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Lars Perner, Ph.D.
Assistant Professor of Clinical Marketing
Department of Marketing
Marshall School of Business
University of Southern California
Los Angeles, CA 90089-0443, USA
(213) 740-7127

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Retailing

Retail positioning. There are several ways in which retail stores can position themselves. One strategy involves low-cost, low-service. On the opposite side of the spectrum, others may offer high-cost-high-service. Generally, having a clear strategy and position tends to be more effective since "average" stores tend to face a greater scope of competition—e.g., Sears competes both "below" with K-Mart and "above" with Macy’s. K-Mart, in contrast, competes mostly laterally, facing Wal-Mart and Target.

Margins. Stores need to maximize their profits and must consider their margins to do so. Gross margins generally reflect the difference between what a store pays the retailer and what it charges the customer. On the average, this difference in supermarkets is about 25%. (Although there are large differences between product categories, as an illustration, a can that sold for $1.00 might have been bought on wholesale for $0.75). Net margins, in contrast, take into account the allocated costs of running the store—wages, rent, utilities, insurance, and "shrinkage." In grocery stores, these margins are usually less than 5%. Margins can be considered at the unit level—you make $0.35 on a package of salt—or as a percentage of sales—35% if the salt sold for $1.00. Sometimes, it may also be useful to consider margins per unit of space to best allocate retail space to different categories.

There are two theoretical forms of retailing. The "High-Low" method involves selling products at high prices most of the time but occasionally having significant sales. In contrast, the "everyday low price" (EDLP) strategy involves lower prices all the time but no sales. In practice, there are few if any EDLP stores—most stores put a large amount of merchandise on sale much of the time. It has been found that offering lower everyday prices requires a very large increase in sales volume to be profitable.

Increasing power of retailers. As more and more products compete for space in supermarkets, retailers have gained an increasing power to determine what is "in" and what is "out." This means that they can often "hold out" for better prices and other "concessions" such as advertising support and fixtures. A significant trend in recent years has been toward manufacturers’ "private label" brands—that is, the retailers' own brands competing against the national ones. For example, Del Monte peas may now have to compete against Ralph’s brand of peas in those stores. Although private label brands sell for lower prices than national brands, margins are greater for retailers because costs are lower. For example, it is more profitable to sell a can of peas $1.00 when it cost $0.60 to supply than it is to sell a name brand can at $1.25 when that cost $1.05 at wholesale.

"Power" and "category killer" retailers. A number of retailers have become a great deal more efficient in recent years than has been traditional in the industry. Firms like Wal-Mart have invested greatly in information technology and logistics and have committed to taking a risk on placing large orders placed well in advance of the need. These stores have frequently attracted a large customer base by charging consistent low prices. The philosophy here is to make a little bit of profit on each thing sold and then selling a great deal. A special case is the "category killer" which focuses on a specific product category—e.g., Circuit City buys up very large volumes of electronics and thus can bargain for low prices from manufacturers. Manufacturers get the benefit of large, consistent orders, but must in turn offer exceptionally low prices or risk having business shifted to other brands. Note that in practice, the category killer tends to carry a large variety of brands, buying a large volume of each. Thus, the mere threat of switching to other brands is enough to get a concession from each brand.

Retailing polarity. A number of retailers have tended to go to one extreme or the other—either toward a great emphasis on price or a move toward higher service. Rapid economic growth has made high service retailers more attractive to a growing number of affluent consumers, and less affluent consumers have become more accustomed to intense price competition between different retailers.