Traditional Retailers Vs Discounters

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Teaching Note

Retailing in Britain: Traditional Retailers vs Discounters Prerequisite Conceptual Understanding • Retail formats and their Different Features • Logistics Management (Finished Products) • Britain’s Retail Industry.

Synopsis of the Case Study

Early 19th century UK usually witnessed small, independent retailers selling a limited variety of products from their shops in various towns across the country. Changing social and income patterns caused by the Industrial Revolution, led to changes in the buying habits of the British. These changes led to innovations in retailing as competition increased, and the emergence of department store chains. Over a period of time, these chains developed their own distribution network system and marketing styles. By the late 20th century, foreign retailers and supermarkets forayed into the retail scenario, offering stiff competition to traditional retailers. Supermarkets, especially, were quite innovative about applying consumer behaviour theories to their marketing strategies. The traditional retailers had inherent weaknesses which reduced their overall profits and exposed them to the threat of being acquired by the bigger players. Market analysts were of the opinion that only those retailers who achieved large product volumes and leveraged on their economies of scale, would survive in such conditions.

Teaching Objectives • To discuss the evolution of retailing industry in the UK • To discuss the differences between the marketing strategies of traditional British retailers, foreign retailers and supermarkets.

Assignment Questions 1) What are the different retail formats? What are the characteristic features of each of these formats? 2) Discuss the evolution of the British retail industry till the late 19th century. What was the scenario in the British retail industry during the 20th century before the entry of foreign players? 3) How were the strategies of the foreign retailers different from those of the native British retailers? What were the factors responsible for the success of foreign retailers in the UK?

This teaching note was written by Chiradeep Chatterjee, under the direction of Souvik Dhar, IBSCDC. It is only an illustrative orchestration of the case study ‘Retailing in Britain: Traditional Retailers vs Discounters’. It is never meant to limit the learning outcomes. © 2007, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. COM0081-1

Teaching Note Retailing in Britain: Traditional Retailers vs Discounters

4) “By the 1990s, apart from the specialist foreign retailers, traditional British retailers had to encounter the domestic supermarkets.” (Page 4, para 2 of the case study). What significant shift in strategy did the supermarkets produce, and how did it influence consumer behaviour? Why did consumers favour the supermarkets? 5) The British retailers took a number of steps to meet the increasing competition from foreign players and supermarkets. However, it was opined that they would not be able to make a success of those strategies. What were the factors hindering the success of those strategies? Besides increasing competition from foreign retailers and supermarkets, which other factors contributed towards constant poor performance of the traditional retailers? 6) What was the threat most imminent to the survival of traditional retailers? What, according to most analysts, could be the way out for the traditional retailers?

Teaching Plan

Both the Teaching Note and the Structured Assignment follow the sequential order as presented in the chart [Annexure (TN)-I].

Case Study Analysis

1) What are the different retail formats? What are the characteristic features of each of these formats?

A retail format is a term usually used to describe a common strategy in retailing. Supermarkets or hypermarkets are all retail formats. Such formats usually follow a conventional form of layout, display arrangement of merchandise, and service to customers. For example, megamarts or supermarkets follow a grid layout, display a variety of articles related to day-to-day usage, standard shelving, self-selection and limited service, centralised checkout at the front, and prices kept low through efficient inventory management and economy of scale. There are many common retail formats that exist throughout the world like – Farmer’s market (where farmers can directly sell their produce to consumers, eliminating in the process, various middlemen), Door-to-door, Department stores, Supermarkets, Convenience stores, Specialty stores, Discount stores, Kiosks, Hypermarkets, Superstores, Factory outlets, etc. Following is a brief explanation of some of the commonly found retail formats. • Mom-and-Pop – Represent the small, individually owned and operated retail outlets. In many cases these are family-run businesses catering to the local community. • Mass Discounters – These retailers can be either general or specialty merchandisers, but either way their main focus is on offering discount pricing. Compared to department stores, mass discounters offer fewer services and lower-quality products. • Warehouse Stores – This is a form of mass discounter that often provides lower prices compared to traditional mass discounters. In addition, they often require buyers to make purchases in quantities that are greater than what can be purchased at mass discount stores. These retail outlets provide few services and product selection can be limited. Furthermore, the retail design and layout is as the name suggests, warehouse style, with consumers often selecting products off the ground from the shipping package. Some forms of warehouse stores, called warehouse clubs or wholesale membership clubs, require customers to purchase membership in order to gain access to the outlet.

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Teaching Note Retailing in Britain: Traditional Retailers vs Discounters

• Category Killers – Many major retail chains have taken over what were previously narrowly focused, small specialty store concepts, and have expanded them to create large specialty stores. These so-called ‘category killers’ have been found in such specialty areas as electronic items (for example, Best Buy), office supplies (for example, Staples) and sporting goods (for example, Sport Authority). • Department Stores – These retailers are general merchandisers offering mid-to-high qualityproducts and strong level of services, though in most cases these retailers do not fall into the full-service category. While department stores are classified as general merchandisers, some carry a more selective product line. For instance, while Sears carries a wide range of products from hardware to cosmetics, Nordstrom focuses on clothing and personal care products. • Boutique – This retail format is best represented by a small store carrying highly specialised and often high-end merchandise. In many cases a boutique is a full-service retailer following a full-pricing strategy. • Catalogue Retailers – Retailers such as Lands’ End and LL Bean have built their businesses by having customers place orders after seeing products that appear in a mailed catalogue. A third-party shipper then delivers orders. • e-tailers – Possibly the most publicised retail model to evolve during the last 50 years is the retailer that principally sells via the Internet. There are thousands of online retail sellers such as Amazon.com or eBay which are very popular. These retailers offer shopping convenience, including being open for business 24 hours. Electronic retailers or e-tailers also have the ability to offer a wide selection of products, since all they need in order to attract customers is a picture and description of the product, that is, they may not need to have the product on-hand the way physical stores do. Instead, an e-tailer can wait until an order is received from its customers before placing its own order with its suppliers. This cuts down significantly on the cost of maintaining products in stock. • Franchise –Afranchise is a form of contractual channel in which one party, the franchiser, controls the business activities of another party, the franchisee. Under such an arrangement, an eligible franchisee agrees to pay for the right to use the franchiser’s business methods and other important business aspects, such as the franchise name. For instance, McDonald’s is a well-known franchiser that allows individuals to use the McDonald’s name and methods to deliver food to consumers. Payment is usually in the form of a one-time, upfront franchise fee and also an on-going percentage of revenue. While the cost to the franchisee may be quite high, this form of retailing offers several advantages, including: (1) allowing the franchisee to open a retail outlet that may already be known to local customers, and (2) being trained in how to operate the business, which may allow the franchisee to be successful much faster than if he/she attempted to start a business on his/her own. For the franchiser, in addition to added revenue, the franchise model allows for faster expansion since funds needed to expand the business (for example, acquiring retail space, local advertising, etc) are often supported by the franchisee’s franchise fee. • Convenience – As the name suggests, these general merchandise retailers offer an easy purchase experience to customers. Convenience is offered in many ways, including through easily accessible store locations, small store size that allows for quick shopping, and fast checkout. The product selection offered by these retailers is very limited and pricing can be high. • Vending or Kiosks – Within this category, are automated methods for allowing consumers to make purchases and quickly acquire products. While most consumers are well aware of vending machines allowing customers to purchase smaller items, such as beverages and snack food, newer devices are entering the market, containing more expensive and bulkier products. These systems require the vending machine to have either Internet or telecommunications access to permit purchases using credit cards.

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Teaching Note Retailing in Britain: Traditional Retailers vs Discounters

• Factory Outlets – This category represents a form of vertical integration on the part of manufacturers. Factory outlets can be individual shops located at isolated locations or they can be huge malls, where individual stalls are leased out to individual manufacturers. These malls thus provide the convenience of providing various popular brands under one roof. Such outlets typically offer discounts of 20% to 60% off the usual Maximum Retail Price (MRP). A diagrammatic representation of various retailing formats is given in Exhibit (TN) – I.

Exhibit (TN) – I Types of Retailers

Expanded Specialty shops and a s s o r t m e n t department stores and serivce

Expanded Supermarkets, discount assortment and houses, mass-merchandisers, or reduced catalogue showrooms, Single margins/service supercentres Conven and tional limited offerings line Added Telephone/mail order, stores Convenience vending machines, higher margins door-to-door, convenience less assortment stones, electronic shopping

Expanded assortment Internet reduced margins more information

Source: http://www.witiger.com/marketing/retailersimage1.gif

2) Discuss the evolution of the British retail industry till the late 19th century. What was the scenario in the British retail industry during the 20th century before the entry of foreign players?

In the early 19th century retail outlets were mostly individual family businesses who sourced their merchandise from the village economy and other craftsmen. Products were unbranded and sold loose without being packaged. The Industrial Revolution changed all this. Large-scale migration and concentration of people in urban areas resulted in retailers resorting to an organised method of selling their wares. Even so, the range of products was limited to sewing and draping material. In the latter part of the 19th century, these stores were replaced by departmental stores that increased the range of products and branded these products. The departmental stores established chains in different cities across the country. The establishment of departmental stores led to the emergence of a new form of logistics management.

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The emergence of departmental stores in the UK led to the materialisation of two features of the logistics process. Firstly, manufacturers and retailers went in for vertical integration. Manufacturers resorted to forward integration and sold their produce through outlets owned by them. Similarly, retailers set up manufacturing facilities and started selling their produce branded with their own labels. But the most important feature of this development was that both manufacturers and retailers tended to have complete control over their distribution channels. The second feature was that of ‘unified relational contracting’. This feature appeared in the early part of the 20th century. Retailers who were new to the scene and wanted to avoid the cost of setting up and maintaining production facilities, adopted this style. Though owning production facilities enabled retailers to have complete control over the demand and supply process, the new retailers found that through relational contracting they could actually achieve economies of scale by buying in bulk from suppliers and take advantage of the brand popularity of well-known manufacturers. The importance of unified relational contracting diminished with the increase in store size. Increase in store size meant a wider range of products being made available to the consumer. This led to the emergence of bilateral relational contracting. This feature enhanced the success rate of both the store-owners and manufacturers. Manufacturers concentrating more on branding and trademarking their products, needed as many outlets for their products as possible. On the other hand, this reduced the obligation of the store-owner to sell a narrow range of goods. While this was one way by which retailers sought to compete with each other, they also resorted to other ways to limit competition amongst themselves in order to maximise profits. The need to restrict price competition arose as a result of the growth of cooperative movement within the UK. Cooperatives emerged in the UK with the objective of protecting the working class against high-priced goods. Wholesalers and retailers perceived this as a threat and arranged to have some kind of a ‘pact’ that would safeguard their interests. The pacts covered two areas of interest. Firstly, they sought to impose restrictions on the members from selling store locations to non-members. Thus, if a member had to sell his store, he could only do it to somebody within his group. This helped many retailers to rapidly increase stores owned by them and establish chains. Secondly, they agreed to restrict both wholesale and retail prices. Wholesalers and retailers established registered societies whose sole task was to see to it that members did not deviate from agreed-upon prices. These societies helped maintain parity in price levels and reduce the risk of indiscriminate discounting due to intratype competition, boosting profits as a result. As a result of these measures, cooperatives were forced to enter into manufacturing and wholesaling. This system continued till the entry of foreign retailers into the UK.

3) How were the strategies of the foreign retailers different from those of the native British retailers? What were the factors responsible for the success of the foreign retailers in the UK?

Traditional British retailers had to face competition from both European and US retailers. Though, foreign entrants initially remained content with retailing high-end goods at London’s West End, by the end of the 19th century they were distributing goods to lower middle class and working class households. Though foreign retailers were new to the UK they had certain inherent advantages compared to the British, who retained more or less the traditional methods of supply chain management that they had developed during the 19th century. The foreigners enjoyed better economies in their supply chains due to superior logistic systems and other management functions. They also employed superior merchandising skills and advertisement strategies which were accepted by the receptive British audience. Their success in logistics management was a result of investing in dedicated distribution channels, which they did, because of some combination of genuine productivity advantages over competitors, the importance of strong presence in the British market and high transaction costs that prohibited easy market entry by competitors.

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Teaching Note Retailing in Britain: Traditional Retailers vs Discounters

By the 1990s, the British retailers were facing a newformof challenge in the formof supermarkets. Supermarkets presented a completely new format for retailing goods. Compared to the previous formats, this style attempted to change the way people bought goods. But the striking difference between this new format and the older ones was that it moved into retailing of non-food goods while the older formats had restricted their activities to either grocery items or high-end items. Supermarkets were successful as they were able to focus on the following features: a) Lower average prices – A basket of Do-it-yourself (DIY) goods at a supermarket cost 46% lower than the average prices while at a purely DIY store it was 58% higher than average. b) Efficient inventory management – The supermarkets kept prices down through efficient inventory management techniques like Just-in-time concept. c) Superior customer service – The supermarkets guaranteed their success by ensuring superior customer service by installing modern information technology systems to enable their backrooms to know and respond quickly to the needs of the customers at the front-end, which decreased working capital requirements. The supermarkets stocked household items along with grocery items, and even apparel. This lured consumers of one category to buy the items of another category and consumers found this convenient. Moreover, the goods available in supermarkets were more economically priced compared to the same goods available in specialty stores.

5) The British retailers took a number of steps to meet the increasing competition from foreign players and supermarkets. However,it was opined that they would not be able to make a success of those strategies. What were the factors hindering the success of those strategies? Besides increasing competition from foreign retailers and supermarkets, which other factors contributed towards constant poor performance of the traditional retailers?

The supermarkets or discounters were definitely the first to give a heavy blow to the retailers as far as their profitability was concerned, by taking away a large chunk of their consumers. But there were several other factors that contributed to the fall in profitability for the retailers. The retailers were hit hard in the apparel business that had formerly been the strong point of their profitability. The retailers used to dabble mostly in formal wear like suits and ties. As time passed and generations changed, people started to turn more towards casual wear. Supermarkets offered these clothes at discounted prices. As production was outsourced from low-cost countries, there was not much to be saved out of the supply chain. Only retail chains that were global could remain competitive by leveraging on their ability to retain a global fashion perspective. Overall spending of consumers also decreased. This happened because a major chunk of traditional consumers who used to drive the market had grown older and their spending got distributed over a variety of services like their children’s education, medical expenditure, etc. They were thus forced to opt for the discounters in order to remain within their expenditure budget.

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The British pound also gained in strength and that made local services costlier, while imported goods were cheaper. This too lured consumers away from retailers. The retailers responded by discounting prices. However, they committed a mistake. They tried to reduce prices by squeezing supply chain costs. According to analysts, this was not a correct strategy. They were of the opinion that the success of a discounting strategy depended on the ability to accurately study consumer behaviour and reduce prices of such commodities that were used frequently. Such price cuts were more likely to be perceived by consumers than for those goods that were infrequently bought. Moreover, the retailers expanded unimpeded during their heydays. When their fortunes decreased they could not think of shutting down outlets and benching employees, as they feared a public backlash. As a result, profits dipped. The retailers had organisational disadvantages too. According to analysts, most decision-makers in the retailing firms were from the ranks of back office departments like purchase, etc. They lacked consumer perception and failed to implement competitive strategies.

6) What was the threat most imminent to the survival of traditional retailers? What, according to most analysts, could be the way out for the traditional retailers?

Reduced profits of the retailers made their position vulnerable to takeovers. Some of the notable takeovers were: i) Arcadia group which owned feminine apparel stores such as Topshop and Dorothy Perkins, taken over by retail entrepreneur Philip Green (2002). ii) Mass-market department store Debenhams, high-end department store Selfridges, and women’s retailer Oasis stores, taken over by a consortium of private equity firms called Baroness Retail composed of CVC Capital Partners and Texas Pacific Group, Wittington Investments of Canada, and Noel Acquisitions owned by the Baugur Group, Iceland’s retail investment group (2003). Such takeover activities were in fact increasing. Retail equity private deal figures which amounted to $5.2 billion in 2003, were 49% higher than the figures in 2002. Till May 2004, there was $2.2 billion worth of such deals. Amidst speculations regarding a way out, British analysts opined that such retailers who were able to control operating costs would be in the best position to survive. Indeed, it did seem that being able to trade in volumes and leverage on economies of scale was the key to success in a highly competitive retail industry. Organisationally, it was necessary to put the right people in the right place so that competitive marketing strategies could be implemented. A further step that could be taken by the British retailers was to expand globally. This could help them relocate additional employees without terminating their services, besides being able to leverage on global supply chains and the global fashion perspective.

Conclusion

British retailing, which originated in medieval England as draper stores, became a sophisticated business after Industrialisation and attained different formats as social formats and income patterns continued to evolve. However, traditional retailers met their challenge when foreign retailers came to the UK, bringing with them new fashion statements and marketing strategies. But their greatest challenge came from supermarkets who comprehensively changed the buying behaviour of consumers. Faced with continuously falling profits, the retailers became vulnerable targets for takeovers by overseas groups. Their salvation lay in their ability to shed off their traditional label and embrace modern techniques of inventory management and consumer behaviour.

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Teaching Note Retailing in Britain: Traditional Retailers vs Discounters

SuggestedAdditional Readings

1. Pearce Michael R., “NOTE ON RETAILFORMATSAND COMPETITION”, Richard Ivey School of Business (Note), Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, December 7th 2005 [ECCH Ref. No. 9B05A034] 2. Tamilia Robert D., “The Wonderful World of the Department Store in Historical Perspective: A Comprehensive International Bibliography PartiallyAnnotated”, École des sciences de la gestion, University of Quebec at Montreal (Research Article), May 2002, http://faculty.quinnipiac.edu/ charm/dept.store.pdf 3. MJH & Associates, “Emerging Trends In the Retail Industry 2004”, June 2004, http:// www.thesaleshunter.com/2004%20EmergingTrends.pdf

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Annexure (TN) - I Teaching Plan

Development of Retailing in Industrial UK

Evolution of Distribution Network Further Evolution of Competition (Logistics) in Tandem with Evolving Competition

Entry of Foreign Influence in Where did the British Retailing (Beginning of British Retailers Lag? External Competition)

Why did the How did they Influence Consumers Favour Entry of Supermarket Chains Consumer Behaviour? Supermarkets?

The Inherent Weakness of Traditional Retailers

Threat to Retailers Possible Solution - How can British Retailers Meet the Challenge of Supermarkets (Discounters)?

Prepared by the author