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The Big-Box Stores The face of retailing has changed greatly in the past 15 years, with the introduction of the category killer store, also known as the "big box" retailer. As discussed above (the increasing size of stores), retailers have been abandoning the small-store format in favor of superstores dedicated to one or a handful of narrow product lines, all at discounted prices. The "mom and pop" pet store, stationer, appliance store, etc., have all fallen on hard times as major chains have developed that seek to be the end-all in their respective categories, offering the entire "world" of products. A collection of big boxes is known as a power center, and is usually located along major thoroughfares and interstate highways, often very close to regional shopping malls. They tend to be situated along the edges of town because that is where large enough tracts of land are available. This changes traffic patterns considerably, creating congested areas over night. The big boxes are magnetic to the extent that they attract restaurants and branch banks to the "pad" sites (the outermost reaches of the parking lot), further congesting traffic flows in and out of the area. While customers have embraced the big boxes for their selection and low prices, they have sacrificed expertise as well as rapport with the retailer. Furthermore, cities and towns do not seem too concerned that profits often wind up being exported to corporate headquarters located elsewhere, because jobs are created (albeit low-paying ones) and the tax base is increased. Finally, the big boxes attract shoppers from a larger radius, thereby importing sales at the expense of smaller outlying communities. Not all product categories have been propelled to big-box status yet, though, and may never do so. For example, jewelry is still sold primarily through small retail outlets. Furniture has not fared well in past attempts (e.g., Levitz and Wickes stores). And services tend to be sold in small outlets. Thus, not all aspects of retailing are destined to being dominated by category killers. For those consumers who are nostalgic and yearn for a simpler life, there will likely always be at least a few types of products sold the "old fashioned way." For the rest, though, it appears that big boxes are here to stay. Consumers like the depth and selection that the big boxes can offer, as well as lower prices. And they're willing to fend for themselves in these four-walled look-alike stores. Direct Product Profit DPP stands for Direct Product Profit, which is a measure of the profitability of a particular product (or SKU--stockkeeping unit). Initially used in the grocery industry, DPP has been embraced throughout all walks of retailing. DPP differs from basic accounting procedures in that it assigns costs directly to each product, thereby allowing the calculation of an absolute contribution to profit generated by each SKU. DPP is thus a much more accurate assessment of the profit contribution from each product, and, because costs have been factored out, it allows comparisons to be made across products. Of course, the success of DPP hinges on the retailer's ability to allocate product-related expenses accurately. If this cannot be done, the benefits of DPP begin to vanish. Other related measures that can be derived from DPP include DPP per square foot, or DPP per department. Still, accommodations must be made when interpreting data because there can be vast differences between product categories (e.g., infrequently-purchased products like washers and dryers, versus frequently-purchased products like batteries). All told, DPP has helped contribute to retailers' better understanding of, and attention to, the bottom line. Co-Branding Another 1990s and 2000s trend is the development of retail stores that combine two or more formats under one roof. Called "co-branding," it is the marriage of complementary product lines in one store, usually owned and operated jointly by one entity. Co-branding is found throughout the gasoline and convenience store industries. Both have brought in brand-name fast-food chains to sell what customers are known to want: familiar burgers, tacos, pizza, etc. It is not uncommon to see a C-store with up to three recognizable brands of fast food, whereas a few years ago they would have relied on their own deli counter, or, worse yet, microwaveable frozen foods. Customers can now feel safe in their product selections, because they are familiar with the brands, and have already formed opinions about product quality. The risk of a Burger King sandwich is much less than that for a no-name burger that comes in a plastic wrapper. A related phenomenon is the placement of fast food and dine-in restaurants in a variety of public places like hospitals, airports, shopping malls, and universities. While these units are usually franchised to outside vendors, the effect is still the same as that of co-branding: it lends authenticity to the product offering, and allows customers to purchase something that which they are already familiar. Another consideration of co-branding is America's preoccupation with brand names. Consumers often use brand names as surrogate indicators of quality; retailers who co-brand are thereby enhancing their own image, and building prestige and respect for their store. Co-brand is such a recent phenomenon that little has been written about it other than that retailers and customers alike are excited about it. Given our fascination with large chains, as well as the possibilities for synergy between the multiple formats, expect to see much more of this type of retailing in the years ahead. Electronic Data Interchange Electronic Data Interchange (EDI) is an important new development that allows both retailers and manufacturers to maintain proper inventory levels in a timely fashion to avoid stockouts as well as over-stocks. It dovetails nicely with JIT (Just In Time), which brings needed parts and products to the right place at the right time. Wal-Mart is a leader in this development. In fact, much of their success can be traced to their EDI system, because it allows them to replenish stocks at each store on a daily basis, and in many cases, the system can anticipate and avoid stockouts entirely. In the case of Wal-Mart, each store tracks sales and transmits data to the nearest distribution center. There, trailers are filled daily with merchandise destined for each of the stores within a 200-300-mile radius or more, and deliveries made promptly. The use of EDI allows stores to not tie up valuable real estate with inventory stored in the traditional back room. Instead, merchandise is delivered to the store and almost immediately shelved where consumers can purchase it. It also eliminates a step in the retailing of goods because they bypass entirely the back room. Manufacturers are also relying on EDI to allow them to keep shipments to retailers flowing at the exact levels needed. Wal-Mart has several such arrangements with suppliers to help facilitate the timely delivery of goods. Manufacturing can then be adjusted as need be to match the flows of product through the channel. EDI thus allows both retailers and manufacturers to operate more efficiently. But one question remains: does EDI violate anti-trust issues because smaller retailers and manufacturers are unlikely to have access to it? The answer is no, unless a retailer and manufacturer were to conspire to control prices and have an undue influence on the market. Otherwise, there is nothing to keep a manufacturer from establishing an EDI arrangement with someone other than Wal-Mart, or Wal-Mart from establishing EDI systems with other manufacturers. Thus, while EDI is primarily the domain of the largest retailers and manufacturers, there is little defense for smaller firms. They each have the right to utilize such a system, even if it is simply not feasible for them to do so. In the mean time, EDI continues to contribute to the success of these corporate giants, and those who cannot match the efficiency of Wal-Mart's system can only watch while Wal-Mart continues to grow. The Decline of the Department Store As discussed in Part 1, the CBD has declined substantially in significance in the 50 years following World War II. Concurrent with this shift in retailing has been the radical downsizing of the department store. Once the pride and joy of every city's downtown district, today's department stores are merely a shadow of their former selves. Who can forget the holiday movie, "Miracle on 34th Street?" This film is a two-hour-long commercial for Macy's, the best-known of New York's downtown retailers. But downtown stores like Macy's have very nearly all bitten the dust. Few down department stores exist; their suburban replacements have whittled away departments one at a time until now they hardly merit being called a department store anymore. For example, Macy's in downtown NYC is the pinnacle of shopping, with floor after floor of clothing, furs, jewelry, furniture, restaurants, beauty shops, etc., and, of course, the bargain basement. Few cities can support a CBD with these gigantic retailers (Chicago, NYC, and Boston are among the few). Instead, older consumers are left with mere memories of department stores of old. What happened? As folks moved to the suburbs, and the stores followed, the thinking was that the downtown store would still remain the hub, the crown jewel if you will, while the suburban stores would be merely "satellite" stores (read: less important). As the suburbs grew and the inner city was vacated, the downtown stores fell upon hard times, and many were closed in the 1970s and 1980s. Furthermore, there were new forms of competition waiting in the 'burbs. Furniture stores took a bite our of department stores that sold home furnishings. Appliance superstores made life tough for them, as did discount jewelers (Service Merchandise is a good example). Thus, department stores were forced to rid themselves of lines in which they could not effectively compete. Today, we're left with a very scaled-down department store that focuses primarily on clothing, and sometimes ventures into linens and other dry goods. Hard goods are mostly left to the category killers, while other items are resigned to the discounters. While there are exceptions (Sears, notably, is still heavily into appliances and tools), today's department stores share only their name with their predecessors, and little more. Auxiliary Merchandising One of the more interesting outcomes of theme-based retailing (as discussed in Part 1) is the development of auxiliary merchandising enterprises. As illustrated in the photos, Coca Cola and M&Ms both have stores dedicated to selling nothing but related merchandise, be it kitchen magnets, t-shirt, caps, denim shirts, toys...anything to which a corporate logo can be affixed. The even more interesting thing is that customers will willingly buy such merchandise, because in so doing they are paying to advertise the manufacturer's products. Every theme restaurant features a complete line of not-so-cheap clothing and knick knacks, ranging from $20 t-shirts to $300 leather jackets. The impact of auxiliary merchandising has become so sizeable that Planet Hollywood and Hard Rock Cafe now report that a full 50-percent of revenues are derived from merchandise. Ambitious wanna-bes could read this information as the ticket to double your restaurant's sales: add merchandise. Of course, it's not that easy. The store must be a novelty to some degree, and there must be a certain cachet for patronizing such venues. Otherwise, no one would want to wear shirts and such as if they were trophies from a sports tournament. Thus, the merchandise carries some souvenir value, but it is a better class of sourvenir. What's better than a shirt that says "Hong Kong?" A Hard Rock Cafe shirt that says "Hong Kong." This merchandise has become so hot that people have begun to collect shirts and jackets from far-away theme outposts, like Hard Rock Jakarta or Planet Hollywood Kowloon. The farther away, the better. In fact, this merchandise has become almost a reflection of the person wearing it. To wear a shirt purchased 8000 miles away says something about the person--likes to travel abroad, has money, loves adventure, etc. Anyone can go to the Hard Rock in your hometown. It takes a special person to go to Jakarta, though. While these restauranteurs cum retailers are rolling in the bucks, consider that their merchandise may be filling an important social function: it allows consumers to feel important, and to be noticed by others who look carefully to see where the shirt was purchased. Furthermore, brand loyalties can be worn. An embroidered M&M sweatshirt says that you like M&Ms (they come in red, green, blue, and yellow---pick the color that matches your personality). A Coke rugby shirt announces your allegiance to a brand of soda. And a Gameworks polo shirt says you played hard at your favorite arcade. Thus, while we may cast an envious glance at this profiteering, we should pay more attention to the glimpses it gives us of consumers and what is important to them. While it may be blatant commercialism, it also makes for happy customers. And who can argue with that? The Balance of Power The increasing size of retailers, as well as the use of EDI and DPP, have combined to shift the balance of channel power away from manufacturers to retailers. This means that, in spite of there being many large manufacturers, retailers are in a position to dictate how things will be done, and even extract concessions (i.e., money) from the manufacturers. An earlier lecture in which slotting fees were discussed showed how manufacturers frequently must pay money to retailers in order to get their products "slotted." This is an example of how the power base has shifted. Furthermore, product proliferation (also discussed earlier) has contributed to this situation; there are far more products than there are retailers who can carry them. Hence, the battle for shelf space. While manufacturers have not exactly become subservient to retailers, they have seen their ability to dominate virtually disappear (with a few exceptions). The "big box" retailers possess very desirable shelf space, and manufacturers need to get their products placed in these stores in order survive in the long run. Not all retailers have power, though, because the balance of power is not evenly distributed among retailers. Only the largest retailers have this power; smaller, independent stores are not "trophy" accounts for many manufacturers, who instead focus their efforts on getting the bigger stores to carry their products. One paradox in the retailer power drama is that of supermarkets. The vast majority of America's groceries are still purchased in regional and even local chains. Notably absent are nationwide chains of groceries. Winn-Dixie, Kroger, and Albertson's are among the largest food retailers in the US, yet still have not come close to being nationwide. So how are supermarkets able to wield such power over manufacturers? In spite of the industry being so decentralized, supermarkets are actually verycentralized at the regional or local level. In fact, the market structure is quite oligopolistic, with usually only three to five groceries vying for a particular market. Thus, at this level, groceries still have a lot of power, and they possess the ultimate goal of manufacturers: shelf space. It may also be argued that, if the industry were less decentralized nationally, and if there were just a half-dozen chains controlling the entire market, business would be much easier for the manufacturers. Instead, the manufacturers must work over-time trying to break into hundreds of different markets across the USA (there are over 325 metropolitan areas in the USA with over 50,000 residents). Thus, if a manufacturer wishes to enter the Boise, Idaho, market, it must pay the price, much like an electronics manufacturer would pay a nationwide chain of appliance stores for temporary display space. A final element in the power shift has been the availability of information---all kinds of information, ranging from individual item sales reports to complete demographics of customers. The bar code on every product has contributed to this information, as has electronic recordkeeping on customers (who pay by checks, credit cards, and debit cards). Armed with a mountain of information about their customers and the sales volume of every item, retailers can bully manufacturers into giving better terms or payments, and in some cases received "failure fees" in case a product fails to meet market expectations. While nothing is permanent in business, there is little to suggest that this balance of power will shift any time soon. In the mean time, the large retailers are enjoying all of this attention. New Challenges and Opportunities For Small Retailers The rise of "big box" retailers and giants like Wal-Mart has made business particularly challenging for small retailers, who suddenly find themselves facing the prospects of either adapt or die. But while retailing has certainly gone upscale and upsize, and has gotten more sophisticated with DPP and EDI, it does not preclude the long-term existence of small retailers. It simply means they need to re-focus their efforts, and learn new ways to compete. Wal-Mart is frequently criticized for putting small home-town stores out of business. Certainly, Wal-Mart presents a formidable foe to small retailers. But the correct response is not to try to compete in terms of price, because Wal-Mart (or any other large retailer) will prevail every time. The challenge for small retailers is to focus on opportunities created by Wal-Mart, et al's, largeness. This would include things like service, expertise, delivery, repairs, installation, and anything else that Wal-Mart cannot or will not do. In other words, small retailers do not need to fold up shop just because Wal-Mart comes to town. It is quite possible for them to coexist, as long as they (the small retailers) strive to not be like their larger competitors. Another competitive opportunity exists for small retailers to "out-niche" the larger stores. While there can be some danger in carving out niches that are too small, it should be noted that Wal-Mart and others serve no niche whatsoever, just the mass market. In other words, it wouldn't take much effort to identify and carve out a potentially lucrative corner of the market. In a recent issue of Bicycle Retailer and Industry News, there was a short blurb lamenting the closing of the bike shop in Clovis, NM. The owner was quoted as saying he had been put out by Wal-Mart, and couldn't compete. If he was trying to compete with Wal-Mart in the cheap department-store variety of bikes, there is little doubt why he failed. Instead, he should have strived to be different from Wal-Mart by carrying higher-quality merchandise, and going after the lucrative repair business that Wal-Mart refuses to handle. in order to be a survivor during this period of "big retailing," the small shops must develop new ways to compete, and avoid head-to-head confrontations at any cost. The road to Wal-Mart is paved with the remains of stores which intended to compete head-on. Smaller stores need to be on a different road. Note to Students: If you have not started your project yet, may I please gently remind you that November is just around the corner. We are about 1/2-way through the semester. |