CH-5 Retail Market Strategy – Retailing Management : Book Guide

CHAPTER 5 RETAIL MARKET STRATEGY ANNOTATED OUTLINE INSTRUCTOR NOTES I. What Is A Retail Strategy? The term strategy is frequently used in retailing. For example, retailers talk about their merchandise strategy, promotion strategy, location strategy, and private-brand strategy. Retail strategy isn’t just another expression for retail management. Ask students to list all the decisions a retailer makes. Now determine which are strategic and which are tactical. Why? Ask students to consider some successful, or unsuccessful, retail strategies that they have witnessed? Consider J.C. Penney’s transition to JCP or Kentucky Fried Chicken’s transition to KFC. A. Definition of 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 and customer services). A sustainable competitive advantage is an advantage over competition that is not easily copied and thus can be maintained over a long time. See PPT 5-4 II. Target Market and Retail Format The selection of a target market focuses the retailer on a group of consumers whose needs it will attempt to satisfy. See PPT 5-4, 5-5, and 5-6 Ask students for local retailers that compete directly against each other. What is the The selection of a retail format outlines the retail mix to be used to satisfy needs of customers in the target market. The retail strategy determines the markets in which a retailer will compete. We define a retail market, not as a specific place where buyers and sellers meet, but as a group of consumers with similar needs (a market segment) and a group of retailers using a similar retail format to satisfy those consumer needs. target market of the retailers? What is the retail format used? Review different ways that markets can be segmented -- target market segments can be defined (see Chapter 4) as: geographic, demographic, psychographic, buying situation, etc. Review Exhibit 5-1 for retail formats and market segments. III. 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. See PPT 5-7, 5-8 What is the effect of cutting prices in the long- term? What will competitors do? What happens if they also cut prices? Ask students to list the number of ways a retailer can get customers to buy from them rather than their competitors. Now, indicate which methods are sustainable -- difficult for competitors to match easily. Why? A. Customer Loyalty Customer Loyalty means that customers are committed to shopping at retailer's locations. Loyalty is more than simply liking one retailer over another. Loyalty means that customers will be See PPT 5-9 Ask students if they are loyal to any retail outlet. Why are they loyal to that outlet? What can a retailer do to build loyalty? reluctant to patronize competitive retailers. Some ways that retailers build customer loyalty are by (1) developing branding strategies along with clear and precise positioning strategies, and (2) creating an emotional attachment with customers through loyalty programs. 1. Retail Brands and Positioning A retail brand, whether it is the name of the retailer or a private label, can create an emotional tie with customers that builds their trust and loyalty. Retail brands also facilitate store loyalty because they stand for a predictable level of quality that customers feel comfortable with and often seek. See PPT 5-10 Which retail brands are students familiar with? Which do they prefer over manufacturers’ brands? Why? 2. Positioning. A retailer builds customer loyalty by developing a clear and distinctive image of its retail offering and consistently reinforcing that image through its merchandise and service. Positioning is the design and implementation of a retail mix to create an image of the retailer in the customer's mind relative to its competitors. A perceptual map is frequently used to represent the customer's image and preference for retailers. PPT 5-12 shows a hypothetical perceptual map of the women's apparel market. Describe the positions of the retailers and segment ideal points. Ask students what retailer customers in segment 5 prefer most. What store is seen as most similar to Neiman Marcus? Most similar to Kmart? B. Vendor Relations By developing strong relations with vendors, retailers may gain exclusive rights (1) to sell merchandise in a specific region, (2) to buy merchandise with better terms than competitors who lack such relations, See PPT 5-13 Discuss the example of Proctor and Gamble’s relationship with Walmart. How does this relationship benefit both Walmart and P&G? or (3) to receive merchandise in short supply. Relationships with vendors, like relationships with customers, are developed over a long time and may not be easily offset by a competitor. C. Human Resource Management Retailing is a labor-intensive business. Knowledgeable and skilled employees committed to the retailer's objectives are critical assets that support the success of several companies. See PPT 5-14 Discuss how employee commitment to the retailer appears to be varied at different stores frequented by students, as evident by employee turnover, interactions with employees, etc. In tight labor markets, and since retailing offers relatively low-paying jobs, at least at the lower levels, what can management do to maintain effective, committed employees? How does effective HR help develop a competitive advantage? D. Distribution and Information Systems All retailers strive to reduce operating costs. They want to get their customers the merchandise they want, when they want it, in the quantities that are required, at a lower delivered cost than their competitors. Retailers can achieve these efficiencies by developing sophisticated distribution and information systems. See PPT 5-15 Ask students to describe their experience at a store where they could not find the product/brand they wanted. If they contacted a store employee, how did this employee respond? Evaluate and discuss. E. Location Location is the critical factor in consumer selection of a store. It is also a competitive advantage that is not easily duplicated. See PPT 5-16 Ask the class to identify the locations of the nearest McDonald’s, Wendy’s, and Burger King. Who was in the location first? Describe that specific locale in terms of traffic patterns, etc. Why can location provide a sustainable advantage? Which local retailers have a good location? A poor location? Why? Ask students if the importance of a location differs based on the product category or shopping experience. IV. Growth Strategies Four types of growth opportunities that retailers may pursue are: market penetration, market expansion, retail format development, and diversification. See PPT 5-17 McDonald's original market was families with young children and its format was selling hamburgers and french fries in stand alone stores at lunch and dinner time. How would you classify these opportunities McDonald's pursued: breakfasts; locations in office building; locations in schools; adding salads to the menu; adding pizza to the menu; opening up seafood restaurants to compete against Red Lobster. A. 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. Consider The Gap, Land’s End, and Kmart. What would be examples of market penetration opportunities they could pursue? See PPT 5-19 B. Market Expansion A market expansion opportunity employs the existing retailing format in new market segments. See PPT 5-20 Consider The Gap, Land’s End, and Kmart. What would be examples of market expansion opportunities they could pursue? Examples of market expansion are Wal-Mart opening stores in large cities and the Gap starting Gap Kids. C. 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. See PPT 5-21 Have the class discuss examples of a retailer adding additional merchandise categories or altering the breadth and depth of the assortment in its stores. Then discuss the pros and cons of this strategy. What type of financial investment would it take? What retailers would benefit from this? Describe their target markets. Consider The Gap, Land’s End, and Kmart. What would be examples of format development opportunities they could pursue? Examples of format development are Kmart starting a discount home improvement center -- Builders Square and Land’s End opening retail stores. D. Diversification A diversification opportunity involves a new retail format directed toward a market segment that is not presently being served. See PPT 5-22 Consider The Gap, Land’s End, and Kmart. What would be examples of diversification opportunities they could pursue? 1. Related versus unrelated diversification Diversification opportunities are either related or unrelated. In a related diversification opportunity, the present target market and/or retail format shares something in common with the new opportunity. This commonality might entail purchasing from the same vendors, using the same distribution and/or management information system, or advertising in the same newspapers to similar target markets. In contrast, an unrelated diversification lacks any commonalty between the present business and the new business. Discuss the example of Home Depot’s building supply business called HD supply. This is an example of related diversification because the targeted customers (contractors) would be similar to the customers that shop using Home Depot’s existing retail mix. For The Gap, Land’s End, and Kmart, what would be examples of related versus unrelated diversification opportunities? What about Sears buying a manufacturer of home appliances? 2. Vertical integration Vertical integration is diversification by retailers into wholesaling or manufacturing. When retailers integrate by manufacturing products, they are making risky investments because the skills required to make products are different from those associated with retailing them. Note that designing private label merchandise is a related diversification because it builds on the retailer’s knowledge of its customers, but actually making the merchandise is considered an unrelated diversification. V. Global Growth Opportunities International expansion is one form of a market expansion strategy. Retailers are increasingly looking to expand in China and India because of the countries’ buying power. Each country has unique challenges for expansion. 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. See PPT 5-23 Ask students to generate international growth opportunities for The Gap, Under Armour, Wal-Mart, and a regional grocery store chain. Discuss why different opportunities might be attractive to each of these retail chains. A. Who is Successful and Who Isn't Retailers with an offering that has universal appeal, such as distinctive merchandise or low cost, are the most successful at exploiting global markets. Some of the most successful global retailers are specialty store retailers with strong brand images and/or unique merchandise. Category specialists and supercenter retailers may be particularly suited to Which U.S. based retailers have been successful going global? Which non-U.S. based retailers have been successful in the U.S.? Discuss the reasons why category killers and hypermarkets may be more successful internationally. These reasons include: (1) experienced use of technology to manage inventories, control global logistical systems and tailor merchandise assortments; (2) buying economies of scale and efficient succeed internationally because of their operating efficiencies. These retailers are leaders in their use of technology to manage their inventory and distribution systems, and enjoy economies of scale that translate into good values for consumers around the globe. distribution systems; (3) development of unique systems and standardized formats facilitating better control; (4) focused communications due to narrow assortment and focused strategy; and (5) willingness of global consumers to forgo service for lower prices. B. 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) financial resources. See PPTs 5-24 C. Evaluating Global Growth Opportunities • From the retailer’s perspective, some countries represent better growth opportunities than others. • Operational restrictions on retailers were lifted in China in 2004, leading to a number of retailers moving into the country. Doing business in China remains a challenge, though, due to increasing operating costs, challenges in finding and retaining talented management personnel, and inefficient supply chains. • India has become an attractive market for retailers because it has a population of over one billion, solid economic growth, and a growing middle-class. The challenge to retailers here is that a majority of consumers prefer small, family-owned shops. • Three opportunity dimensions – growth, risk, and market size – are used to portray the top 30 countries. The U.S., U.K., Taiwan, and Malaysia fall in the “Best Opportunity” quadrant of the diagram, with Australia and Canada just on the fringe of the quadrant. • Moving into global markets requires all the same success factors as opening up any store – a good strategy that is sustainable, a strong financial position, and a little luck. • However, global expansion requires much more. To succeed in global expansion, retailers must: (1) act like they are local and understand their customers’ needs, (2) understand and act appropriately in response to subtle nuances between markets and countries, (3) ensure their timing is right, and (4) be selective. D. Entry Strategies Four approaches that retailers take when entering non-domestic markets are direct investment, joint venture, strategic alliance, and franchising. See PPT 5-25 Have the students choose a retailer who has or could go global. Ask them to choose and justify an entry strategy. 1. Direct Investment Direct investment involves a retail firm investing in and owning a division or subsidiary that builds and operates stores in a foreign country. This entry strategy requires the highest level of investment and exposes the retailer to significant risks, but has the highest potential returns. Identify the products/services/conditions for which the retailer would prefer direct control over global operations offered by a direct investment strategy. 2. Joint Venture A joint venture is formed when the entering retailer pools its resources with a local retailer to form a new company in which ownership, control, and profits are shared. A joint venture reduces the entrant’s risks. The local partner understands the Would a retailer be more likely to use a joint venture when entering Canada or when entering China? Discuss. market and access to resources – vendors and real estate. Problems with this entry approach can arise if the partners disagree or the government places restrictions on the repatriation of profits. 3. Strategic Alliance A strategic alliance is a collaborative relationship between independent firms. For example, a foreign retailer might enter an international market through direct investment but develop an alliance with a local firm to perform logistical and warehousing activities. Strategic alliances are often used for learning about a country's unique environment and other business conditions. 4. Franchising Franchising offers the lowest risk and requires the least investment. However, the entrant has limited control over the retail operations in the foreign country, profit potential is reduced, and the risk of assisting in the creation of a local domestic competitor is increased. VI. 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. The planning process can be used to formulate strategic plans at different levels within a retail corporation. PPT 5-26 charts the steps in the strategic planning process. Go through the various stages of the planning process for a local retailer or pick an idea for a new retail business and develop a strategic plan for the business. A. 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 Why does a retailer need to have a formal mission statement? Define a mission for Sears, which includes its financial services, 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? insurance company, and real estate brokerage. Define a mission for Wal-mart. Have students find mission statements for some of their favorite retailers. Are the mission statements aligned with the positioning of the retailer? Define a mission for your college or university. B. 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 four elements: market factors, competitive factors, environmental factors, and strengths and weaknesses analysis. . See PPT 5-27 Conduct a situation audit for any department store most familiar to students. 1. Market Factors Some critical factors related to consumers and their buying patterns are market size and growth, sales cyclicality, and seasonality. Market size, typically measured in retail sales dollars, is important because it indicates a firm's opportunity for generating revenues to cover its investment. Large markets are attractive to large retail firms, but they are also attractive to small entrepreneurs because they offer more opportunities to focus on a market segment. Growing markets are typically more attractive than mature or declining markets. In general, markets with highly seasonal sales are unattractive because a lot of resources are needed to accommodate What makes a market attractive? Ask for examples of attractive and unattractive markets. How attractive over the long-term is the elderly market? The Tween market? See PPT 5-28 the peak season, but are underutilized the rest of the year. 2. Competitive Factors The nature of the competition in retail markets is affected by barriers to entry, the bargaining power of vendors, and competitive rivalry. Retail markets are more attractive when competitive entry is costly. Barriers to entry are conditions in a retail market that make it difficult for firms to enter the market. These conditions include scale economies, customer loyalty, and availability of locations. Scale economies are cost advantages due to a retailer's size. Markets dominated by large competitors with scale economies are typically unattractive. Retail markets dominated by a well- established retailer that has developed a loyal group of customers offer limited profit potential. The availability of locations may impede competitive entry. A retail market with high entry barriers is very attractive for retailers presently competing in that market, but unattractive for retailers not already in that market. Another competitive factor is the bargaining power of vendors. Markets are unattractive when a few vendors control the merchandise sold in it. In these situations, the vendors have an opportunity to dictate prices and other terms, such as delivery dates, and thus reduce the retailer's profits. The final industry factor is the level of competitive rivalry in the retail market, which is the frequency and See PPT 5-29 What are examples of retail markets that have high entry barriers? Low entry barriers? Are there entry barriers for a new fast food franchise in the local community? A new department store? A new discount store specializing in toys? Take a set of local competitors and evaluate how intense the rivalry is. Compare competitive issues for a bricks and mortar retailer versus a multichannel and an Internet-only retailer. intensity of reactions to actions undertaken by competitors. Conditions that may lead to intense rivalry include: (1) a large number of competitors that are all about the same size, (2) slow growth, (3) high fixed costs, and (4) the lack of perceived differences between competing retailers. 3. Environmental Factors Environmental factors that affect market attractiveness are technological, economic, regulatory, and social changes. When a retail market is going through significant changes in technology, present competitors are vulnerable to new entrants that are skilled at using the new technology. Some retailers are more affected by economic conditions than others. Government regulations can reduce the attractiveness of a retail market. Finally, trends in demographics, lifestyles, attitudes, and personal values affect retail markets' attractiveness. See PPT 5-30 Analyze some potential changes in the environment such as people becoming more health conscious about the food they eat, more concerned about the environment, more interested in having experiences rather than buying products. Review some of the changes discussed in Chapter 4. Ask students how these changes will affect specific retailers? Government regulations reduce the attractiveness of a retail market by making it costly to build stores (zoning laws) and hire employees (wage regulations). 4. Strengths and Weakness Analysis The most critical aspect of the situation audit is for a retailer to determine its unique capabilities in terms of its strengths and weaknesses relative to the competition. A strengths and weaknesses analysis indicates how well the business can seize opportunities and avoid harm from threats in the environment. See PPT 5-31 C. 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. D. 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. Go through the example in the text evaluating the merchandise categories in a department store. Have students evaluate the market attractiveness and competitive position of some opportunities the local college bookstore is presently pursuing and is considering: a. college textbooks, b. clothing with the college name on it, c. fashionable brand name clothing, d. fast food, e. renting DVDs. Have students list the factors and go through the ratings. E. 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. Ask students which opportunities the bookstore should pursue. Relate these opportunities to the competitive advantages the bookstore has. F. 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. G. 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. H. Strategic Planning in the Real World As described here, the strategic decisions in the planning process seem to be made in a sequential manner. After the business mission is defined, the situation audit is performed, strategic opportunities are identified, alternatives are evaluated, objectives are set, resources are allocated, the implementation plan is developed, and finally, performance is evaluated and adjustments are made. But, actual planning processes have interactions among the steps. For example, the situation audit may uncover some logical alternative for the firm to consider, even though this alternative is not included in the mission statement. Ask students to relate the strategic decision making process to the strategy they will use for seeking a job after graduation. Will they go through all the steps? Why or why not? Will their strategy change as they look? Why or why not? VII. Summary • A retailer’s long-term performance is largely determined by its strategy. A strategy coordinates employees’ activities and communicates the direction the retailer plans to take. • Retail market strategy describes both the strategic direction and the process by which the strategy is to be developed. • The retail strategy statement indicates an identification of a target market and the retail format (its offering) to be directed toward that target market. The statement also needs to indicate the retailer’s methods to build a sustainable competitive advantage. ANSWERS TO “GET OUT AND DO ITS” 2. INTERNET EXERCISE Visit the websites for IKEA (www.ikea.com) and Starbucks (www.starbucks.com). Are the look and feel of these Internet sites consistent with the in-store experience of these retailers? Ikea’s in-store experience is a little bit more utilitarian and less hedonic than other retailers. Ikea’s website has a similar feel. Students will also notice similarities between Starbucks’ website and in-store. The color scheme is similar and the same music is played on the website as it is in the store. 3. INTERNET EXERCISE Go to the Web sites for Walmart (www.walmartstores.com), Carrefour (http://www.carrefour.com) Royal Ahold (www.ahold.com) and Metro AG (www.metro.de) Which entry strategy has each company used to penetrate nondomestic markets? Justify your answer. International growth can be accomplished by means of new start-ups, expansion of existing affiliates, partial or complete acquisitions, and mergers with other companies, or joint ventures. Different strategies are selected based on resources, competition, legal requirements, and past experience and results. 4. GO SHOPPING Visit two stores that sell similar merchandise categories and cater to the same target segment(s). How are their retail formats (the elements in their retail mixes) similar? Dissimilar? On what bases do they have a sustainable competitive advantage? Explain which you believe has a stronger position? Students’ answers will vary. Most retailers that target similar audiences and sell similar merchandise categories will have comparable retail formats. Students should be able to identify the similarities, likely including: product assortment, store atmospherics, location choice (mall versus stand alone, etc), and services. Differences between the two stores might include exclusive merchandise or sales associate knowledge and assistance. Students should articulate which one they believe has a stronger position and why? Is the difference noticeable to other consumers as well? ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. For each of the four retailers discussed at the beginning of the chapter (Chipotle Mexican Grill, Lululemon, Chico’s, and Save-A-Lot), describe its strategy and the basis of its competitive advantage. Chipotle Mexican Grill specializes in fresh, quick food. The quick-service chain offers only five items, burritos, fajitas burritos, burrito bowls, tacos and salads. Chipotle only sells naturally raised meat, organic produce, and dairy without any added hormones. The company will not expand its menu, instead choosing to focus on quality delivery of its current menu. This focus helps ensure that Chipotle does a few things better than anybody else. Lululemon primarily sells yoga and apparel accessories. Recently, the company has begun offering casual clothing and running apparel as well. Lululemon apparel is made with special materials that are flattering while also comfortable to wear while exercising. Lululemon wearers can engage in rigorous exercise while still looking attractive. Lululemon has also created an ambassador program to build a sense of community and really engage consumers with the brand. Chico's specializes in comfortable, easy-to-wear apparel designed for women in the age group of 35-55 years old. The company sells only its own brand and has complete control over its supply chain. The emphasis on private labels, a strong customer loyalty program, and high-quality customer service with emphasis on a person-to-person relationship with each customer, differentiate the retailer from other competitors, and ensure not only repeat sales, but also a higher transaction size among its loyal patrons. Save-A-Lot is the country’s 13th largest supermarket chain. Save-A-Lot has created a competitive advantage by offering a limited assortment of 1,250 SKU’s, versus the 20,000 to 30,000 of competing supermarket retailers. Save-A-Lot reduces its cost and is able to price its merchandise 40% lower than conventional supermarkets. Save-A-Lot has such strong buying power that it is able to develop quality private label products at low prices. 2. Choose a retailer and describe how it has developed a competitive strategic advantage. Students should examine how their chosen retailer has developed a strategic competitive advantage. This should include at least one of the following components. Customer Loyalty: In order to keep customers committed to shopping at their store(s) and/or Web sites, retailers can build customer loyalty by (1) emphasizing a unique positioning, and (2) developing loyalty programs. For example, retailers can try to design a retail mix that creates an image in the customer’s mind, which will keep them committed to the retailer. Or, by implementing customer loyalty programs, as part of a broader customer relationship management (CRM) program, and maintaining and analyzing customer purchasing data, retailers can develop strategies to create and maintain a loyal customer base. Location: Location is one of the most important factors in retailing. For example, if a retailer is the only one of its kind in a certain area, or is set in a high traffic area with a visible store front, the retailer has a competitive advantage. Human Resource Management: Since retailing is a labor-intensive business and also has high levels of contact between employees and customers, retailers need to develop programs to motivate and coordinate employee efforts. These are usually done by providing appropriate incentives for employees, fostering a strong and positive organizational culture, and managing diversity. Distribution and Information Systems: Retailers can achieve significant operational efficiencies through developing sophisticated distribution and information systems. Efficient operations reduce retailer costs, and thus, enable retailers to provide the same or similar merchandise at lower prices than their competitors. Unique Merchandise: Retailers can develop sustainable competitive advantage by offering private-label brands. Vendor Relations: Retailers may gain exclusive rights to sell merchandise in a region, to buy merchandise at lower prices, or to receive popular merchandise in short supply through strong vendor relationships. Customer Service: Retailers can build competitive advantage by offering excellent customer service. This involves instilling the importance of good customer service in employee training and performance and consciously developing a reputation for good service. Retailers should not rely on a single approach to gain a sustainable competitive advantage, but instead, should use multiple approaches. 3. Give an example of a market penetration, a retail format development, a market expansion, and a diversification growth strategy that Best Buy might use. Market Penetration: Best Buy could offer coupons, frequent purchase promotions, etc. to increase sales among existing customers using its present format. Retail Format Development: Best Buy already offers a new format to the same target market in their online retailing at www.bestbuy.com. However, they could offer additional merchandise categories such as more types of accessories including computer desks, chairs, television stands etc. Market Expansion: Best Buy with its existing retail format could geographically expand (international) and or target promotions to specific market segments that it may not currently be targeting (senior citizen and/or student discounts). Diversification: Backward integration into electronics manufacturing would represent a related diversification strategy for Best Buy, while opening retail stores for automobile service and repair would represent an unrelated diversification strategy. 4. Choose your favorite retailer. Draw and explain a positioning map, like that shown in Exhibit 5-3, that includes your retailer, retailers that sell the same types of merchandise, and the customer segments (ideal points). Students’ answers will depend on the market in which they live and their preference of retailer. For a bicycle retailer, the dimensions could be: High price/service and low price/service for one dimension and broad assortment (mountain bikes, road bikes, tandems, kids, lots of accessories) and narrow assortment (road bikes only) on the other dimension. 5. Do a SWOT analysis for McDonald’s. What is its mission? What are its strengths and weaknesses? What opportunities and environmental threats might it face over the next 10 years? How could it prepare for these threats? Students should perform a SWOT Analysis for McDonald’s. The mission statement for McDonald’s can be found on its website: “McDonald's brand mission is to be our customers' favorite place and way to eat and drink. Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience – People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers' experience.” McDonald’s strengths include its global brand equity, customer loyalty, vendor relationships and buying power, a successful franchise model and a wide distribution network. McDonald’s weaknesses include high employee turnover, employee dissatisfaction, and a population that opposes McDonalds. Opportunities for McDonalds include global growth and expansion as well as introducing new products to adapt to changing consumers’ tastes. The political and regulatory environment might create threats for McDonald’s by forcing it to include calorie information on its menu board. Similarly, many consumers are changing their dietary habits to focus on healthier, organic foods. This trend could also be a threat for McDonald’s over the next ten years. McDonald’s is already responding to this threat by developing relationships with new farmers and investing in sustainable farming practices. 6. What are Neiman Marcus’s and PetSmart’s bases for sustainable competitive advantage? Are they really sustainable, or are they easily copied? Neiman Marcus offers extensive service and stocks fashion merchandise that could be called "fashion forward," since these may be offered first and/or exclusively at these stores. Their prices are higher than those charged by other retailers for similar product categories, but they cater to a wealthier than average target market of customers for whom fashion and service may be more important than low price. The multiple bases for competitive advantage used by Neiman Marcus are unique positioning, location in upscale malls or neighborhoods so as to be closer to target market segments, unique merchandise, and a heavy emphasis on customer service. The combination of these sources of competitive advantage makes their strategy quite sustainable. Alternatively, PetSmart offers a deep selection of pet related merchandise at everyday low prices. Though very different in approach than Neiman Marcus, PetSmart uses multiple bases for competitive advantage including unique merchandise and services for pet owners. The combination of these sources of competitive advantage makes their strategy sustainable. 7. Assume you are interested in opening a restaurant in your town. Go through the steps in the strategic planning process shown in Exhibit 5–7. Focus on conducting a SWOT analysis of the local restaurant market, identifying and evaluating alternatives, and selecting a target market and a retail mix for the restaurant. (1) Define the Business’s Mission: Looking to be in the Italian restaurant business, my target market would be those customers in my local town and surrounding towns interested in paying money for an authentic Italian meal in a romantic setting. The mission of this restaurant would be to have high quality food, in a romantic setting, while avoiding being too expensive for those interested in a special meal. (2) Conduct a Situation Audit: Market Factors include the size of the market interested in Italian food and the growth potential of this particular market. Competitive factors include how hard it is to enter the Italian Restaurant Market including the startup costs, and the number of other Italian Restaurants in the area along with alternatives. The environmental factors would include the social and economic. The restaurant business focuses on the social aspect of dining out. Is there a growing trend in those people eating out? With the shifting roles of women in society, there is often less time for cooking, which may in turn increase dining out. What impact does the economy have on consumers’ decisions to spend their dollars on dining out? The analysis of strengths and weaknesses allows a retailer to judge their potential success. The strengths and weaknesses in this situation could include my financial resources, the availability of a good location, my restaurant management experience, my need to build customer loyalty, and my prospects of good operations. (3) Identify Strategic Opportunities: • Market Penetration: Can I increase the variation on my menu, open another restaurant in another neighborhood? • Market Expansion: Open a to-go style restaurant, open a restaurant in another geographic area. • Retail Format Development: Sell candles with the restaurant name on them, or develop an online ordering format for to-go style meals. • Diversification: Manufacture Spaghetti Sauce under the restaurant name, or open an Italian food grocery store. (4) Evaluate Strategic Opportunities: In evaluating the alternatives, we must look at both the market attractiveness and the competitive position. Retailers can maximize their growth opportunities by investing in areas that have high market attractiveness and a low competitive position. In the restaurant business, this might include opening additional restaurants, opening a to-go restaurant, and manufacturing their own food products, like spaghetti sauce. (5) Establish Specific Objectives and Allocate Resources: After finding growth opportunities, resources must be allocated to each opportunity. This is done by looking at the performance sought, the time frame needed, and the level of investment needed to accomplish the objective. (6) Develop a Retail Mix to Implement Strategy: (Merchandise and services offered, merchandise pricing, advertising and promotional programs, store design, and convenience of the store’s location): The restaurant will offer a large variety of Italian dishes with a large experienced wait staff, the pricing will be medium to high to attract the upscale customer and show the value of the food, the advertising will start with publicity on the opening of the business and then focus on word of mouth, promotional programs may be implemented to frequent eaters, store design will be small, elegant, and romantic with many tables for two and private tables, and the location would be in a downtown area. After this strategy is implemented, a retail mix can be developed for the growth opportunities. (7) Evaluate Performance and Make Adjustments: The final step of the planning process is evaluating the results of the strategy and implementation program. 8. The Gap Inc. owns five apparel brands — Gap, Piperlime, Athleta, Old Navy and Banana Republic and has Gap, Old Navy and Banana Republic stores located in the United States, Canada, United Kingdom, France, Ireland and Japan. What type of growth opportunity was Gap Inc. pursuing when it opened each of these retail concepts in these various locations? Which is most synergistic with the original Gap chain? Developing retail concepts to target specific markets offers Gap a number of market expansion strategies. Each of the concepts described here is very similar to the others. Merchandise categories are the same, basic store layouts are the same (yet with image and fixture differences appropriate to the target markets) and even the brand’s Web site follow a very similar format, though emphasizing models and fashion styling appropriate to their respective target markets. Students could also consider the market penetration strategy as appropriate here. The multiple Gap brands/formats are closely related enough that one could argue expected overlap in consumers. 9. Identify a store or service provider that you believe has an effective loyalty program. Explain how the program works and why it is effective. An example that would readily come to mind to most students would be frequent flyer programs of various airlines. Many airlines not only award frequent flyer miles on airline travel but also carry out these programs in partnership with credit card companies and retailers. The effectiveness of such programs depends on the extent to which there are various levels of rewards and bonuses and the availability of multiple opportunities to earn points toward a reward. 10. Choose a retailer that you believe could be, but is not yet, successful in other countries. Explain why you think it could be successful. A nonstore retailer such as Amazon.com is poised to be successful globally with the increasing spread and prevalence of the Internet and World Wide Web. Since the costs associated with entry and set up are less than in conventional retailing and most products carried by Amazon.com are quite standardized, Amazon.com could pursue a cost-efficient and effective global expansion strategy. However, such an expansion strategy would have to await infrastructure development in various countries. The success of Amazon.com's global strategy would come from utilizing technological and global efficiencies of scale, lower costs of operations, enhanced customer service at lower costs due to better customer information and relationship management, and better adaptability to local tastes and preferences due to superior information collection and analysis. 11. Amazon.com started as an Internet retailer selling books. Then it expanded to groceries, DVDs, apparel, software, travel services; introducing the e-readers; operating the Internet channel for other retailers; and hosting virtual stores for small, independent retailers. Evaluate these growth opportunities in terms of the probability that they will be profitable businesses for Amazon.com. What competitive advantage does Amazon.com bring to each of these businesses? Groceries and Apparel: These categories represent somewhat risky growth propositions for Amazon.com. The web grocery business has a few well positioned competitors (www.tesco.com and www.peapod.com) that are more focused on the online grocery segment. These competitors have developed business models specifically around providing the grocery merchandise and services that customers in the channel expect. While Amazon.com may compete well on price on non-perishable food items in small size that can be shipped easily, as books can, they are less well prepared to compete on other types of grocery purchases. In terms of apparel retailing online, there are many players in this market and the prices may not be much lower on Amazon's site as compared to those offered by other players in these markets. Apparel shopping on Amazon.com is most likely to succeed with those consumers who want a one stop shop for clothing, books, entertainment, small appliances, etc. DVDs: These growth opportunities will most likely be profitable because, like books, they do not need to be touched and felt prior to purchase. Most customers will feel very comfortable ordering DVDs over the Internet without previous viewing or experience. The primary threat to profitability here is competitive from movie downloads and increasingly popular pay per view and DVD rental services. Yet for those consumers interested in purchasing and owning DVDs, Amazon.com will bring a competitive advantage to selling DVDs mainly through their name recognition over many other dot.com companies. Also, Amazon has an amazing database system that will be able to better target their customers and keep track of their purchases. Amazon’s distribution system will be able to deliver the goods in minimal time at a minimal cost. Software: Since software is an information product, even the distribution of the product could be over the Internet. Thus, instead of costly packaging and stocking at retail stores, Amazon could simply offer the product for immediate download, thereby also providing the immediate gratification that is typically lacking for most products purchased over the Internet. The lower costs of distribution coupled with the already lower costs of operations, could render this category quite profitable for Amazon. However, larger software manufacturers, such as Microsoft, Adobe, Real Networks, Broderbund, etc. already have their own retail and distribution site and may use Amazon only for expansion to market segments that they are not currently serving. Internet Travel Site: This market expansion to a new service has its strengths and weaknesses. Amazon may attract a larger customer base by offering this new service. However, most travel, including airline travel is now viewed as a commodity, with consumers often deciding more on price than on brand name. There is more intense competition and the prices may not be much lower on Amazon's site as compared to those offered directly by the service providers. e-Readers: Amazon has dominated the e-Reader market with its Kindle. Amazon typically offers lower prices on books and e-books than other retailers, making it an affordable option for many consumers. Amazon often takes a loss on books in order to attract more customers and encourage them to buy other products from Amazon as well. Hosting virtual stores- Hosting virtual stores is almost a win-win for Amazon and the small retailer. Amazon can expand its merchandise assortment and offer more unique merchandise by partnering with smaller retailers. Conversely, smaller retailers can expand their reach and capitalize on Amazon’s network by hosting a virtual store through Amazon.com. Chapter 5 – Retail Strategy McDonald’s original market was families with young children and its format was selling hamburgers and French fries in freestanding stores at lunch and dinner time. How would you classify these opportunities McDonald’s pursued? A) Adding breakfasts B) Locations in office buildings C) Locations in schools D) Adding salads to the menu E) Adding pizza to the menu F) Opening up seafood restaurants to compete against Red Lobster G) Opening up stores in China & Germany Draw an “Opportunity Matrix” and classify each of the aforementioned moves by McDonald’s. Give an example of each type of growth strategy that Best Buy might use (include related AND unrelated diversification). To help you, Best Buy currently targets five composite segments: 1. “Barrys” = affluent, professional males, 30-60 years old, who make a minimum of $150,000 a year and drive luxury cars 2. “Jills” = busy, suburban moms 3. “Buzzes” = focused, active, younger men 4. “Rays” = family men who like their technology practical. 5. Small businesses who buy their consumer electronics at Best Buy. Chapter 5 - Sustainable Competitive Advantage for a Regional Grocery Store Read the material from Giant’s homepage http://www.giantfood.com/main.htm and describe how this retailer is creating sustainable competitive advantage in the grocery store category. Be prepared to discuss your responses with the entire class. Sustainable Competitive Advantage Giant’s Implementation Customer Loyalty Location Distribution Merchandise Customer Service Human Resources Sustainable Competitive Advantage for a Regional Grocery Store with Answers Read the material from Giant’s homepage http://www.giantfood.com/main.htm and describe how this retailer is creating sustainable competitive advantage in the grocery store category. Be prepared to discuss your responses with the entire class. To have students complete this exercise in class you will need to print out the following pages from this retailer’s homepage and make a packet for each team: Welcome to Giant Online ordering Giant brand products BonusCard Center Store locator Corporate Information/Giant at a glance Careers at Giant Sustainable Competitive Advantage Giant’s Implementation Customer Loyalty Bonus card program Sweepstakes Coupons A+ Bonus Bucks for schools Weekly circular Savings with partners Savings at checkout Personalized offers Location Convenient to work or home 197 stores in MD, Delaware, New Jersey, DC and Virginia Good parking Neighborhood strip centers Distribution Processing plants for dairy and ice in Landover, and ice cream in Jessup. Distribution center in Landover for meat, produce, health and beauty, general merchandise and seafood. Semi-automated distribution center and warehouse in Jessup Merchandise National brands Super G brand Bakery Meat Produce Health and Beauty Deli Dairy Frozen Pet food Sustainable Competitive Advantage Giant’s Implementation Customer Service Peapod delivery Health & nutrition information Wine guide Flu shots Catering Recipes online Picture center Kids’ Corner Human Resources Employs over 27,000 full and part-time staffers Looking to hire the best people Competitive wages, training and benefits Career opportunities Solution Manual for Retailing Management Michael Levy, Barton A. Weitz, Dhruv Grewal 9780078028991