Evaluating The Competition in Retailing: Retail Management

CHAPTER 5
Evaluating the Competition in Retailing

Retailers compete for target customers on five major fronts or factors:
1. The price for the benefits offered
2. Service level
3. Product selection (merchandise line width and depth)
4. Location or access: the overall convenience of shopping the retailer
5. Customer experience (the customer’s positive feelings and behaviors in the purchase process)
Market Structure
Economists use four different economic terms to describe the competitive environment in the
retailing industry: pure competition, pure monopoly, monopolistic competition, and
oligopolistic competition.
Pure competition occurs when a market has:

1. Homogeneous (similar) products.
2. Many buyers and sellers, all having perfect knowledge of the market.
3. Ease of entry for both buyers and sellers; that is, new retailers can start up with little
difficulty and new consumers can easily come into the market.
RETAIL MANAGEMENT
In pure competition, each retailer faces a horizontal demand curve and must sell its products
MM4 at the going ‘‘market’’ or equilibrium price. To sell at a lower price would be foolish, since
you could always get the market price. Of course, you could not sell your merchandise at a
higher price because customers know they can buy the item for less.
Pure monopoly- the seller is the only one selling a particular product and will set its selling
price accordingly. Nonetheless, as the retailer seeks to sell more units, it must lower the selling
price. This is because consumers who already have one unit will tend to place a lower value on
an additional unit. This is called the ‘‘law of diminishing returns’’ or ‘‘declining marginal utility.
Monopolistic competition is a market situation that develops when a market has:

1. Different (heterogeneous) products in the eyes of consumers that are still substitutes for each
other. Here two or more retailers may be selling the same product, but one retailer is able to
differentiate itself in another dimension. Thus, consumers perceive the retailers to be selling
different products, given the total purchase experience.
2. Sellers who may be the only ones selling a particular brand, but who face competition from
other retailers selling similar goods and services.
The word monopolistic means that each seller is trying to control its own segment of the market.
However, the word competition means that substitutes for the product are available.
Oligopolistic competition occurs when a market has the following conditions:

1. Essentially homogeneous products, such as air travel to the same destination.
2. Relatively few sellers or many small firms who always follow the lead of the few large firms.
3. The expectation that any action by one party is expected to be noticed and reacted to by the
other parties in the market.
Oligopolists face a long-run trend toward selling at a similar price since everybody knows what
others are doing. Non-price competition is extremely difficult since consumers view the products
and services as essentially similar.
Types of Competition
1. Intratype competition- Occurs when two or more retailers of the same type, as defined by
NAICS codes in the Census of Retail Trade, compete directly with each other for the same
households.
2. Intertype competition- Occurs when two or more retailers of a different type, as defined by
NAICS codes in the Census of Retail Trade, compete directly by attempting to sell the same
merchandise lines to the same households.
3. Divertive competition- Occurs when retailers intercept or divert customers from
competing retailers.
4. Break-even point- Is where total revenues equal total expenses and the retailer is making
neither a profit nor a loss.
MM4 RETAIL MANAGEMENT

Evolution of Retail Competition
The Wheel of Retailing- Describes how new types of retailers enter the market as low-status,
low- margin, low-price operators; however, as they meet with success, these new retailers
gradually acquire more sophisticated and elaborate facilities, and thus become vulnerable
to new types of low-margin retail competitors who progress through the same pattern.
Retail accordion- Describes how retail institutions evolve from out- lets that offer wide assortments to specialized stores
and continue repeatedly through the pattern.
The Retail Life Cycle
The final framework we will examine is the retail life cycle. Some experts argue that retailing
institutions pass through an identifiable cycle. This cycle has four distinct stages; it starts with (1)
introduction, proceeds to (2) growth, then (3) maturity, and ends with (4) decline.
Introduction
This stage begins with an aggressive, bold entrepreneur who is willing and able to develop a
different approach to the retailing of certain products. Most often the approach is oriented to a
simpler method of distribution and passing the savings on to the customer.
Growth
During the growth stage, sales, and usually profits, explode. New retailers enter the market and
begin to copy the idea.
Maturity
In maturity, market share stabilizes and severe profit declines are experienced for several
reasons. First, managers have become accustomed to managing a high- growth firm that was
simple and small, but now they must manage a large, complex firm in a non-growing market.
Second, the industry has typically over-expanded. Third, competitive assaults will be made on
these firms by new retailing formats (a bold entrepreneur starting a new retail life cycle) or
more efficient retailers consolidating the industry.
RETAIL MANAGEMENT
Decline
MM4 Although decline is inevitable for some formats (few people get their milk delivered to the door
anymore), retail managers will try to postpone it by changing the retail mix. These attempts can
postpone the decline stage, but a return to earlier, attractive levels of operating performance is
not likely. Sooner or later a major loss of market share will occur, profits fall, and the once
promising idea is no longer needed in the marketplace.
Introduction Growth Maturity Decline

E-tailing (1990s) Food courts Warehouse clubs (1970s) Variety stores
Recyclers (2000s) (1980s) Supermarkets (1930s) (1890s)
Liquidators Airport-based Convenience stores Factory outlet
(2000s) retailers (1960s) malls (1970s)
(1980s) Category killers (1970s) Department
Supercenters Fast food (1950s) stores (1850s)
(1990s) Discount department
stores (1940s)
Resource-Advantage Theory
The final theory to describe in the evolution of retail competition is resource- advantage.17 This
theory is based on the idea that all firms seek superior financial performance in an ever-changing
environment. Retail demand is dynamic because consumer tastes are always changing, and
supply is dynamic because, as firm’s search for a superior performance, they are forced to
change the elements of their retail mix to match changing consumer preferences.
Resource-advantage illustrates two important lessons for retailers:

1. Superior performance at any point in time is the result of achieving a competitive advantage
in the marketplace as a result of some tangible or intangible entity (or ‘‘resource’’). The
retailer is able to use this entity, such as an innovation regarding location procedures or
merchandise selection, to offer greater value to the market place.
2. All retailers cannot achieve superior results at the same time. The retailer is able to use this
entity, such as innovation regarding location procedures or merchandise selection, to offer
greater value to the marketplace and/or to operate their firms at a lower cost relative to
competitors.
Thus, it is important for currently high-performing retailers to maintain their vigilance over the
actions of lower performing competitors, so as not to be overtaken.
MM4 RETAIL MANAGEMENT
The result is ongoing market turbulence, in which new retail forms and offerings continually
appear and consumers continually shift their buying preferences and retail patronage

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CHAPTER 5

Evaluating the Competition in Retailing

Pure competition occurs when a market has:

Monopolistic competition is a market situation that develops when a market has:

Oligopolistic competition occurs when a market has the following conditions:

MM4 RETAIL MANAGEMENT

Introduction Growth Maturity Decline

Resource-advantage illustrates two important lessons for retailers:

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