Retail Strategy

Christine Cuthbertson, Dr Jonathan Reynolds

• Publisher: Routledge
• Year: 2007
• eBook ISBN: 9781136368462
• Topic: Business
• Subtopic: Business General
• Index: Business

The book is made distinctive by the presentation of practitioner insight allied with academic underpinning to create a powerful new framework of unusual breadth and depth. The book communicates contemporary retail thought from the perspectives of both senior international retailers and expert observers. It is structured around four sections: * Section I : retailing in an international context * Section II: chapters from faculty at Templeton College in Oxford outlining the key issues with review questions, discussion topics, assignments and further reading. * Section III : A unique series of in depth interviews with senior executives in the world's major retailers conducted by the Oxford Institute of Retail Management. Each case is backed up by company and sector information to demonstrate the changing retail and global environment. * Section IV: A summary and overview with further exercises assignments and recommended reading.The book is an innovative and highly effective new text for both students and executives needing to understand the complexities of the latest global developments and thinking.

Part I

Introduction

Chapter 1

Introduction to
retail strategy

Jonathan Reynolds

Introduction

Retail practitioners, historically, have been suspicious of strategy. Sir Ken Morrison, chairman of family-run Morrisons supermarkets in the UK, is on record as saying that running supermarkets is simple. Sir Ken reportedly has little time for fancy theories or clever marketing: ‘It's just taking money off people, isn't it? And giving them something in return’ (Mail on Sunday, 2002). Marketers and economists used to share this somewhat folksy view, in effect regarding retailers as mere ciphers in the distribution channel, working as intermediaries just to smooth the flow of goods and services between suppliers and consumers. Then it became clear that in practice, retailers were able to become much more active agents in their own right within the value chain than was sometimes suggested. Indeed, the flows of people, goods and money through the retail supply chain make the sector's businesses some of the most influential corporate players in the economies of developed countries. In 1999, for example, European retail trade generated sales of d1518 billion; created d292.5 billion in added value and employed 12.4 million people (European Commission, 2003).

From the point of view of the marketer, retailers are, by definition, closer to the consumer than supplier companies. This has two implications. First, retailers are in principle better placed to gather information on the behaviour of consumers and customers than organizations further back in the supply chain. Second, and as a consequence of this data-gathering activity, such companies are also therefore becoming better placed to communicate more effectively with consumers and to develop strategies that are more effectively market-oriented. And strategies are required, as Sam Walton once remarked: ‘retailing is simple but it ain't easy’ and such businesses – like Wal-Mart – are becoming increasingly complex animals: very large, widely spread organizations, managing multiple product supply lines, managing very large amounts of data, and above all, far from being ciphers, are competing more and more with other large organizations rather than small ones.

But strategy has come late to retailing. Business strategy text books have contained few references to the sector until relatively recently. Now retailing is the domain of corporate strategy, format strategy, marketing strategy, international strategy and so on. Strategy has arrived because of the most important of the structural trends we can identify: this is that large organizations now run most of the retailing in western economies and are now coming to do so in transitional economies. In a strategic sense, retailers are concerned with growing larger and faster than their competitors, being different from the competitors, attracting and keeping customers, and gaining efficiencies in systems and procedures. Bell describes the way this has happened for food retailing as an ‘inexorable logic’ (Bell, 2000). There are, he suggests, four stages:

• The development of retail chains as retailers sought to increase their buying power. The early exponents of this process were the consumer co-operatives and during this stage most chains, including the co-ops were organized on a regional basis within a country. This was followed by the emergence of national retail chains with large market shares.
• The development of large retail formats. The emergence of these formats across Europe coincided with increasingly lax planning regimes, initially in Belgium followed by France, Spain, Portugal, and then the UK. The large surface outlets resulted in a reduction in the number of small corner stores and the decline of town centre supermarkets. This process in itself contributed to the retail concentration of ownership characterized by stage 1.
• The development of dedicated distribution systems by the large integrated retailers. The development and application of scanning systems provided the necessary information for the supply chain to be reversed from ‘producer push’ to ‘consumer pull’. A consequence of this process is the decline of traditional wholesalers and cash and carries that has the effect of further disadvantaging small retailers.
• The emergence of retail chains as national brands in their own right. The effect is to move away from head-to-head price competition to a differentiation strategy based on range, service, store format and location.

This book is about achieving a better understanding of the characteristics and consequences of this process. In doing so, it seeks to bridge the gap between retailing and strategy and between retailers and academics. It takes several of the corporate themes of strategic interest to contemporary retailing and explores them through the presentation of practitioner insight underpinned by rigorous academic analysis. In particular, a series of case studies are developed based on interviews with senior executives in some of the world's leading retailers. The book is an attempt to communicate contemporary retail thought from the perspectives not only of senior international retailers but also retail commentators and analysts.

Size and its consequences

Even as recently as 1990, there were no retailers in the Fortune 500 list of the largest global companies. Now there are over 50, and in 2002 Wal-Mart became the largest of all companies, judged by size of sales. (Wal-Mart alone employs over 1.3 million associates worldwide; 100 million customers a week visit the company's 4,300 stores.) In just two years – between 1996 and 1998 – retailers’ share of the revenues of the Fortune top 500 grew by over 25 per cent, and their share of total assets doubled (Gestrin, 2000). Small shops, independent retailers and small firms have closed in their hundreds of thousands. Some large and medium sized companies have grown dramatically: Dutch retailer Ahold tripled in size between 1990 and 1998 and then added over 50 per cent in the following year. French retailer Carrefour is five times its size at the beginning of the last decade. Wal-Mart's compound annual growth rate throughout the 1990s was 19.5 per cent. Despite significant consolidation activity in the US, it is European countries that show the highest levels of concentration. For example, in France, the five largest retailers have increased their share of grocery retailing from 61 to 83 per cent in just six years (Bell, 2001). Maturing markets are also catching up: in Greece the top ten food retailers’ market share grew from 18.5 per cent in 1990 to 72 per cent in 1999 (Bourlakis, 2001). Nor should we forget that large companies dominate many of the specialist non-food retail trades too – although by their nature levels of turnover are generally smaller. In the UK, three companies accounted for 26.4 per cent of clothing sales in 2001 and fully 82 per cent in DIY. Italy, so long a preserve of small firms and small retailers within the EU is changing too: the presence of Carrefour and Auchan in the country has helped increase the number of hypermarkets to over 400 in 2000 – a fourfold increase in ten years (Mintel Retail Intelligence, 2002). From negligible levels in 1989, large multiple firms have grown to take substantial proportions of a growing retail trade in the countries of central Europe. The trends are the same in Latin America and Asia Pacific countries. The degree to which large corporations dominate in the latter seems mainly related to the degree to which the countries are open to foreign direct investment. In China, for example, the reforms and changes of the last few years mean that, apart from the foreign entrants who see huge prospects for growth, indigenous multiple retailers are growing. Although they are responsible for only a small fraction of retailing at the moment, official policy is to encourage their growth, as a means to increasing the efficiency of distribution and encouraging growth in the consumer economy (Central Committee of the People's Republic of China, 2002).

The implications of size become significant when retailers affect consumer choice, obtain a relative competitive advantage and/or influence supplier profitability. This has brought retailing to the attention of the regulatory authorities. Market share reflects retailers’ influence over consumers, competitors and suppliers. Absolute size is also important vis-à-vis suppliers. The potential impact of retailer size can be measured by their ability to extract non-cost-related discounts from suppliers. Size becomes important here when the potential lost volume to a supplier has a significant effect on profit. Businesses whose profit is highly sensitive to changes in sales volume are more likely to offer non-cost-related discounts and are more vulnerable to smaller sized accounts, e.g. with market shares of under, say, 10 per cent. Thus the exact level of size at which a retailer exercises power varies with financial structure of each supplier. Chapter 3 discusses the consequences that have emerged in terms of supply chain collaboration of such a situation.

The relevant measure of size with respect to influence over consumers, and relative competitive advantage is the level of concentration shown by the Herfindahl-Herschman Index. The HHI is determined by adding the squares of the market shares of each competitor within the relevant product and geographic market. For example, if there are four firms, with shares of 30 per cent, 30 per cent, 20 per cent, and 20 per cent, respectively, then the HHI equals 2,600 (900 + 900 + 400 + 400).If two or three retailers have a very large market share, this is reflected in a higher HHI than if five retailers have similar market shares, even though the aggregate share for the top five retailers is similar. The US regulatory authorities have used the HHI as a means of understanding and potentially challenging prospective post-merger outcomes in retailing (Miller, 1997):

The guidelines under which the FTC and the Department of Justice operate are as fo...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Table of Contents
• List of contributors
• List of figures and tables
• Part I Introduction
• Part II Strategic issues in retailing
• Part III The view from the bridge
• Part III Putting it all together
• Index