Consumer Behavior

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II. Categorizing Retailers

There are five popular schemes for categorizing retailers.

A. Census Bureau

- The U.S. Bureau of the Census classifies all retailers using three-digit North

American Industry Classification System (NAICS) codes. The code reflects the type of merchandise a retailer sells.

- Three-digit codes are very broad; four-digit codes provide much more

information on the structure of retail competition and are easier to work

with.

- The major portion of a retailer’s competition comes from other retailers in its NAICS category. General merchandise stores which carry a variety of

merchandise are the exception to this rule.

4. Census Bureau data might not be accurate. The Census Bureau cautions that sales made to a customer in a foreign country through a U.S. website are included in the bureau’s estimates.

- Shortcoming of using the NAICS codes - do not reflect all retail activity. According to the Census Bureau, retailing is associated only with the sale of “tangible” goods or merchandise. However, by our definition, selling of services to the final consumer is also retailing.

B. Number of Outlets

1. Another method of classifying retailers is by the number of outlets each firm operates. Generally, retailers with several units are a stronger competitive threat because they can spread many fixed costs, such as advertising and top management salaries, over a large number of stores and can achieve economies in purchasing.

2. Chain Stores - This text considers a retail operation to be a chain if it has 10 or more stores.

a. Account for 43% of all retail sales.

b. Large chains take advantage of their economies of scale and centralized buying by using:

(1) Standard Stock List – Method whereby all stores in a chain stock the same merchandise.

(2) Optional Stock List - Method which gives each store in a retail chain flexibility to adjust its merchandise mix to local tastes and demands.

(3) Providing Supply Chain Leadership - by directing the channel and having other channel members do what they might not otherwise do, the retailer by serving as the channel advisor can make it more effective. Channel advisor or channel captain is the institution (manufacturer, wholesaler, broker, or retailer) in the marketing channel that is able to plan for and get other channel institutions to engage in activities they might not otherwise engage in. Large store retailers are often able to perform the role of channel captain.

(4) Private Label Branding - Chains use their own brand name instead of a manufacturer’s brand name; results in lower costs for consumers. Private-label branding may be

(i) Store branding - when a retailer develops its own brand name and contracts with a manufacturer to produce the product with the retailer’s brand.

(ii) Designer lines - where a known designer develops a line exclusively for the retailer.

3. A disadvantage of using the number of outlets scheme for classifying retailers is that it addresses only traditional bricks & mortar retailers. It ignores many nontraditional retailers such as catalog-only sellers and e-tailers.

C. Margin vs. Turnover

1. Gross-Margin Percentage or Gross-Margin Return on Sales - It is a measure of profitability derived by dividing gross margin by net sales. Gross margin is used to pay the retailer’s operating expenses.

a. Gross Margin - Net sales minus the cost of goods sold.

b. Operating Expenses - Expenses the retailer incurs while running the business other than the cost of merchandise [i.e., rent, wages, utilities, depreciation, and insurance].

2. Inventory Turnover - Number of times per year, on average, that a retailer sells its inventory.

3. High-performance Retailers - Are those retailers that produce financial results substantially superior to the industry average.

4. Retailers can be classified into 4 types based on margin and turnover

a. Low-margin/Low-turnover - These retailers will not be able to generate sufficient profits to remain competitive and survive. Least able to withstand a competitive attack because this retailer is usually unprofitable or barely profitable; when competition increases, profits are driven even lower.

b. High-margin/Low-turnover - The types of retailers in this category include bricks & mortar retailers such as furniture stores, high-end women’s specialty stores and furriers, jewelry stores, gift shops, funeral homes and most of the mom-and-pop stores located in small towns across the country. They also include some clicks-and-mortar retailers - Retailers who sell both online and in physical stores.

c. Low-margin/High-turnover - Is one that operates on a low gross margin percentage and a high rate of inventory turnover.

d. High-margin/High-turnover - Convenience store retailers fall into this category. Best able to withstand and counter competitive attacks. Because in the early stages of Internet commerce most retailers are trying to achieve a high turnover rate, there are not any examples of e-tailers using this strategy.

3. While the Margin/Turnover scheme provides an encompassing classification, it fails to capture the complete array of retailers operating in today’s marketplace. Service retailers and e-tailers that carry no inventory are neglected in this classification.

D. Location - Retailers can improve financial performance results not only by improving the sales per square foot of traditional sites but by operating in new nontraditional retail areas or over the Internet.

E. Size - Retailers are often classified by sales volume or by number of employees.

1. Operating performance tends to vary according to size; larger firms usually have lower

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