LESSON—4

RETAIL STRATEGY

Objectives:

After completion of this lesson you will be able to understand

What is Strategy,

Strategy—Retail perspective

Identifying Options/Strategic Alternatives

Develop a Strategic Plan

Implementation of Strategy and Control

International Expansion—A growth Strategy

Concept of Branding

Retail value Chain.

Structure:

4.1         Introduction

4.2         Retail Strategy

4.3         International Expansion – A Growth Strategy

4.4         The concept of Branding

4.5         Concept of Retail Branding

4.6         Questions

4.7         References

1.1 Introduction:

Success in retail is a combination of well thought out plans, processes and their implementation.  As the retailer expands his operations from a single store to multiple stores, the need for good planning and analysis increases.  Increased competition, changing consumer expectations and shifting economies increase the risk of failure.  To be successful, a retailer needs to plan his moves very carefully.  The retail marketplace has fast become the domain of those who know how to use core strengths to dominate.  Strategy thus has become important to the retailer than ever before.

This lesson examine the process of strategy formulation from the perspective of the retailer.  The steps involved in creating this strategic plan are discussed.  International expansion as a growth strategy is explored and the need for retailers to build a strong retail brand is examined.  The value chain that a retailer needs to build is discussed at the end of this lesson.

What is Strategy:

According to Henry Mingzberg, people use “strategy” in several different ways, the most common being these four:

1. Strategy is a plan, a “how”, a means of getting from here to there.
2. Strategy is a pattern in actions over time: for example, a company that regularly markets very expensive product is using a “high end” strategy.
3. Strategy is position that is; it reflects decisions to offer particular products or services in particular markets.

1. Strategy is perspective, that is, vision and directs

Strategy as the basis for competition is best understood from the perspective of Michael Porter.  According to Porter, Competitive Strategy is “about being different”.  He add, “it means deliberately choosing a different set of activities to deliver a unique mix of value”.  Thus, Porter argues that strategy is about competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors.  In his earlier book, Porter defines competitive strategy as “a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there”.

1.2 Retail Strategy:

A retail strategy is the overall plan guiding a retail firm.  It influences the firm’s business activities and its response to market forces, such as competition and the economy.  Any retailer, regardless of size or type, can and should utilize these six steps in strategic planning:

1. Define the type of business in terms of the goods or service category and the company’s specific orientation (such as full-service or “no frills”).
2. Set long-run and short-run objectives for sales and profit, market share, image, and so on.
3. Determine the customer market to which to appeal on the basis of its characteristics (such as gender and income level) and needs (such as product and brand preferences).
4. Devise an overall, long-run plan that gives general direction to a firm and its employees.
5. Implement an integrated strategy that combines such factors as store location, product assortment, pricing, and advertising and displays to achieve objectives.
6. Regularly evaluate performance and correct weaknesses or problems as they are observed.

Strategy – The Retail Perspective:

A Strategy in commercial parlance would mean the plan or the method by which an organization whishes to achieves its objectives.  Thus, a retail strategy can be defined as “a clear and definite plan that the retailer outlines to tap the market and build a long-term relationship with the consumers”. A retail strategy is fundamental to the existence of the retail organization.  It helps define the organization, its purpose and how the retailer will face various challenges in the environment and marketplace.  The retailer then determines his tactics.  Each aspect of the retail business, such as merchandising, sales, operations, service and finance will draw their individual operational strategies to support the main business strategy.  The strategy document for the retailer thus acts as the guide for how processes, systems and information are handled in the organization.

The definition of a retail strategy enables other area within the organization to determine their strategies.  Primary among these are:

1. Store Location
2. Merchandising
3. Pricing
4. Marketing

The primary area which is influenced by the business strategy to be adopted by the retailer is the decision on store location.  For year’s experts have argued that the three most important aspects of any retail business are Location, and location.  Depending on the business model that is to be adopted by a retailer, the store location has to be chosen.  A strategy for tapping the up-market consumer requires that the store be located in a place where such a consumer will shop.  Similarly, for building a model based on discounting, one may not really require prime locations, though in this case, a larger space may be needed.

The second factor which is influenced by the strategy is the type of merchandise to be stocked.  If the retailer chooses to dominate the marketplace on the basis of product selection, he needs to ensure that he has the largest and widest selection of product category imaginable, or merchandise that is so unique that people will seek out the store.  The merchandising strategy has to draw from the overall business strategy, so as to understand and determine the types of products that will be needed in the store and the kind of prices that will have to be determined.  The merchandising strategy has to match the selling strategy.  Very often the merchandising strategy is based more on long-term vendor relationships or competitive distribution issues, than on a well thought out business strategy that is written down and communicated throughout the organization.  Merchandise strategies should be based on consumer research.  Selling strategies should also be based on research, not just merchandise-based research.  Selling strategies should also be based on research, not just merchandise-based research that indicates to the retailer what consumers want to buy, but relationship-based research which indicates to the retailer how they want to be treated when they buy.

Related to the concept of merchandising is the concept of pricing, which again is influenced by the business model that the retailer has chosen to adopt.  Very often, being the price leader is still a valid strategy.  However, it is not necessary to be a low-price leader.  The other end of the pricing spectrum also presents an opportunity.  Lastly, the complete marketing strategy adopted by the retailer is a reflection of the overall business strategy.  It is a combination of the advertising, promotions, communications, stales staff, the level of customer service and the complete shopping experience offered to the end consumer.

The process of strategy formulation is retail is the same as that for any other industry.  It starts with the retailer defining or stating the mission for the organization.  The mission is at the core of the existence of the retailer.  The other aspects of the strategy may change over a period of time or may vary for different markets.  Figure 1.0 illustrates the steps involved in strategic planning.  After defining the mission of the organization, an analysis of the internal strengths and weaknesses and external threats and opportunities is then undertaken to help the management decide on the best way to carry out the organization’s mission.  The options which can be pursued, are then examines and the objectives set.

Figure 4.0 Steps involved in Developing a Retail Strategy

Next, the management identifies the major strategic alternatives it could pursue.  Markets in which the retail organization chooses to compete are then determined.  Once this is determined, the objectives to be achieved are determined and resources are obtained and allocated so as to help achieve the objectives.  The strategy must then be implemented.  Finally, results must be measured and evaluated to ensure that the strategy is working and any changes necessary must be effected.

Let us now understand each one of the Steps:

Step -1: Define the Mission or the Purpose of the Organization:

The mission statement is a statement of the long-term purpose of the organization.  It describe what the retailer wishes to accomplish in the markets in which it chooses to compete.  A retailer’s mission statement normally highlights the following elements:

• The products and services that will be offered
• The customers who will be served
• The geographic areas that the organization chooses to operate in
• The manner in which the firm intends to compete in its chosen markets.

Mission statements need to provide a clear sense of direction for the organization and often reflect an organization’s values or corporate culture.

Some examples of mission statements:

Wall-Mart: “To give ordinary folk the chance to buy the same thing as rich people”

McDonald’s (QSCV) “Quality, Service, Convenience, and Value.”

Step- 2: Conduct a Situation Analysis:

Once the mission has been defined, the retail organization needs to look inwards and understand what its strengths and weaknesses are and look outwards and analyze the opportunities and threats, which may arise in the environment.  Over the years.  Many management experts have deloveloped various models for conducting a situation analysis.  These include PEST analysis and SWOT analysis and the BCG Matrix.

The PEST Analysis: the Pest analysis is a framework that strategy consultants use to scan the external macro-environment in which a firm operates.  PEST is an acronym for Political, Economic, Social and Technological Factors.  Typically, these factors are outside the control of the retailer and may either be threats or opportunities.  These factors may vary within the regions of a country and would most definitely vary from one country to another.

Key PEST factors that can affect the retail sector are listed in Table 4.1.

An industry analysis can also be done using the framework developed by Michael Porter, known as Porter’s five forces.  This framework helps evaluate entry barriers, suppliers, customers, substitute products and industry rivalry.

Table 4.1 PEST Factors that Affect the Retail Sector:

The situation analysis basically helps the retailer determine his position and his strengths and weaknesses.  This helps formulate a clear picture of the advantages and opportunities which can be exploited and the weaknesses that need to be worked upon.  This forms the basis or the core elements of any strategy.

Step -3: Identifying Options/Strategic Alternatives:

After determining the strengths and weaknesses of the organization vis-à-vis the environment, the retailer needs to consider the various alternatives available to him for tapping a particular market.

Ignore Ansoff presented a matrix which looked at growth opportunities by focusing on the firm’s present and potential products in the existing and new markets.  This matrix, which is popularly known as Ansoff’s Matrix, helps us understand the options available to a retailer.

The alternatives available to the retailer are:

• Market penetration
• Market development
• Retail format development
• Diversification

They are illustrated in Figure 4.2

Market penetration:

This is a strategy adopted by the firm when it seeks to achieve growth with the existing products, in the market segments that it operates in.  Thus, a retailer who targets an existing market in the existing retail formats, he is said to follow a strategy of market penetration.  This strategy may focus either on:

• Increasing the number of customer or,
• Increasing the quantity purchased by the customers, i.e. the basket size, or on increasing the frequency of purchase.

Increasing the number of customers can be achieved can by adding new stores and by modifying the product mix, to bring in new customers.  Another approach is to encourage salespeople to cross-sell.

Figure 4.2: Growth Opportunities for a retailer.

Cross selling involves salespeople from one department attempti on to sell complementary merchandise from other departments to their customers.  For example, a salesperson that has just sold a part of trousers to a customer may take the customer to the shirt and tie area and try to sell to the customer, a shirt and tie that complement the trousers.  Increasing the frequency with which customers purchase a particular product may not really be easy.  A lot of companies resort to freebies to attract customers e.g., Pizza Parlors offering a discount on the purchase of a second pizza ordered within a specific period of time.

The market penetration strategy is the least risky since it leverages many of the firm’s existing resources and capabilities.  In a growing market, simply maintaining one’s market share will result in growth, and there may exist opportunities to increase the market share if competitors reach capacity limits.   However, market penetration has limits, and once the market approaches saturation, some other strategy must be pursued if the firm is to continue to grow.

Market expansion/development:

A retailer is said to follow a strategy of market development if he reaches new market segments or completely changes the customer base.  Thus, this strategy involves.

• Tipping new geographical markets or,
• Introducing products to the existing range that appeal to a wider audience.

Expansion by adding new retail stores to the existing network is an example of geographical expansion.  Introducing a pharmacy in a supermarket (The Medicine Shopper at Trinetra Super Market) is an example of a retailer introducing new products, which appeal to a different audience.  Another example of the same is McDonald’s, who introduced ice creams at Rs.5.  This not only created add-on sales but also brought in the customers who had the perception that McDonald’s was an expensive fast food restaurant.

Retail format Development:

Developing a retail format is introducing a new retail format to customers.  Good examples are fast-food retailers like McDonald’s and Subway, who offer limited menus in smaller locations many a time inside large department stores. Another example is of the bookstore chain Crosswords, opening smaller format stores by the name of Crossword corners at Shopper’s Stop.

This strategy may be appropriate if the retailer’s strengths are related to specific customers rather than to specific products itself.  In this situation, it can leverage its strengths by developing new product targeted to its existing customers.  Similar to the case of market development, new format development carries more risk than simply attempting to increase the market share.

Diversification:

The retailer grows by diversifying into new businesses by developing new products for new markets.  A good example of diversification in India is that the tobacco giant ITC, who has entered the business of apparel retail through its Wills Lifestyle stores and now, plans to enter the greeting card business.  International expansion is also a growth alternative and it is discussed latter in the lesson.

Step-4: Set Objectives:

The objectives are translation of the mission statement into operational terms.  They indicate the results to be achieved.  The purpose of setting objectives is to give direction and set standards for the measurement of performance.  Management normally set both long-term and short-term objectives.  One-or-two-year frames for achieving specific targets are short term.  Long-term objectives are less specific than short-term targets and reflect the strategic dimensions of the firm.

Good Objectives are measurable, are specific to time, and indicate the priorities for the organization. Two areas may be set keeping these two areas in mind: Examples:

• Sales volume targets
• Market share targets
• Retail expansion targets
• Profitability to be achieved
• Liquidity
• Returns on Investment

Setp – 5: Obtain and Allocate the Resources Needed to Compete:

The resources that a retailer needs are human as well as financial.  Financial resources take care of the monetary aspects of the business, like shop rent, salaries and payments for merchandise.  Human resources are just as vital to the success of a retail operation as are financial resources and physical facilities.  The human resources plan must be consistent with the overall strategy of the retail organization.  Human resources management also involves a variety of issues such as recruiting, selecting, training, compensating, and motivating personnel, as well as organizing, and it is essential that these activities be managed effectively and efficiently.

Step – 6: Develop Strategic Plan:

At this stage, the retailer determines the strategy by which he will achieve the objectives set forth.  The target market is defined and the retail mix that will serve this audience finalized.

The target market is that segment of the consumer market that the retail organization decides to serve.  There is no definite or best way for deciding upon and selecting the target market in which to compete.  Often, the retailer begins by looking at the entire market in terms of both the size and the consumer segments to which it might appeal.  From these segments, he identifies a smaller member of segments that holds the most promise for the firm – these are the possible targets.  The retailer then zeroes in on these possible targets and applies a set of screening criteria to help select the final targets.  A number of variables like the growth potential of each likely target market, the investment needed to compete and the strength of the competition, etc., are normally evaluated for each segment in order to arrive at other ones which are most compatible with the organization’s resources and skills.

In order to be successful in segmenting the market, the retailer must ensure that it is:

• Measurable – Is the segment measurable and identifiable?
• Accessible – Will focusing marketing efforts on a particular market segment have a positive impact on eliciting the desired responses?
• Economically viable – Is the segmentation variable shared by enough potential customers to justify the expense and effort of focusing marketing efforts on that segment?
• Stable-Are the consumer characteristics stable indicators of the market potential?

Once the retailer has chosen the target market, the retail mix needs to be determined. This involves determining the merchandise mix, the pricing policy, the types of locations that the retail store will be located at, the services that will be offered at the store and the communication platform that will be adopted by the retailer. The positioning strategy is then formulated. Positioning refers to the image of the retailer in the customers mind. All the elements of the retail mix work together in creating this positioning strategy.

Step – 4: Implement the Strategy, Evaluate and Control

The key to the success of any strategy lies in its implementation. To implement a firm’s desired positioning effectively, every aspect of the store must be focused on the target market. Merchandising must be single-minded; displays must appeal to the target market; advertising must talk to it; personnel must have empathy for it; and customer service must be designed with the target customer in mind.

Once a strategy is implemented, managers need feedback on the performance of the new strategy. The effectiveness of the long-term competitive strategy of the firm must be evaluated periodically. Such an evaluation covers all elements of the plan. This type of evaluation guarantees that the firm’s plan does not degenerate into fragmented, ad hoc efforts that are not in harmony with the overall competitive strategy of the business. Management can also use the process to decide what changes, if any, should be made in the future to ensure that the combination of retailing mix variable supports the firm’s strategy.

Retail Snapshot 5.3 focuses on the strategy adopted by the retailed, Ebony, to tap into markets in the Northern belt in India. Retail Snapshot 5.4 examines what could be the reasons for the failure of Arcus, which had to pull out from the Mumbai market.

1.3 INTERNATIONAL EXPANSION – A GROWTH STRATEGY

The removal of trade barriers between countries and the rise of consumerism are two factors that have aided the rise of international retail trade. In this section, we examine the concept of international retailing and the methods by which a retailer can enter a new market.

International retailing is more than just replicating the retail store in other markets. Retail internationalization has been defined as “the management of retail operations in markets which are different from each other in their regulation, economic development, social conditions, cultural environment and retail structures”.

Retail formats have evolved in response to social and economic developments in the economy. Typically, retailers start as local or regional players. As they expand in size, they develop operational efficiencies. Many retailers then expand to a national presence. The growth in size also gives them financial resources. In most cases, international expansion happens when the retailers have reached a level of dominance in the domestic market. Saturation of the domestic market may also be a reason for the retailer to look at international expansion.

When taking a decision to enter a new market, a retailer needs a sharp focus on that market. He needs to understand the culture and the buying habits of the local population. He should also be able to use technology and the systems and processes that he has developed in the domestic market. The population levels the expected growth rates, density of the population and the income levels are important factors to be taken into consideration.

A retailer can enter a new market by adopting any of the methods given below:

1. Export:

Export is the selling of domestically manufactured products, in a different country.  A retailer who has a distinct product, such as an own brand, which may be attractive to customers in other markets, may look at exports as an option.  Marks and Spencer did this successfully with its St. Michael’s brand, as did The Body Shop. ; If the response to the exported product is good in the market, it is a good indication that the retail stores for the brand would also do well in the particular country.

2. Franchising/Licensing:

This arrangement permits a company in the target country to use the property of the licensor.  Such property usually is intangible, such as trademarks, patents and production techniques.  The licensee pays as a fee in exchange for the rights to use the intangible property and possibly, for technical assistance.

The strategy of market development has seen the rapid expansion of many retail chains across the globe.  McDonald’s owes a great deal of its success in the international and national markets to successful franchising. This strategy enables a retailer to build a strong identity in the market.  For franchising to be successful, it is necessary that the partnerships be with people who share the organization’s vision and understand the market equally well.  Systems and procedures also need to be in place with the parent company, so that they can be successfully duplicated.

3. Acquisitions and Mergers:

Acquisition, as the word suggests, implies one organization acquiring another organization.  A good example of a retail acquisition is that of Ads by Wal-mart. Shopper’s Stop acquiring the bookstore chain Crossword.  While acquisitions are an easy way of entering a new non-domestic market, it is not without its complications.  Various aspects like the management structure, new operating culture and the financial burdens of the company being acquired need to be taken into consideration.

Mergers on the other hand, imply two organizations coming together to form a combined entity.  The merger of the retail gains Carrefour and Promotes in Europe in an example of the same.

4. Joint Venture:

A joint venture is a strategic partnership between a local retailer and an international/foreign player.  This arrangement allows the international retailer to learn from the expertise of the domestic partner, while the domestic retailer can learn from the international practices of the partner.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources and government regulations.

Most joint ventures involve one local partner and one foreign partners.  However, two retailers may also form a company to enter into a new market.  The expansion of US toy retailer A”Toys R Us to the Japanese market, in an example of the same.  For entering the Japanese market, Toys R Us teamed up with McDonald’s which already existed in Japan.

5. Organic Growth:

Organic growth refers to replicating the retail format in the non-domestic market, within the regulatory framework of the new market.  While on the hand, it given the retailer the kind of control that he may require, it also requires a great deal of investment.

Various factors come into play while deciding on the method of entry into a particular market many a times, a retailer who looks at international expansion, is a leader in his domestic market, and has access to global systems and the ability to adapt to the requirements of the global market and a long term commitment towards the business.

Very often, retailers adopt a strategy of aggressive rollout of stores. This strategy, also known as the strategy of saturating a market of carpet-bombing, is aimed at increasing the number of retail stores in one particular geographic region, in a relatively short span of time.

This strategy aims at capturing a substantial market share in a relatively short period of time.  This may be achieved by increased penetration of the market and/or by increasing the number of shopping occasions made available to the end consumer.  This may mean multiple formats catering to different target audiences or simply rolling out an increased number of stores of one format in a geographic area, to ensure that the customer needs are satisfied only by one retailer, thereby leaving little room for others.

A rapid roll out helps the retailer by offering the following advantages:

• Building Economies of Scale;
• Creating Entry Barriers;
• Capturing possibly scarce resources in terms of location, manpower, etc; and
• Building brands

1. 4 The Concept of Branding:

It is often said that branding is the art and cornerstone of marketing.  Without brands, a shopper’s choice becomes arbitrary.  In the first part of this section, we examine a few definitions of the terms ‘brand’ and ‘branding’.  The American Marketing Association defines a brand as “a name, term, design, symbol or a combination of them, intended to identify the goods or services of one seller or group of seller and to differentiate them from those of the competitors”.

Branding has existed probably from the time that man felt the need to differentiate his products from the being offered by others. Early man stamped ownership on his livestock by burning a sign on them.  With the development of trade, buyers eventually started using brands as a means of distinguishing between the cattle of one farmer and another.  Some of the earliest manufactured goods in mass production were clay pots; potters identified their pots by putting their thumbprint into the wet clay on the bottom of the pot or by making his mark: a fish, a star or cross.  Thus symbols (rather than initials or names) were the earliest visual form of brands.  In these early days, branding gradually becomes a guarantee of the source of the product and ultimately, its use as a form of legal protection against copying grew.

With the development of shops, shopkeepers hung pictures above their shops indicating the types of goods they sold.  Symbols thus developed as indicators of the retailer’s specialty.  Today, trademarks include words, symbols (logos) and shapes (Coco-Cola, Pepsi), which have been registered and which buyers recognize as being unique to particular brand.  The industrial Revolution made it possible to mass manufacturer products, but at the same time, the distance between the manufacturer and the consumer increased.

A consequence of this was that manufactures’ production increased, but with the increasing patents was registered and the owners affixed brand names.  This eventually led to the evolution of the role of the brands as tool by which consumers identified the products.

1.5 The Concept of a Retail Brand:

As markets evolve and become more competitive, it will become more important for retailers to focus on branding.  Retail branding does not necessarily focus only on the creation of a private label.  In the case of multi brand retailers, the task becomes more difficult as the retailer needs to create a store identity which is different from that of the brands that he sells within the store, but at the same time, there has to be a level of consistency among the products available.

A brand is essentially a seller’s promise to deliver a specific set of features, benefits and services consistently, to the buyers.  The relative position and perception of a brand evolves over a period of time.  Branding therefore, has to be managed on the basis of constant change.

While retail in India is still at a nascent stage, there still is a strong need to look at branding as a key tool for differentiation.  Customers today not only know what they want to buy, but also have a phenomenal amount of choice available to them.  If a customer wants to by a pair of Levis’s jeans, he can buy them from the company’s own outlet or any of the department stores like Shopper’s Stop, Lifestyle.  The price of the product would be the same and the shopping environment would also be similar. Why then should the consumer choose one retailer and not the other? This where a strong retail brand, which connects to the consumer, can make a difference.  A strong retail brand can swing the consumer’s decision in the favour of a particular retailer.

In the competitive retail environment, the three generic strategies of cost, focus and differentiation, have become bare necessities to survive in business.  The customer is looking at experience that a company can provide while delivering the solution to the customer.  A brand depicts and portrays the total experience a customer has with the product or service.  Today, amidst the retailing revolution, branding carries great importance.  The retail storefront is the reflection of the brand and this is where products are made or marred.  Retail provides services that increase the value of merchandise by combining the tangible deliverable with the intangible such as courtesy, access and reliability.

There is a thin line between losing a customer and retaining him.  Customer memory is short for good experiences, but a negative experience will stay with him forever.  A single experience can decimate the whole relationship with the customer.  It is the interaction point where the personality of the brand is reflected and it has to live up to the expectations that the company builds for the brand. It is the branding that pulls in the customer, but the delivery proposition and experiences retain him.  Delivery points should not act as point of deflection; rather they should cement the relationship with the customer.  Customers would buy where they would feel comfortable.  Customers evaluate when they have a problem.  The tenacity is in how well a store is equipped to handle it.  The aim is to deliver real value to customers.

This clearly

This clearly indicates that branding is at a turning point.  The very definition of brand is undergoing a change.  In future, brands would constitute the whole gamut of interaction the product would have with the customer.  Brands which fail to deliver might not see the light of another day.

Building a Retail Brand:

A retail brand is a combination of the company’s heritage, the merchandise mix available in the store, the store environment, the service strategy, the advertising and the promotion.  Retail brands constantly need to keep evaluating themselves by asking the following questions:

• Can the brand be identified with the lifestyles of its target customers?
• Is there a perceptible difference between the brand and the products offered by the retailer and other retailers?
• Can a story be woven around the brand?

Creating a unique brand identity is what most retailers strive for.  This has become more important today than virtually ever before.  The starting point of creating a unique brand identity

4.5 Questions:

1. What is strategy and explain various strategies in retailing?

2. Explain the concept of branding

3. What is the perspective of retailer strategy and explain the various steps in it?

4. Explain:

a. Diversification

b. Acquisition and Mergers

c. Franchising and Licensing

d. Joint Ventures

e. Market Penetration

4.6 References:

Michael Levy, Barton A Weitz; Retail management; Fifth Edition; Tata Mc Graw-Hill Publishing Company Limited.

Barry Besrman, Joel R. Evans; Retail management; Eighth Edition; Pearson Education Asia.

www.wikipedia.org

www.answers.com