11.9 billion catalogs each year.^[9]

Nonstore Retailing

Beyond those mentioned in the categories above, there's a wide range of traditional and innovative retailing approaches. Although the Avon lady largely disappeared at the end of the last century, there are still in-home sales from Arbonne facial products, cabi women's clothing, WineShop at Home, and others. Many of these models are based on the idea of a woman using her personal network to sell products to her friends and their friends, often in a party setting.

In addition, the amount of subscription services such as Stitch Fix, Trunk Club, and Amazon Prime Wardrobe has increased. Research from the NPD group shows these services are increasing in popularity although still very much in the beginning stages.  The annual spend for these services increased 5% to $170 according to NPD.

Vending machines and point-of-sale kiosks have long been a popular retail device. Today they are becoming more targeted, such as companies selling easily forgotten items—such as small electronics devices and makeup items—to travelers in airports.

Each of these retailing approaches can be customized to meet the needs of the target buyer or combined to span a range of needs.

Supply Chains

Remember your favorite retailer we discussed at the beginning of this course.  Have you wondered how the product is made and just how it makes it to the sales floor? The answer to that question is through exploring the supply chain.

What exactly is the retail supply chain? The supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer.^[10]

It is important that every part of the supply chain is efficient, nimble, and seamless to allow retailers to deliver product to the customers in the most efficient and profitable way to achieve success and meet its overall goals.  Some of the biggest issues in the retail supply chain are customer service, controlling costs, effective supplier/partner relationships, qualified talent, and proper planning.

We can better understand how supply chain issues can affect a company by looking at Chipotle.  In 2015 the company stopped serving pork due to the strict requirements they had regarding how animals were raised.  It took them some time to find another supplier that met its shortage, and therefore had a shortage for approximately 10 months.  They are now using a British supplier.  As the company continues to expand think about how this will affect the business and how they can work through these issues.

Now let’s discuss some common supply chain firms within the supply chain structure.

Supplier

Think of the supplier as the person providing the good and/or service.  Suppliers can typically be domestic or international.  However, one thing to keep in mind is that if you are dealing with international suppliers you will often have longer lead times.  Lead times can vary but it is in the best interest of the supplier to deliver the product as quickly and efficiently as possible or else risk losing business to another supplier.  Common types of suppliers include manufacturers, wholesalers, and vendors.

Factory

The supplier has the raw materials made into products at the factory.  Retailers can work with numerous factories all over the world in meeting demands.  A great example of this is Adidas Group.  They work with about 800 factories in approximately 55 countries.  Most retailers are transparent regarding the factories they use for production of product to improve and promote compliance and safe working conditions.

Distribution Center (DC)

The DC is also known as the Distribution Center and this can be small and/or large depending on the retailer.  This is where the finished product will go after leaving the factory.  A great example of a distribution network is Wal-Mart.  They have 152 distribution centers that service all Wal-Mart locations, Sam’s Club, and delivery to the customer.  Each distribution center for Wal-Mart is more then 1 million square feet and has over 600 employees.  Remember we talked about the global reach of retail earlier!  Think about how an expansive supply chain creates job opportunities!

Goods can go to the retailer or directly to the consumer from the distribution center.

Regional Distribution Center (RDC)

An RDC, Regional Distribution Center, is more local to the area and has several advantages.  They allow retailers to save money and time.  If you have multiple stores on the east and west coast a regional distribution center would allow you to quickly transport products to customers and process returns.  Regional Distribution Centers are also smaller and less costly to build.  One disadvantage of a regional distribution center is that you must replicate processes, procedures, equipment, infrastructure, and labor which can be a challenge for any retailer.  Managing inventory in multiple locations can also be costly for the retailer.

Industry Week provides a list of the top 25 supply chains every year. You can find the 2017 list here as well as previous years.

Challenges in Retailing

In today's economy retailers are facing a unique set of challenges. It is important to understand what they are as well as how today's retailer is working to overcome these challenges.

Inventory

Adequate inventory levels are essential for today's retailer. Having too little or too much can have a dramatic affect on the retailer's reputation as well as the consumer's perception. A key example of how low inventory levels can affect the reputation of a retailer is that of Marks & Spencer in 2012.  First quarter clothing sales were down 6.8% that year because they didn't react to accelerated selling on key items.  If they had ordered additional inventory to meet consumer demand, they likely would not have lost out on those sales.  While having too little inventory is a significant issue in today's environment you can also have too much inventory that leads to unprofitable markdowns.

Mobile Experience and Engagement

In 2013 mobile was almost 25%  ($60 billion) of ecommerce revenue and  by 2021 mobile revenue is expected to be $420 billion in the United States. For any retailer that has online operations, mobile engagement must be a significant part of their business. Consumers use their mobile phones for everything from shopping for different prices for products and even shipping costs. In fact, 90% of consumers use smart phones while shopping in stores. So, how can retailers push the envelope here to engage the consumer even more? An example of a company capitalizing on this trend is Walgreens. More than 60% of the retailer's online traffic is from smartphone devices. Their mobile app includes services such as prescription transfers and Quick Print. In addition, they are partnering with a service called MDLive to provide customers with medical doctors 24/7 via smartphone cameras.

Digital Disruption

Technology is continuously changing the way consumers shop.  There are five stages consumers go through whenever purchasing a product. These are

1. Need recognition
2. Information search
3. Evaluating alternatives
4. Purchase decision
5. Post-purchase evaluation.

Social media sites such as Facebook, and Instagram have revolutionized how fast and to what extent consumers can receive information about products. Consumers can rate products and share with their friend base on these sites and communicate directly with companies. According to a Deloitte report, consumers who utilize social media are four times more likely to make a purchase than those who don't. In addition, 29% are more inclined to make a purchase the same day.

It is important to note that there are generational differences in how consumers use technology.  For example, 47% of millennials are influenced by social media as opposed to 19% of other age groups. This might change a retailer markets using social media based on the product offering and target market.

Watch the video below to gain an understanding of a few other challenges that have a significant impact on today's retailer.  Consider how these are impacting you now as a consumer and an industry professional.  What else do you believe could be some other notable challenges in the future and what actions do you believe today's retailer could take to work through these challenges and stay more competitive in today's environment as well as that of the future?

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