Retail Market Strategy

EXECUTIVE BRIEFING
David Berg, President and CEO of Outback
Steakhouse International LLC

My career path in retailing is somewhat unusual. expansion into Mexico and Turkey; and the creation
After graduating from Emory University with a of its joint venture with The Carphone Warehouse,
degree in economics, I went to law school at the which provided an opportunity to introduce the
University of Florida. During law school, I was Best Buy brand in Europe.
attracted to corporate law, which was a good fit My present position is challenging and exciting.
with my undergraduate training in economics. I took Our corporation owns and operates more than
a position in the corporate counsel’s office at Nordic- 400 restaurants under the brands names of Outback
Track. At the time, NordicTrack was best known for Steakhouse, Carrabba’s Italian Grill, Bonefish Grill,
its cross-country ski simulator, which dominated the Roy’s, and Fleming’s Prime Steakhouse & Wine Bar.
home fitness market in the late 1980s. While we have more than 200 Outback Steakhouses
As the U.S. market for the NordicTrack’s simulator in 19 countries, our potential for international
matured, the company became interested in expand- expansion is tremendous.
ing internationally. I volunteered to set up a network The dining experience for our international
of international distributors. While I did not have a customers is similar to our domestic experience. Our
lot of retail experience, in law school, I had learned international restaurants tend to follow U.S. design
how to be an effective negotiator and how to logi- guidelines with some modifications to account for
cally analyze situations—skills that were very valuable local needs and customs. Most restaurants are in
in developing a worldwide distribution network. shopping centers or office buildings; very few are
After NordicTrack, I went to work for Best Buy and free standing. In Asian cities, where space is at a par-
eventually was promoted to COO of Best Buy Inter- ticular premium, many restaurants are located above
national, responsible for the operations of all of Best the ground floor and sometimes split in two sepa-
Buy’s brands and businesses outside of the United rate floors.
States. I was deeply involved in the sale of Best Buy’s The international menu is also similar to the U.S.
Musicland subsidiary; its acquisition of a majority menu, with some changes made to meet local taste
interest in Jiangsu Five Star Appliance in China; its preferences. For example, we feature local beef cuts
 CHAPTER 5

LEARNING OBJECTIVES
LO1 Define the retail strategy. LO4 Identify issues that arise as domestic
retailers become global retailers.
LO2 Illustrate how retailers build a
sustainable competitive advantage. LO5 Know the steps retailers go through to
develop a strategic plan.
LO3 Classify the different strategic growth
opportunities retailers pursue.

such as Picanha in Brazil or Neobiani in Korea, in expansion of product-focused retailing. Tastes in

addition to the traditional Outback Special sirloin. food vary significantly from country to country and
Product and ingredient availability in a region also even within countries, but preferences for products
drive specific menu offerings. For example, our iconic is pretty homogenous across the globe—shopping
Bloomin’ Onion is replaced by the Typhoon Bloom in for flat-panel TVs is pretty universal. While we need
Southeast Asia because the exact onion needed for a great deal of local input as we expand internation-
the Bloomin’ Onion is not readily available there. ally, we have found that direct foreign investment
Going global with retail services, particularly res- is more than three times more profitable than
taurants, is more challenging than the international franchising.

R
etailers need to focus on long-term strategic planning to cope effectively
with the growing intensity of retail competition as well as the emergence of
new channels, technologies, and globalization. The retail strategy indicates
how a retailer will deal effectively with its environment, customers, and competi-
tors.1 As the retail management decision-making process (discussed in Chapter 1)
indicates, the retail strategy (Section II) is the bridge between understanding the
world of retailing (Section I) and the more tactical merchandise management and
store operations activities (Sections III and IV) undertaken to implement the
retail strategy.
124 SECTION II Retailing Strategy

The first part of this chapter defines the term retail strategy and discusses three
important elements of retail strategy: (1) the target market segment, (2) the retail
format, and (3) the retailer’s bases of sustainable competitive advantage. Then we
outline approaches retailers use to build a sustainable competitive advantage. After
reviewing the various growth opportunities, specifically international expansion,
that retailers can pursue, the chapter concludes with a discussion of the strategic
retail planning process.

WHAT IS A RETAIL STRATEGY?

LO1 The term strategy is frequently used in retailing. For example, retailers talk about
Define the retail strategy. their merchandise strategy, promotion strategy, location strategy, channel strategy,
or branding strategy. The term is used so commonly that it might appear that all
retailing decisions are strategic decisions, but retail strategy isn’t just another
REFACT expression for retail management.
The word strategy comes
from the Greek word Definition of Retail Market Strategy
meaning the “art of the
general.”2
A retail strategy is a statement identifying (1) the retailer’s target market, (2) the
format and resources the retailer plans to use to satisfy the target market’s needs, and
(3) the bases on which the retailer plans to build a sustainable competitive advantage.3
The target market is the market segment(s) toward which the retailer plans to focus
its resources and retail mix. A retail format describes the nature of the retailer’s
operations—its retail mix (type of merchandise and services offered, pricing policy,
advertising and promotion programs, store design and visual merchandising, typical
locations, and customer services)—that it will use to satisfy the needs of its target
market. A sustainable competitive advantage is an advantage the retailer has over
its competition that is not easily copied by competitors and thus can be maintained
over a long period of time. The following are Founder’s name is Ells. a few examples
of retail strategies:
REFACT • Chipotle Mexican Grill. Steve Ells, founder and co-chair of Chipotle Mexican
Chipotle is by far the Grill, is changing the way America eats, one burrito at a time. The first store
largest purchaser of
of this fast, casual restaurant chain was opened in Denver in 1993 and has
natural meat in the
grown to 1,200 locations with annual sales of more than $2 billion. Its menu
United States.5
consists of only four items: burritos, burrito bowls, tacos, and salads. When
asked about expanding the menu, Steve Ells said, “[I]t’s important to keep the
menu focused, because if you just do a few things, you can ensure that you do
them better than anybody else.” Its
mission statement, Food With
Integrity, highlights its efforts to
increase the use of naturally raised
meat, organic produce, and dairy
without added hormones. This
philosophy goes beyond using
fresh ingredients to understanding
how the animals are raised. The
majority of food is prepared in
each restaurant. None of the
restaurants have freezers, microwave
ovens, or can openers.4
• Lululemon Athletica. Lululemon is a
Canadian specialty store chain selling
apparel and accessories that support
Lululemon’s retail strategy is selling merchandise that appeals to consumers the practice of yoga. The products it
seeking spiritual enrichment through yoga. sells include headbands, bamboo
 Retail Market Strategy CHAPTER 5 125
blocks, and yoga mats printed with encouraging healthy-living slogans like
“Drink fresh water.” The signature Lulu item is the Groove Pant, cut with
special gussets and flat seams to create a feeling of a drop of water free from
gravity. Lululemon’s apparel is made with special materials, Silverescent and
Luon, enabling customers to engage in vigorous yoga exercises and still look
attractive. Lululemon stores are a community hub where people can learn
about and discuss the physical aspects of healthy living, from yoga and diet to
running and cycling, as well as the spiritual aspects of life. To create this
community, the company recruits local ambassadors before opening a store.
These ambassadors, usually popular yoga teachers, are featured on
Lululemon’s website and on bulletin boards in the store.6
• Chico’s. Chico’s is a specialty apparel chain serving the lifestyle needs of fashion-
savvy women over 30 years old with a household income of $50,000 to $100,000.
Its apparel uses easy-to-care-for fabrics; distinctive, fashionable designs; and a
comfortable, relaxed fit. Accessories, such as handbags, belts, scarves, earrings,
necklaces, and bracelets, are designed to coordinate with the assortment of
clothing, allowing customers to easily personalize their wardrobes. All of the
merchandise offered is private label, so Chico’s designers and buyers specify the
patterns, prints, construction, designs, fabrics, finishes, and colors. The distinctive
nature of Chico’s clothing is carried through to its sizing. Chico’s uses sizes of 0,
1, 2, 3, rather than the more commonly used sizes of 1 to 16 so women are less
sensitive to large sizes. The relaxed styles of the clothing allow Chico’s to utilize a
reduced number of sizes and still offer a wide selection of clothing without
having to invest in a large number of different sizes within a single style.7
• Save-A-Lot. From a single store in 1977, Save-A-Lot, a wholly owned subsidiary
of SuperValu, has grown to more than 1,300 stores, making it the nation’s 13th-
largest U.S. supermarket chain. Save-A-Lot stores offer a limited assortment of
1,250 SKUs compared to 20,000 to 30,000 SKUs in a conventional supermarket.
By offering only the most popular items in each category, most of which are
private-label merchandise, Save-A-Lot reduces its costs and is able to price its
merchandise 40 percent lower than prices at conventional supermarkets.
Due to its buying power, Save-A-Lot is able to develop customized product
specifications that provide high-quality, private-label merchandise at low prices.
Because the stores generally do not feature grocery store–style shelving, items
instead are available in specially printed, cut-out shipping containers. Finally,
most customers bring their own bags; the stores charge those customers who
forget their own and need to obtain bags from the retailer.8

CENTRAL CONCEPTS IN A RETAIL MARKET STRATEGY

Each of these retail strategies described in the preceding section involves (1) the LO2
selection of target market segment(s), (2) the selection of a retail format (the ele- Illustrate how retailers
ments in the retailer’s retail mix), and (3) the development of a sustainable com- build a sustainable
petitive advantage that enables the retailer to reduce the level of competition it competitive advantage.
faces. Now let’s examine these central concepts of a retail strategy.

Target Market and Retail Format

A retail market is a group of consumers with similar needs and a group of
retailers that satisfy those needs using a similar retail channels and format.9
Exhibit 5–1 illustrates a set of retail market segments for women’s clothing. It
lists various retail formats in the left-hand column. Each format offers a differ-
ent retail mix to its customers. Market segments are listed in the exhibit’s top
row. As mentioned in Chapter 4, these segments could be defined in terms of the
customers’ geographic location, demographics, lifestyle, buying situation, or
benefits sought. In this exhibit, we divide the market into three fashion-related
126 SECTION II Retailing Strategy

EXHIBIT 5–1 Retail Market Segments for Apparel

Fashion Segments

Conservative Traditional Fashion-forward

Specialty The Gap Bebe

store Fashion Bug The Limited Urban Outfitters
Talbots H&M

JCPenney Macy's Saks Fifth Ave.

Retail Formats

Department
Kohl's Bloomingdale's
store
Neiman Marcus

Discount Family Dollar Kmart Target

store Dollar General Walmart

Off-price Stein Mart

Ross Stores T.J.Maxx
store Bluefly.com

segments: (1) conservative—consumers who place little importance on fashion;

(2) traditional—those who want classic styles; and (3) fashion-forward—those
who want the latest fashions.
Each square of the matrix in Exhibit 5–1 describes a potential retail market in
which retailers compete for consumers with similar needs. For example, Walmart
and Kmart stores in the same geographic area compete with each other using a
full-line discount store format to target conservative customers. Bloomingdale’s
and Neiman Marcus compete against each other using a department store format
targeting the fashion-forward segment.
Exhibit 5–1’s matrix describes the battlefields on which women’s apparel retail-
ers compete. The position in each battlefield (cell in the matrix) indicates the first
two elements of a retailer’s strategy: the fashion segment (the x-axis) and the retail
format (the y-axis).
Consider the situation confronting Target as it refines its retail strategy for the
women’s clothing market. Should Target compete in all 15 retail markets shown in
Exhibit 5–1, or should it focus on a limited set of markets? If Target decides to
focus on a limited set of markets, which should it pursue? Target’s answers to these
questions define its retail strategy and indicate how it will focus its resources.
The women’s clothing market in Exhibit 5–1 is just one of several representations
that we could have used. Retail formats might be expanded to include off-price stores
and category specialists. Although Exhibit 5–1 isn’t the only way to describe the
women’s retail apparel market segments, it does illustrate how retail market segments
can be defined in terms of retail format and customer market segments.

Building a Sustainable Competitive Advantage

After selecting a target market and a retail mix, the final element in a retail strat-
egy is the retailer’s approach to building a sustainable competitive advantage.10
Establishing a competitive advantage means that the retailer, in effect, builds a
wall around its position in a retail market, that is, around its present and potential
 Retail Market Strategy CHAPTER 5 127

SUSTAINABILITY OF ADVANTAGE EXHIBIT 5–2

Approaches for
Sources of Advantage Less Sustainable More Sustainable
Developing a
Customer loyalty Habitual repeat purchasing Building a brand image with an Sustainable
(Chapters 11 and 16) because of limited competition emotional connection with Competitive
in the local area customers; using databases to Advantage
develop and utilize a deeper
understanding of customers
Location (Chapters 7 and 8) Convenient locations
Human resource management More employees Committed, knowledgeable
(Chapter 9) employees
Distribution and information Bigger warehouses; automated Shared systems with vendors
systems (Chapter 10) warehouses
Unique merchandise More merchandise; greater Exclusive merchandise
(Chapters 12 and 13) assortment; lower price; higher
advertising budgets; more sales
promotions
Vendor relations (Chapter 13) Repeat purchases from vendor Coordination of procurement
due to limited alternatives efforts; ability to get scarce
merchandise
Customer service (Chapter 18) Hours of operation Knowledgeable and helpful
salespeople

customers and its competitors. When the wall is high, it will be hard for competi-
tors outside the wall (i.e., retailers operating in other markets or entrepreneurs) to
enter the market and compete for the retailer’s target customers.
Any business activity that a retailer engages in can be the basis for a competi-
tive advantage. But some advantages are sustainable over a long period of time,
while others can be duplicated by competitors almost immediately. For example,
it would be hard for Peets Coffee & Tea to establish a long-term advantage over
Starbucks by simply offering the same coffee specialties at lower prices. If Peets’
lower prices were successful in attracting a significant number of customers,
Starbucks would soon realize that Peets had lowered its prices and would quickly
match the price reduction. This might lead to a price war that Starbucks is likely
to win because it has lower costs due to its larger size. Similarly, it’s hard for
retailers to develop a long-term advantage by offering broader or deeper assort-
ments of national brands. If the broader and deeper assortment attracts a lot of
customers, competitors will simply go out and buy the same branded merchan-
dise. Exhibit 5–2 indicates which aspects of these potential sources of advantage
are more and less sustainable.
Over time, all advantages erode due to competitive forces, but by building high
walls, retailers can sustain their advantage for a longer time. Thus, establishing a
sustainable competitive advantage is the key to long-term financial performance.
Three approaches for developing a sustainable competitive advantage are
(1) building strong relationships with customers, (2) building strong relationships
with suppliers, and (3) achieving efficient internal operations. Each of these
approaches involves developing an asset—loyal customers, strong vendor relation-
ships, committed effective human resources, efficient systems, and attractive REFACT
locations—that is not easily duplicated by competitors. Let’s look at each of these Approximately half of
approaches. food and beverage shop-
pers and nearly 60 percent
of consumers of health/
Relationships with Customers—Customer Loyalty beauty and household
Customer loyalty means that customers are committed to buying merchandise and goods would purchase
services from a particular retailer. Loyalty is more than simply liking one retailer their preferred brands,
over another. Loyalty means that customers will be reluctant to switch and patron- even if a less expensive
alternative were to
ize a competitive retailer. For example, loyal customers will continue to have their
become available.11
car serviced at Jiffy Lube, even if a competitor opens a store nearby and charges
128 SECTION II Retailing Strategy

McDonald’s has developed a

competitive advantage by
projecting an image of fast
service, consistent quality,
and clean restrooms.

slightly lower prices. Approaches for developing loyalty discussed in this section are
building a strong brand image, creating a unique positioning in the target market,
offering unique merchandise, providing excellent customer service, implementing a
customer relationship management program, and building a retail community.
Brand Image Retailers build customer loyalty by developing a well-known,
REFACT attractive image of their brands and of the name over their doors. For example,
Brooks Brothers, a men’s when most consumers think about fast food or hamburgers or French fries, they
specialty store chain, sold immediately think of McDonald’s. Their image of McDonald’s includes many
the rights to the Polo favorable beliefs such as fast service, consistent quality, and clean restrooms.
brand name to Ralph Strong brand images facilitate customer loyalty because they reduce the cus-
Lauren.12
tomers’ risks associated with purchases. They assure customers that they will re-
ceive a consistent level of quality and satisfaction from the retailer. The retailer’s
image can also create an emotional tie with a customer that leads the customer to
REFACT trust the retailer. The steps retailers take to develop a strong brand image are dis-
Because brands build cussed in Chapter 15.
loyalty, they are very
valuable. The five most Positioning A retailer’s brand image reflects its positioning strategy. Positioning
valuable U.S. retail is the design and implementation of a retail mix to create an image of the retailer in
brands are Walmart the customer’s mind relative to its competitors. A perceptual map is frequently
(worth $142 billion), used to represent the customer’s image and preferences for retailers.
Target ($32 billion), Exhibit 5–3 offers a hypothetical perceptual map of retailers selling women’s
Home Depot ($20 billion), clothing. The two dimensions in this map, fashion and service, represent two im-
Best Buy ($19 billion),
portant characteristics that consumers in this example use in forming their images
and CVS ($17 billion).13
of retailers.
Perceptual maps are developed in a way so that the distance between two retail-
ers’ positions on the map indicates how similar the stores appear to consumers. For
example, Neiman Marcus and Saks Fifth Avenue are very close to each other on the
map because consumers in this illustration see them as offering similar services and
fashion. In contrast, Nordstrom and Marshalls are far apart, indicating consumers
think they’re quite different. Note that stores close to each other compete vigor-
ously because consumers feel they provide similar benefits and have similar images.
 Retail Market Strategy CHAPTER 5 129
Hypothetical Perceptual Map of Women’s Apparel Market EXHIBIT 5–3
FASHION FORWARD

x Zara
x 6
Forever 21
Bebe x
Neiman Marcus x
Saks Fifth Ave. x
4
x Bloomingdale's
Nordstrom x
Marshalls x x Macy's
3
T.J.Maxx x
Banana Republic x

5
The Limited x
Target x 2 x JCPenney
x Abercrombie and Fitch
The Gap x

EXTENSIVE SERVICE
LIMITED SERVICE

x American Eagle Outfitters

x Old Navy

x Talbots
x Chico's
7
x Sears
1
x Walmart

x Kmart

TRADITIONAL

In this example, Macy’s has an image of offering moderately priced, fashionable

women’s clothing with good service. TJ Maxx offers slightly less fashionable cloth-
ing with considerably less service. Sears is viewed as a retailer offering women’s
clothing that is not very fashionable with moderate customer service.
The ideal points (marked by red dots on the map) indicate the characteristics of
an ideal retailer for consumers in different market segments. For example, con-
sumers in segment 3 prefer a retailer that offers high-fashion merchandise with
low service, while consumers in segment 1 want more traditional apparel and
aren’t concerned about service. The ideal points are located so that the distance
between the needs of customers in the segment (marked with a blue “x”), and the
perception of the retailer’s offering (marked with a red dot) indicates the con-
sumer’s probability the consumers in the segment with patronize the retailer.
Retailers that are closer to an ideal point are evaluated more favorably by the
consumers in the segment than are retailers located farther away. Thus, consumers
in segment 6 prefer Forever 21 and Bebe to Neiman Marcus because these retail-
ers are more fashion-forward and their target customers do not require such high
service levels. Retailers strive to develop an image desired by customers in their
target segment and thus develop loyalty with those customers.

Unique Merchandise It is difficult for a retailer to develop customer loyalty

through its merchandise offerings because most competitors can purchase and sell
the same popular national brands. But many retailers build customer loyalty by
130 SECTION II Retailing Strategy

developing private-label brands (also called store brands or own brands)—

products developed and marketed by a retailer and available only from that retailer.14
For example, Costco’s highly regarded private-label brand, Kirkland Signature,
engenders strong brand loyalty and consequently generates considerable loyalty
toward Costco. The quality image of its private-label products makes a significant
contribution to the image of Costco. Retailing View 5.1 describes how IKEA builds
customer loyalty through its unique merchandise. Issues pertaining to the develop-
REFACT ment of store-brand merchandise are discussed in Chapter 13.
The Ritz-Carlton is the
only hotel chain and the Customer Service Retailers also can develop customer loyalty by offering ex-
first service company to cellent customer service.15 Consistently offering good service is difficult because
win the annual Malcolm customer service is provided by retail employees who are less consistent than ma-
Baldrige National Quality chines. Machines can be programmed to make every box of Cheerios identical, but
Award. It has won the
employees do not provide a consistent level of service because they vary in their
award twice.16
training, motivation, and mood.

5.1 RETAI LING V IEW The IKEA Way

IKEA, a global retailer headquartered in Sweden, offers a
wide range of well-designed, functional home furnishing
products at low prices. It’s easy to make high-quality products
and sell them at a high price or make low-quality products
to sell at a low price. But IKEA has to be cost-effective and
innovative to sell quality products at low prices.
Creating IKEA’s unique merchandise starts on the fac-
tory floor. IKEA product developers and designers work
closely with suppliers to efficiently use production equip-
ment and raw materials and keep waste to a minimum.
For example, an IKEA product developer learned about
board-on-frame construction touring a door factory. This
technique is cost-effective and environmentally friendly
because sheets of wood are layered over a honeycomb
core to provide a strong, lightweight structure with a
minimal wood content. This type of construction is used in
many IKEA products, such as its LACK tables.
Many items IKEA sells are shipped and sold disassem-
bled in flat packs to reduce transportation costs and make
it easier for customers to take them home. However, some
products like lamps take up a lot of space even when
disassembled. The LAMPAN illustrates the IKEA way of
offering extremely low price with beautiful design and
high quality. This was achieved by
developing a new packing method in
REFACT which the lamp shade could be used
Annually 600 million cus- as a bucket for the lamp base.
tomers visit IKEA’s stores, IKEA reduces labor costs in its
eat two billion of those stores by providing signage with ex-
meatballs, and carry off tensive information about its products
168 million catalogues.17 and their quality, presenting its prod- The LACK table and LAMPAN are classic IKEA designs only
available at IKEA’s stores and website.
ucts in room settings, and prominently
displaying price tags. These features enable customers to
serve themselves and reduce IKEA’s labor costs.

Sources: www.IKEA.com; Deniz Caglar, Marco Kesteloo, and Artt Kleiner,

“How Ikea Reassembled Its Growth Strategy,” Strategy1Business, May 2012; DISCUSSION QUESTION
“The Man Who Named the Furniture,” Financial Times, January 16, 2010,
p. 30; and Yongquan Hu and Huifang Jiang, “Innovation Strategy of Retail- Why does IKEA’s private-label furniture create a
ers: From the View of Global Value Chains,” 6th International Conference sustainable competitive advantage?
on Service Systems and Service Management, 2009, pp. 340–345.
 Retail Market Strategy CHAPTER 5 131
It takes considerable time and effort
to build a tradition and reputation for
customer service. But once a retailer
has earned a service reputation, it can
sustain this advantage for a long time
because it’s hard for a competitor to
develop a comparable reputation. For
example, Ritz-Carlton hotels are
world-renowned for providing out-
standing customer service. Employees
gather daily for a 15-minute staff
meeting, during which they share ac-
counts of how they or their peers have
gone above and beyond the call for
conventional customer service, also
known as “WOW stories.” A great ex-
ample involved a chef in a Balinese
Ritz Carlton’s outstanding
Ritz-Carlton who learned that a guest had extensive food allergies and responded service builds customer
by having special eggs and milk flown in from a small grocery store, located in loyalty.
another country. Such WOW stories help maintain employees’ focus on customer
service and gives them recognitions for the efforts they make.18 Chapter 18 dis-
cusses how retailers develop a customer service advantage.

Customer Relationship Management Programs Customer relationship

management (CRM) programs, also called loyalty or frequent shopper
programs, are activities that focus on identifying and building loyalty with a re-
tailer’s most valued customers.19 These programs typically involve offering customers
rewards based on the amount of services or merchandise they purchase. For example,
airlines offer free tickets to travelers who have flown a prescribed number of miles,
and Subway gives customers a free sandwich for each 10 they purchase.
The discounts offered by these programs may not create loyalty. Customers may
join loyalty programs of competing retailers and continue to patronize multiple
retailers. However, the data collected about customer shopping behavior by these
programs can provide insights that enable retailers to build and maintain loyalty.
For instance, CVS Caremark’s CRM program enables the retailer to collect exten-
sive information about each of its customers and use this information to increase
sales. For example, if customers shop relatively infrequently, e.g., once a month for
prescriptions, CVS Caremark may provide incentives that expire in a week to en-
courage more frequent visits. Alternatively, if customers buy frequently, but buy
less than $20 per visit, CVS Caremark offers incentives to increase each visit’s pur-
chases to, say, $25. It may provide incentives to get customers who are purchasing
only national brands to purchase more private-label merchandise. CVS also uses
the loyalty data to determine if a household is purchasing less of a category than it
should based on usage in similar households, and therefore provide it with a “buy
one, get one free” coupon. Thus, the data developed through the loyalty program
enable a retailer to develop a personal relationship with customers that builds loy-
alty. CRM programs are discussed in detail in Chapter 11.

Building a Retail Community Using Social Media Retailers are beginning

to use their websites and social media to develop retail communities. A retail REFACT
community is a group of consumers who have a shared involvement with a retailer. Starbucks, with 29 million
The members of the community share information with respect to the retailer’s fans, ranks second after
activities. The involvement in the community can range from simply becoming a Coca-Cola on Facebook
fan of a retailer’s Facebook page to meeting face-to-face with community members and ranks third after
Facebook and Whole-
to share experiences. Increased involvement in the community by its members
Foods on Twitter.21
leads to a greater emotional feeling and loyalty toward the retailer.20
132 SECTION II Retailing Strategy

Starbucks builds customer

loyalty by developing a
community of customers
who offer suggestions for
improving Starbucks’
offering.

Starbucks started building a community in 2008 when it launched My Star-

bucks Ideas (http://mystarbucksidea.force.com). The website was initially a
hub for Starbucks customers to share their ideas, suggestions, and even frus-
trations on this mini social network. As Starbucks customers started enjoying
their time interacting with other customers, the website evolved into a com-
munity. Now, the online community gives customers the ability to see what
others are suggesting, vote on ideas, and check out the results. Starbucks actu-
ally implements the most popular ideas, resulting in customers feeling that
they have a say on what their favorite coffee does.22 Starbucks has extended its
online efforts into the social media space. Its Facebook page (www.facebook.
com/Starbucks) has more than 32 million likes.

Relationships with Suppliers

A second approach for developing a competitive advantage is to develop strong
REFACT relationships with companies that provide merchandise and services to the retailer,
In 1989, P&G was the first such as real estate developers, advertising agencies, and transportation companies.
vendor to open an office
Of these relationships with suppliers, the most important are relationships with
in Bentonville, Arkansas
vendors. For example, the relationship between Walmart and Procter & Gamble
(Walmart’s corporate
headquarters). Now more
initially focused on improving supply chain efficiencies. Today, the partners in this
than 1,266 out of Walmart’s relationship share sensitive information with each other so that Walmart is better
100,000 vendors world- able to plan for the introduction of new P&G products and even develop some
wide have a presence in unique packaging for P&G’s national brands exclusively available at Walmart.
northwest Arkansas.24 Walmart shares its sales data with P&G so that P&G can better plan its produc-
tion and use a just-in-time inventory management system to reduce the level of
inventory in the system. By strengthening relationships with each other, both re-
tailers and vendors can develop mutually beneficial assets and programs that give
the retailer–vendor pair an advantage over competing pairs.23
Relationships with vendors, like relationships with customers, are developed
over a long time and may not be easily offset by a competitor.25 Chapter 13
 Retail Market Strategy CHAPTER 5 133
examines how retailers work with their vendors to build mutually beneficial, long-
term relationships.

Efficiency of Internal Operations

In addition to strong relationships with external parties, customers, and suppliers,
retailers can develop competitive advantages by having more efficient internal op-
erations. Efficient internal operations enable retailers to have a cost advantage over
competitors or offer customers more benefits than competitors at the same cost.
Larger companies typically have greater internal operations efficiency. Larger
retailers can invest in developing sophisticated systems and spread the fixed cost of
these systems over more sales. In addition to size, other approaches for improving
internal operating efficiencies are human resource management and information
and supply chain management systems.
Human Resource Management Retailing is a labor-intensive business, in
which employees play a major role providing services to customers and building
customer loyalty.26 Some retailers view employees as an expense that needs to be
reduced over the long run. But research has found that highly successful retail
chains such as Costco invest heavily in store employees, but still have low prices,
solid financial performance, and better customer service than their competitors.
They recognize that under-investing in their employees makes their operations
more inefficient and, therefore, much less profitable. Knowledgeable and skilled
employees committed to the retailer’s objectives are critical assets that support the
success of these retailers. The retail landscape is increasingly dominated by retail-
ers such as Wegman’s and Costco that have adapted to this new reality.27
Chapter 9 examines how retailers build their human resource assets by develop-
ing programs to motivate and coordinate employee efforts, provide appropriate in-
centives, foster a strong and positive organizational culture and environment, and
manage diversity. In Chapter 16, additional information is presented on increasing
employee productivity and retention through recruiting, training, and leadership.
Distribution and Information Systems The use of sophisticated distribu-
tion and information systems offers an opportunity for retailers to reduce operat-
ing costs—the costs associated with running the business—and make sure that the
right merchandise is available at the right time and place.28 Information flows
seamlessly from Walmart to its vendors to facilitate quick and efficient merchan-
dise replenishment and reduce stockouts. Walmart’s distribution and information
systems have enabled it to have a cost advantage that its competitors cannot over-
come. This component of competitive advantage is discussed in Chapter 10.
In addition to using information systems to improve supply chain efficiency, the
customers’ purchase data collected by information systems provide an opportunity
for retailers to tailor store merchandise assortments to the market served by each
of its stores and to tailor promotion to the specific needs of individual customers.
These data about its customers’ buying behavior are a valuable asset offering an
advantage that is not easily duplicated by competitors. These applications of infor-
mation systems are discussed in more detail in Chapter 11.

Location
While committed relationships with customers and vendors and efficient internal
operations are important sources of advantage, location is a pervasive source of
advantage in retailing. The classic response to the question, “What are the three REFACT
most important things in retailing?” is “Location, location, location.” Location is Seventy-four percent of
a critical opportunity for developing competitive advantage for two reasons: U.S. consumers said that
(1) Location is the most important factor determining which store a consumer shopping locations should
patronizes. For example, most people shop at the supermarket closest to where be located no more than
they live. (2) Location is a sustainable competitive advantage because it is a 15-minute travel time
from their homes.29
not  easily duplicated. Once Walgreens has put a store at the best location at an
134 SECTION II Retailing Strategy

intersection, CVS is relegated to the

second-best location.
Starbucks has developed a strong
competitive advantage with its loca-
tions. As it expanded across the United
States, it saturated each market before
entering a new market. For example,
there were more than 100 Starbucks
outlets in the Seattle area before the
company expanded to a new region.
Starbucks frequently opens several
stores close to one another. It has two
stores on two corners of the inter-
section of Robson and Thurlow in
Vancouver. By having such a high den-
sity of stores, Starbucks makes it very
difficult for a competitor to enter a mar-
ket and find good locations. Approaches
for evaluating and selecting locations are
discussed in Chapters 7 and 8.

Multiple Sources of
Advantage
To build an advantage that is sustain-
able for a long period of time, retailers
typically cannot rely on a single ap-
proach, such as good locations or ex-
cellent customer service. Instead, they
use multiple approaches to build as
high a wall around their position as
possible.30 For example, McDonald’s
long-term success is based on provid-
ing customers with a good value that
Starbucks creates a meets their expectations, having effi-
competitive advantage by
saturating an area with
cient customer service, possessing a strong brand name, and offering convenient
stores, which makes it locations. By building strategic assets in all of these areas, McDonald’s has devel-
difficult for competitors to oped a strong competitive position in the quick-service restaurant market.31
find good locations.
In addition to its unique products and associated customer loyalty, IKEA has a
large group of loyal customers due to its strong brand image and the stimulating
shopping experience it provides its customers. Walmart complements its size advan-
tage with strong vendor relationships and the clear positioning of a retailer that of-
fers superior value. Starbucks combines its location advantage with unique products,
committed employees, a strong brand name, and strong relationships with coffee
growers to build an overall advantage that is very difficult for competitors to erode.
Retailing View 5.2 describes The Container Store, a retailer that has also built
multiple bases of sustainable competitive advantages through unique merchandise,
excellent customer service, and strong customer and vendor relationships.

GROWTH STRATEGIES
LO3 In the preceding sections, we have focused on a retailer’s strategy, its target market
Classify the different and retail format, and the approaches that retailers take to build a sustainable
strategic growth competitive advantage and defend their position from competitive attacks. When
opportunities retailers retailers develop these competitive advantages, they have valuable assets. In this
pursue. section, we discuss how retailers leverage these assets to expand their businesses.
 Retail Market Strategy CHAPTER 5 135

Growth Opportunities
Four types of growth opportunities that retailers may pursue—market penetra-
tion, market expansion, retail format development, and diversification—are shown
in Exhibit 5–4.32 The vertical axis indicates the synergies between the retailer’s
present markets and the growth opportunity—whether the opportunity involves
markets the retailer is presently pursuing or new markets. The horizontal axis in-
dicates the synergies between the retailer’s present retail mix and the retail mix of
the growth opportunity—whether the opportunity exploits the retailer’s skills and
knowledge in operating its present format or requires new capabilities to operate
a new format.

Market Penetration A market penetration growth opportunity is a growth

opportunity directed toward existing customers using the retailer’s present retail-
ing format. Such opportunities involve either attracting new consumers from the
retailer’s current target market who don’t patronize the retailer currently or devis-
ing approaches that get current customers to visit the retailer more often and/or
buy more merchandise on each visit.
Market penetration approaches include opening more stores in the target mar-
ket and/or keeping existing stores open for longer hours. Other approaches involve
displaying merchandise to increase impulse purchases and training salespeople to

RETAI L ING V IEW The Container Store—Building a Competitive 5.2

Advantage by Selling Products That Make Life Simpler
The Container Store sells products to help customers solve
problems, or challenges, as the company likes to call
them, in organizing their lives. It offers more than 10,000
innovative products, including multipurpose shelving and
garment bags to organize closets; portable file cabinets
and magazine holders to create order in home offices;
backpacks, modular shelving, and DVD holders to make
dorm rooms less cluttered; and recipe holders, bottles,
jars, and recycling bins to bring harmony to kitchens.
More than 1,500 new products are added to its assort-
ment every year.
Over the years, the company has developed strong
vendor relationships. Most of its vendors’ primary focus
was to manufacture products for industrial use. Yet, over
time, the company has worked closely with its vendors to
develop products that are appropriate for the home.
The Container Store’s sales associates provide out-
standing customer service. The company actively recruits
customers who are intrigued with helping people organize.
It spends considerable time educating sales associates about The Container Store has multiple sources of competitive
the merchandise (240 hours versus the typical 12 hours for advantage, including unique merchandise, excellent
customer service, strong vendor relationships, and
new retail employees) and then empowering them to use committed employees.
their own intuition and creativity to solve customer
challenges.
Employees are very committed to the company; as a and Angela Ellis, “Inside the Container Store: Secrets of America’s Favorite
result, its turnover rate is among the lowest in the retail Stores,” ABC News, March 30, 2010; and “Three Good Hires? He’ll Pay More
for One Who’s Great,” The New York Times, March 14, 2010.
industry. The Container Store also has appeared on
Fortune’s list of the “100 Best Companies to Work For” in
each of the last 11 years. DISCUSSION QUESTION
How does the Container Store maintain its competitive
Sources: Steven R. Thompson, “Container Store Uses Personal Approach in advantage?
New Strategy,” Dallas Business Journal, April 27, 2012; Bianna Golodryga
136 SECTION II Retailing Strategy

EXHIBIT 5–4 TARGET MARKETS

Growth Opportunities Existing New

Existing
Market Penetration Market Expansion

RETAIL FORMAT

New
Format Development Diversification
(unrelated/related)

cross-sell. Cross-selling means that sales associates in one department attempt

to sell complementary merchandise from other departments to their customers.
For example, a sales associate who has just sold a Blu-Ray player to a customer will
take the customer to the accessories department to sell special cables to improve
the performance of the player.

Market Expansion A market expansion growth opportunity involves using

the retailer’s existing retail format in new market segments. For example, Dunkin’
Donuts has been opening new stores outside its traditional target market in the
northeastern United States.33 When Chico’s acquired White House Black Market,
it engaged in a market expansion growth opportunity. Chico’s and White House
Black Market have similar retail formats. They are both mall-based specialty
apparel stores. But Chico’s targets women over 30 years old, while White House
Black Market targets a younger age segment. In contrast, Chico’s acquisition of
Soma, a mall-based specialty store chain offering lingerie for women between
35  and 55, was a market penetration opportunity—same market and similar
operations; however, Chico’s and Soma offer different products.

Retail Format Development A retail format development growth

opportunity is an opportunity in which a retailer develops a new retail format—a
format with a different retail mix—for the same target market. The U.K.-based
retailer Tesco has employed a retail format development growth strategy by oper-
ating several different food store formats that all cater to essentially the same tar-
get market. The smallest is Tesco Express, up to 3,000 square feet. These stores
are located close to where customers live and work. Tesco Metro stores are 7,000
to 15,000 square feet, bring convenience to city center locations, and specialize in
offering a wide range of ready-to-eat meals. Tesco Superstores, up to 50,000
square feet, are the oldest format. In recent years, the company has added nonfood
products, such as Blu-Rays and books, to improve customer satisfaction. Finally,
Tesco Extra stores, more than 60,000 square feet, are designed to be a one-stop
destination, with the widest range of food and nonfood products, from housewares
and clothing to garden furniture.34

Diversification A diversification growth opportunity is one in which a

retailer introduces a new retail format directed toward a market segment that’s not
 Retail Market Strategy CHAPTER 5 137
currently served by the retailer. Diversification opportunities are either related or
unrelated.

Related versus Unrelated Diversification In a related diversification

growth opportunity, the retailer’s present target market and retail format shares
something in common with the new opportunity. This commonality might entail
purchasing from the same vendors, operating in similar locations, using the same
distribution or management information system, or advertising in the same news-
papers to similar target markets. In contrast, an unrelated diversification growth
opportunity has little commonality between the retailer’s present business and
the new growth opportunity.
Through acquisition, Home Depot built a wholesale building supply business,
called HD Supply, which had generated more than $3 billion in annual sales.
Management felt that this growth opportunity would be synergistic with the firm’s
retail business, because its stores were already selling similar merchandise to con-
tractors. Thus, Home Depot viewed this growth opportunity as a related diversifi-
cation, because the targeted customers (i.e., contractors) would be similar, and the
new large contractor market could be served using a retail mix similar to Home
Depot’s present retail mix. In addition, Home Depot would realize cost savings by
placing larger orders with vendors because it would be selling to both retail and
wholesale large and small customers.
In hindsight, though, the HD Supply actually was an unrelated diversifica-
tion. The large contractor market served by HD Supply sold primarily pipes,
lumber, and concrete—products with limited sales in Home Depot’s retail stores.
Selling these supplies to large contractors involved competitive bidding and
transporting large, bulky orders to job sites—skills that Home Depot lacked. So
Home Depot sold this unrelated diversification to concentrate on its core retail,
small-contractor business.35

Vertical Integration Vertical integration describes diversification by retail-

ers into wholesaling or manufacturing. For example, some retailers go beyond
designing their private-label merchandise to owning factories that manufacture
the merchandise. When retailers integrate backward and manufacture products,
they are making risky investments because the requisite skills to make products
are different from those associated with retailing them. In addition, retailers and
manufacturers have different customers. The immediate customers for a manufac-
turer’s products are retailers, while a retailer’s customers are consumers. Thus, a
manufacturer’s marketing activities are very different from those of a retailer.
Note that designing private-label merchandise is a related diversification because
it builds on the retailer’s knowledge of its customers, whereas actually making the
merchandise is an unrelated diversification.

Growth Opportunities and Competitive Advantage

Typically, retailers have the greatest competitive advantage and most success when
they engage in opportunities that are similar to their present retail operations and
markets. Thus, market penetration growth opportunities have the greatest chances of
succeeding because they build on the retailer’s present bases of advantage and don’t
involve entering new, unfamiliar markets or operating new, unfamiliar retail formats.
When retailers pursue market expansion opportunities, they build on their
advantages in operating a retail format and apply this competitive advantage in a
new market. A retail format development opportunity builds on the retailer’s
relationships and loyalty of present customers. Even if a retailer doesn’t have
experience and skills in operating the new format, it hopes to attract its loyal
customers to it. Retailers have the least opportunity to exploit a competitive
advantage when they pursue diversification opportunities.
138 SECTION II Retailing Strategy

GLOBAL GROWTH OPPORTUNITIES

LO4 In this section, we provide a more detailed discussion of one type of growth
Identify issues that arise as opportunity—expanding operations to international markets. This growth oppor-
domestic retailers become tunity is becoming particularly attractive to large retailers as they begin to saturate
global retailers. their domestic market. Of the 20 largest retailers in the world, only 3 operate in
one country.36 By expanding internationally, retailers can increase their sales,
leverage their knowledge and systems across a greater sales base, and gain more
bargaining power with vendors. But international expansion is risky because
retailers must deal with different government regulations, cultural traditions,
consumer preferences, supply chains, and languages. Retailing View 5.3 describes
the substantial differences in grocery shopping in Shanghai.
We first discuss the attractiveness of different opportunities for global expan-
sion and then the keys to success for expanding globally. Finally, we review the
approaches that retailers can take to enter international markets.

Attractiveness of International Markets

Three factors that are often used to determine the attractiveness of international op-
portunities are (1) the potential size of the retail market in the country, (2) the degree
to which the country does and can support the entry of foreign retailers engaged in
modern retail practices, and (3) the risks or uncertainties in sales and profits.37 Some
indicators of these factors are shown in Exhibit 5–5. The (1) or (2) indicates whether
the indicator is positively or negatively related to the factor.
Note that the importance of some country characteristics depends on the type
of retailer evaluating the country for entry. For example, a retailer of video games,
such as Gamestop, would find a country with a large percentage of people under
19 to be more attractive than a country with a large percentage of people over 65.
High-fashion retailers that sell expensive merchandise, such as Neiman Marcus
and Cartier, would find a country that has a significant percentage of the popula-
tion with high incomes to be more attractive than a country that has a large per-
centage of people in poverty.
Most retailers considering entry into foreign markets are successful multina-
tional retailers that use sophisticated management practices. Thus, they would
find countries that have modern retailing, more advanced infrastructures, and sig-
nificant urban populations to be more supportive. In addition, countries lacking
strong domestic retailers but having a stable economy and political environment
would be more supportive.
The factors outlined in Exhibit 5–5 are weighted to develop an index scoring
each country on the attractiveness dimensions. One index ranking the 20 most

EXHIBIT 5–5 Indicators of the Potential, Support, and Risk in International Markets

Country Potential Country Support Country Risk

Population (1) Market share of modern retailing (1) Political stability (1)
Population growth rate (1) Quality of infrastructure (roads, trains, etc.) (1) Business-friendly laws and regulations (1)
GDP (1) Urban population (1) Access to bank financing (1)
GDP growth rate (1) Market share of domestic retailers (1) National debt (2)
GDP per capita (1) Market share of international retailers (1) Crime (2)
Retail sales (1) Market share of largest retailers (1) Violence (2)
Retail sales growth rate (1) Corruption (2)
Retail sales per capita (1)
Population (1)
Income distribution (1 or 2)
Age (1 or 2) 
 Retail Market Strategy CHAPTER 5 139
attractive international retail markets on market potential (country potential and
support) and risk is shown in Exhibit 5–6. Of the top 20 counties in this ranking,
10 are emerging economies. The emerging international markets that receive the
most attention from global retailers are India, China, Russia, and Brazil, collec-
tively referred to as “the BRIC” (Brazil, Russia, India, China) countries. However,
in this analysis, Russia is not in the top 20 because of its high risk.

RETAI L ING V IEW Wet Markets in Shanghai 5.3

Shanghai, with more than 23 million inhab-
itants, is the largest city by population in
the world. It is a sophisticated international
city, like New York, London, and Tokyo,
with substantial influence in global com-
merce, culture, finance, media, fashion,
technology, and transportation. It is a
major financial center and the busiest con-
tainer port in the world. The major interna-
tional food retailers (Walmart, Carrefour,
Metro, and Tesco) have now opened more
than 200 Western-style hypermarkets in
Shanghai. In addition, there are more than
2,000 modern supermarkets operated
mostly by Chinese firms. But the majority
of perishable goods (fish, meat, chicken,
pork, vegetables, and fruit) sales still are
made in traditional wet markets.
Wet markets are buildings divided into
small stalls lined along narrow corridors
with small, independent retailers selling Even though there are many modern supermarkets and hypermarkets in
Shanghai, the majority of perishable groceries are still bought at traditional
perishables in the stalls. The retailers lease wet markets.
the stalls from market operators. They buy
the perishables from various sources, in-
cluding wholesale markets, rural merchants, and farmers’ Second, for logistical reasons, most Chinese consumers
cooperatives, and then sort, clean, and package the per- shop for groceries every day and buy just enough to
ishables for sale to their customers. These markets are prepare for that day’s meals. In their small homes, the
called “wet markets” because the concrete floor is con- average kitchen size is about 60 square feet, leaving little
stantly wet from the spraying of perishables and cleaning room to store any items for extended periods, especially
of live meat and fish. There are more than 900 wet mar- perishable foods that require refrigeration. Furthermore,
kets in Shanghai. though the automotive market is growing in China, many
The Chinese government would like to close all wet families still travel by other means. In Shanghai for exam-
markets because they do not reflect the modern China ple, bicycles (20 percent), buses (30 percent), and walking
and because they pose health risks due to poor hygiene. (40 percent) are more common means of transport for
But Chinese urban consumers cross-format shop for gro- shopping trips. In these locations, the small wet markets
ceries: They buy manufactured goods in supermarkets and provide far more convenient locations than larger super-
hypermarkets but perishables in wet markets. Two factors or hypermarkets.
contribute to this preference for wet markets.
First, Chinese consumers place great importance on Sources: “Buying the Store,” China Economic Review, June 14, 2012; Louise
freshness. Perishables sold at supermarkets and hypermar- Herring, Daniel Hui, Paul Morgan, and Caroline Tufft, Inside China’s Hyper-
kets usually get to the store around eight o’clock the markets: Past and Prospects (Hong Kong: McKinsey By McKinsey, 2012);
and Qian Forrest Zhang and Zi Pan, The Transformation of Urban Vegetable
night before and have been shelved for at least half a day Retail in China: Wet Markets, Supermarkets, and Informal Markets in
before reaching consumers. At wet markets, vendors buy Shanghai, Research Collection School of Social Sciences, 2012.
their perishables around four o’clock in the morning and
constantly trim, spray, clean, and sort the perishables
to  keep them fresh. Also, wet-market vendors do not
have or use refrigerators for storage; thus, they have DISCUSSION QUESTION
to  replenish their inventory with fresh supplies every Given the Chinese government’s disdain for wet markets,
day. The modern-format retailers simply cannot win the do you think they will endure?
freshness contest.
140 SECTION II Retailing Strategy

EXHIBIT 5–6 Country Attractiveness

100 Oman Chile

Malaysia United Arab Emirates
90 Kuwait
Country Risk (economic and political)

Botswana
Brazil
Saudi Arabia
0 = high risk, 100 = low risk

80
Colombia Turkey China
70 Mexico Sri LLanka Georgia
Panama India
Morocco Jordan Indonesia
60
Tunisia
nisia Uruguay
Russia Mongolia
Kazakhstan
50 Philippines Peru
Albania Macedonia
40 Azerbaijan

30 Lebanon

20
30 35 40 45 50 55 60 65 70 75
Market Potential*
0 = low potential, 100 = high potential
On the radar screen To consider Lower priority Size of bubble indicates net retail sales, 2011

*Based on weighted score of market attractiveness, market saturation, and time pressure of top 30 countries

SOURCE: Hana Ben-Shabat, Helen Rhim, Mike Moriarity, and Fabiola Salman, Global Retail Expansion Keeps Moving—2012 (New York: ATKearney, 2012).

India and China are by far the largest and most attractive retail markets. How-
ever, these two countries offer different opportunities and challenges for retailers
contemplating entry.38

India In India and most emerging economies, the retail industry is divided into
organized and unorganized sectors. The unorganized retailing includes the
REFACT small independent retailers—the local kirana shops, owner-operated general
Less than 5 percent of stores, paan/beedi shops, convenience stores, and handcart and street vendors.
India’s retail sales are
Most Indians shop in open markets and millions of independent grocery shops
through organized retail
channels.39
called kirana. However, India’s growing, well-educated, aspirational middle class
wants a more sophisticated retail environment and global brands.
While the demand for modern
(organized) retailing exists in India,
entering the Indian market is chal-
lenging. As the world’s largest pluralis-
tic democracy, with myriad cultures
and 22 official languages, India actu-
ally is a conglomeration of discrete
markets. In addition, government reg-
ulations impede foreign investment in
retailing. Retailers must comply with a
myriad of regulations before opening
stores and shipping merchandise. For
example, there are taxes for moving
goods to different states and even
within states. Initially, Walmart’s entry
into India is a partnership with Bharti
Enterprises to open wholesale outlets
called Best Price Modern Wholesale.
In India, most consumers shop at small, independent retail outlets. The outlets initially were allowed to
 Retail Market Strategy CHAPTER 5 141
sell only to firms that register by showing tax documents that prove they own re-
tail outlets. The development of organized retailing is being undertaken by indus-
trial conglomerates that have limited expertise in running retail chains.40

China Government regulations of retailing are much less onerous in China

than in India, and direct foreign investment is encouraged. Since the lifting of
most operational restrictions on international retailers, six global food retailers
(Auchan, Carrefour, Ito-Yokado, Metro, Tesco, and Walmart) have entered China,
although much of this retail development has been in the large eastern coastal
cities of Shanghai, Beijing, Guangzhou, and Shenzhen.41
China is rapidly developing the infrastructure to support modern retailing.
Highway density in China is already approaching similar levels as the United
States. China has a number of high-quality airports and a rapidly developing so-
phisticated railroad network.
However, doing business in China is still challenging. Operating costs are
increasing, managerial talent is becoming more difficult to find and retain, and an
underdeveloped and inefficient supply chain predominates.

Brazil Brazil has the largest population and strongest economy in Latin America.
It is a country of many poor people and a few very wealthy families. Brazilian retail-
ers have developed some very innovative practices for retailing to low-income
families, including offering credit and installment purchases. The very wealthy
Brazilians provide a significant market for luxury goods and retailers. Even though
they are approximately 1 percent of the population, this equates to approximately
19 million people, a market just a little smaller than all of Australia.

Russia In Russia, the impediments to market entry are less visible but more
problematic. Corruption is rampant, with various administrative authorities REFACT
The anticorruption group
capable of impeding operations if payments are not made. Retailers encounter
Transparency International
severe logistical challenges in supporting operations in Russia. There are long
ranks Russia 143th out of
delays at borders and ports and a scarcity of containers. More than 70 percent of 183 countries on its most
international container shipments come through the St. Petersburg port, which is recent index of the most
very congested. Retailers often cannot rely on domestic products because the corrupt countries.42
quality of products made in Russia is poor. Most major retailers offer their own
credit card facility, with “signing up” booths at the entrances to their stores. Many
low-income customers go from week to week paying their credit card commit-
ments. Finally, much of the purchasing power is concentrated in Moscow, where
salaries are about double those in other regions. But Moscow is already saturated
with shopping centers.

Keys to Success in Global Retailing

Four characteristics of retailers that have successfully exploited international
growth opportunities are (1) a globally sustainable competitive advantage,
(2) adaptability, (3) a global culture, and (4) financial resources.

Globally Sustainable Competitive Advantage Entry into nondomestic

markets is most successful when the expansion opportunity builds on the retailer’s
core bases of competitive advantage. For example, Walmart and ALDI have a sig-
nificant cost advantage that facilitates success in international markets in which
price plays an important role in consumer decision making and a distribution in-
frastructure is available to enable these firms to exploit their logistical capabilities.
In contrast, H&M and Zara are more successful in international markets that
value lower-priced, fashionable merchandise.
Some U.S. retailers have a competitive advantage in global markets because
American culture is emulated in many countries, particularly by young people.
Due to rising prosperity, the rapidly increasing access to broadband Internet,
142 SECTION II Retailing Strategy

social media like Facebook and networks such as MTV that feature American
programming, fashion trends in the United States have spread to young people in
emerging countries. The global MTV generation prefers Coke to tea, Nikes to
sandals, Chicken McNuggets to rice, and credit cards to cash. China’s major cities
have American stores and restaurants, including KFC, Pizza Hut, and McDonald’s.
Shanghai and Beijing have more than 100 Starbucks stores even though coffee had
never been the drink of choice before Starbucks came to town. But Chinese urban
dwellers go to Starbucks to impress a friend or because it’s a symbol of a new kind
of lifestyle. Although Western products and stores have gained a reputation for
high quality and good service in China, in some ways it is the American culture
that many Chinese consumers want.

Adaptability Although successful global retailers build on their core compe-

tencies, they also recognize cultural differences and adapt their core strategy to
the needs of local markets. Retailing View 5.4 illustrates how 7-Eleven changed its
retail offering to be more appealing in Indonesia.
Carrefour is an expert at understanding and integrating itself into local regions.
For example, it realized early on that the merchandising of fish differs for each
local market. In San Francisco, fish is sold dead and filleted; in France, fish is sold

5.4 RETAI LING V IEW 7-Eleven Is Trendy Hangout in Indonesia

In a local hangout in Jakarta, hipsters gather to drink iced
coffee, gossip, eat nachos, listen to a live band, and text
their friends. This sort of hanging out is so popular and
common among young Indonesians that their language
includes a word to describe sitting around, chatting, and
generally doing nothing productive: nongkrong. For
years, the most popular gathering spots were food stalls,
located along the sides of roads, known as warung. But
the warung are giving way to another popular nongkrong
location: local 7-Eleven stores.
This shift is exactly the response that 7-Eleven hoped
to achieve when it instituted a new strategy in Indonesia:
adding seating to its existing small supermarkets and of-
fering inexpensive, ready-to-eat meals, such as fried rice
and pillow bread (i.e., small cheese- or chocolate-filled
sandwiches). Jakarta is notably lacking in outdoor recre- 7-Eleven is a trendy place for young Indonesians to hang
ation space, so the little hangouts effectively attract social out with their friends.
customers. And Indonesia has plenty of those, as evi-
denced by its massive social networking rates. In Indonesia
alone, 7-Eleven has attracted nearly 60,000 Twitter and hot coffee. But in locations in the world’s most popu-
followers and almost as many Facebook fans. lous Muslim country, 7-Eleven only sells alcohol after con-
The strategy also means that the franchise mainly tar- ducting neighborhood surveys to obtain community
gets young customers, who constitute 65 percent of its approval.
market. These Millennials make use of the 24/7 access that
7-Eleven offers, surfing the Internet at all hours, before or Sources: Sara Schonhardt, “7-Eleven Finds a Niche by Adapting to Indonesian
after gathering with their friends. In Indonesia, one of the Ways,” The New York Times, May 28, 2012; and Anthony Deutsch,
most electronically connected nations in the world, cus- “7-Eleven Becomes Indonesia’s Trendy Hangout,” Financial Times, Septem-
ber 13, 2011.
tomers constantly update their social networks to alert
them about when a band is about to start playing at the
local 7-Eleven, for example. Among this generational
cohort, the store appeals to a wide range of economic DISCUSSION QUESTION
classes, such that the parking lots fill with Mercedes-
Could 7-Eleven adapt what it has learned in Indonesia to
Benzes interspersed with rusted-out motor bikes.
the United States to attract young urban customers?
Despite these unique offerings, 7-Elevens are still
Would it want to?
7-Elevens: They sell Big Gulps, flavored Slurpees, doughnuts,
 Retail Market Strategy CHAPTER 5 143
dead but whole on ice with the head still intact; and in China, fish is sold live.
However, consumers in the middle and western parts of China have more confi-
dence in frozen fish, because they are so far from the ocean.43 Carrefour and Tesco
make sure that more than 90 percent of the merchandise they sell is produced in
the country in which it is sold.44
Peak selling seasons also vary across countries. In the United States, many
stores experience a sales increase in August, when families stock up on back-to-
school supplies and apparel. However, this month is one of the slowest sales
periods in Europe because most people are on vacation. Back-to-school season in
Japan occurs in April.
Store designs and layouts often need to be adjusted in different parts of the world.
In the United States, for instance, supercenters are usually quite large and on one
level, except in a few urban areas. In other parts of the world, such as Europe and
parts of Asia, where space is at a premium, stores must be designed to fit smaller
footprints and are often housed in multiple levels. In some cultures, social norms
dictate that men’s and women’s clothing cannot be displayed next to each other.
Government regulations and cultural values can also affect store operations.
Some differences, such as holidays, hours of operation, and regulations governing
part-time employees and terminations, are easy to identify. Other factors require a
deeper understanding. For example, Latin American culture is very family oriented,
so traditional U.S. work schedules would need to be adjusted so that Latin American
employees could have more time with their families during family meals. Boots, a
U.K. drugstore chain owned by Walgreens, has the checkout clerks in its Japanese
stores stand up because it discovered that Japanese shoppers found it offensive to
pay money to a seated clerk, but retailers have to provide seating for checkout
clerks in Germany. Retailers in Germany also must recycle packaging materials
sold in their stores. Also in Germany, seasonal sales can be held only during specific
weeks and apply only to specific product categories, and the amount of the
discounts are limited. Spanish and French retailers work under government-
controlled operating hours and must mind policies prohibiting midseason sales.

Global Culture To be global, retailers must think globally. It is not sufficient to

transplant a home-country culture and infrastructure to another country. In this
regard, Carrefour is truly global. In the early years of its international expansion,
it started in each country slowly, an approach that reduced the company’s ethno-
centrism. Further enriching its global perspective, Carrefour has always encour-
aged the rapid development of local management and retains few expatriates in its
overseas operations. Carrefour’s management ranks are truly international. One is
just as likely to run across a Portuguese regional manager in Hong Kong as a
French or Chinese one. Finally, Carrefour discourages the classic overseas “tour of
duty” mentality often found in U.S. firms. International assignments are impor-
tant in themselves, not just as stepping stones to ultimate career advancement
back in France. The globalization of Carrefour’s culture is perhaps most evident in
the speed with which ideas flow throughout the organization. A global manage-
ment structure of regional committees, which meet regularly, advances the aware-
ness and implementation of global best practices. The proof of Carrefour’s global
commitment lies in the numbers: It has had more than 30 years of international
experience in 30 countries, both developed and developing.45

Financial Resources Expansion into international markets requires a long-

term commitment and considerable up-front planning. Retailers find it very
difficult to generate short-term profits when they make the transition to global
retailing. Although firms such as Walmart, Carrefour, Office Depot, and Costco
often initially have difficulty achieving success in new global markets, these large
firms generally are in a strong financial position and therefore have the ability to
keep investing in projects long enough to become successful.
144 SECTION II Retailing Strategy

Entry Strategies
Four approaches that retailers can take when entering nondomestic markets are
direct investment, joint venture, strategic alliance, and franchising.46
Direct Investment Direct investment occurs when a retail firm invests in and
owns a retail operation in a foreign country. This entry strategy requires the high-
est level of investment and exposes the retailer to the greatest risks, but it also has
the highest potential returns. A key advantage of direct investment is that the
retailer has complete control of the operations. For example, McDonald’s chose
this entry strategy for the U.K. market, building a plant to produce buns when
local suppliers could not meet its specifications.
Joint Venture A joint venture is formed when the entering retailer pools
its resources with a local retailer to form a new company in which ownership,
control, and profits are shared. A joint-venture entry strategy reduces the entrant’s
risks. In addition to sharing the financial burden, the local partner provides an
understanding of the market and has access to local resources, such as vendors and
real estate. Many foreign countries require that foreign entrants partner with do-
mestic firms. Problems with this entry approach can arise if the partners disagree
or the government places restrictions on the repatriation of profits.
Strategic Alliance A strategic alliance is a collaborative relationship between
independent firms. For example, a retailer might enter an international market
through direct investment but use independent firms to facilitate its local logisti-
cal and warehousing activities.
Franchising Franchising offers the lowest risk and requires the least investment,
but also has the lowest potential return on investment. The retailer has limited con-
trol over the retail operations in the foreign country, its potential profit is reduced,
and the risk of assisting in the creation of a local domestic competitor increases. The
U.K.-based Marks & Spencer, for example, has franchised stores in 30 countries.47

THE STRATEGIC RETAIL PLANNING PROCESS

LO5 In the previous sections, we reviewed the elements in a strategy statement, the
Know the steps retailers go approaches for building a sustainable competitive advantage, the growth opportu-
through to develop a nities that retailers consider, and the factors they consider when evaluating and
strategic plan. pursuing a global growth opportunity. In this section, we outline the process re-
tailers use to review their present situation and decide on a strategy to pursue.
The strategic retail planning process is the set of steps a retailer goes through
to develop a strategy and plan48 (see Exhibit 5–7). It describes how retailers select
target market segments, determine the appropriate retail format, and build sus-
tainable competitive advantages. As indicated in Exhibit 5–7, it is not always nec-
essary to go through the entire process each time a strategy and plan are developed
(step 7). For instance, a retailer could evaluate its performance and go directly to
step 2 to conduct a SWOT analysis.
The planning process can be used to formulate strategic plans at different levels
within a retail corporation. For example, the corporate strategic plan of Tesco in-
dicates how to allocate resources across the corporation’s various divisions, such as
Tesco, Tesco Extra, Tesco Express, Tesco Metro, Tesco Homeplus, and One Stop.
Each division, in turn, develops its own strategic plan.
As we discuss the steps in the retail planning process, we will apply each step to
the planning process for a hypothetical retailer owned by Kelly Bradford. Kelly
owns Gifts To Go, a small, two-store chain in the Chicago area. One of her
1,000-square-foot stores is located in the downtown area; the other is in an upscale
suburban mall. The target market for Gifts To Go is upper-income men and
women looking for gifts in the $50 to $500 price range. The stores have an eclectic
 Retail Market Strategy CHAPTER 5 145

EXHIBIT 5–7
1. Define the business mission
Stages in the Strategic
Planning Process

2. Conduct a situation audit:

Market attractiveness analysis
Competitor analysis
Self-analysis

3. Identify strategic opportunities

4. Evaluate strategic alternatives

5. Establish specific objectives and allocate resources

6. Develop a retail mix to implement strategy

7. Evaluate performance and make adjustments

selection of merchandise, including handmade jewelry and crafts, fine china and
glassware, perfume, watches, writing instruments, and a variety of one-of-a-kind
items. Gifts To Go also has developed a number of loyal customers who are
contacted by sales associates when family anniversaries and birthdays come up. In
many cases, customers have a close relationship with a sales associate and enough
confidence in the associate’s judgment that they tell the associate to pick out an
appropriate gift. The turnover of Gifts To Go sales associates is low for the industry
because Kelly treats associates as part of the family. The company pays for health
insurance for all associates, and the associates share in the profits of the firm.

Step 1: Define the Business Mission

The first step in the strategic retail planning process is to define the business mis-
sion. The mission statement is a broad description of a retailer’s objectives and
the scope of activities it plans to undertake.49 While the principle objective of a
publicly held firm is to maximize its stockholders’ wealth, firms also are concerned
about their impact on society.
For example, Maxine Clark, founder and chief executive bear at Build-A-Bear
Workshop, in discussing her goals for the company, says, “We also believe strongly
that we need to give back to the communities in which we have stores. For exam-
ple, as part of our on-going commitment to children’s health and wellness, we in-
troduced a series of Nicki Bears to honor Nicki Giampolo, a young girl who lost
her life to cancer. A portion of the sales of each Nicki is donated to support pro-
grams that help children maintain normal lives while they struggle with difficult
health issues.”50 Owners of small, privately held firms frequently have other objec-
tives, such as achieving a specific level of income and avoiding uncertainty rather
than maximizing income.
The mission statement defines the general nature of the target segments and
retail formats on which the firm will focus. For example, the mission statement
“Serve the customer, build value for shareholders, and create opportunities for
associates,” is too broad. It fails to provide a sense of strategic direction.
146 SECTION II Retailing Strategy

In developing the mission statement, managers need to answer five questions:

(1) What business are we in? (2) What should our business be in the future?
(3) Who are our customers? (4) What are our capabilities? (5) What do we want to
accomplish? Gifts To Go’s mission statement is “The mission of Gifts To Go is to
be the leading retailer of higher-priced gifts in Chicago and provide a stable
income of $100,000 per year for the owner.”
Because the mission statement defines the retailer’s objectives and the scope of
activities it plans to undertake, Gifts To Go’s mission statement clarifies that its
management won’t consider retail opportunities outside the Chicago area, selling
low-priced gifts, or activities that might jeopardize its ability to generate $100,000
in annual income.

Step 2: Conduct a SWOT Analysis

After developing a mission statement and setting objectives, the next step in the
strategic planning process is to conduct a SWOT analysis. A SWOT analysis in-
volves an analysis of the retailer’s internal environment (strengths and weaknesses)
and external environment (opportunities and threats).

Internal Environment The internal analysis identifies the retailer’s strengths and
weaknesses—the retailer’s unique strategic capabilities relative to its competition.
These unique capabilities are the assets, knowledge, and skills that the retailer
possesses such as the loyalty of its customers and the quality of its relationships with
its vendor. These capabilities reflect the retailer’s ability to develop a strategic
advantage as an opportunity it is considering. Exhibit 5–8 outlines some issues to
consider in performing a strengths and weaknesses analysis.
Here is Kelly Bradford’s analysis of Gifts To Go’s strengths and weaknesses:

Capabilities Gifts To Go Strength and Weaknesses

Financial resources Good—Gifts To Go had no debt and a good relationship with a bank. Kelly has saved $255,000 that she has
in liquid securities.
Customer loyalty Good—While Gifts To Go did not achieve the sales volume in gifts done in department stores, the company
has a loyal base of customers.
Locations Excellent—Both of Gifts To Go’s locations are excellent. The downtown location is convenient for office
workers. The suburban mall location is at a heavily trafficked juncture.
HUMAN RESOURCES
Merchandise management Limited—Kelly has a flair for selecting unique gifts but has no systems to support her.
Store management Excellent—The store managers and sales associates are excellent. They are very attentive to customers
and loyal to the firm. Employee and customer theft is kept to a minimum.
Other staff and systems Limited—An accounting firm keeps the financial records for the business.
Vendor relationships Kelly has excellent relationships with vendors providing one-of-a-kind merchandise.
Supply chain management Poor—While Kelly feels Gifts To Go has relatively low overhead, the company does not have a computer-
and information systems based inventory control system or management and customer information systems. Her competitors (local
department stores, catalog, and Internet retailers) certainly have superior systems. No skills in developing
and utilizing customer databases.

EXHIBIT 5–8 Financial resources Human resources

Elements in a Customer loyalty Top managers
Strengths and Strength of brand image Store manager
Weaknesses Analysis
Development of unique merchandise Merchandise managers
Quality of customer service Operation managers
Information about customers Vendor relationships
Size and involvement of community Supply chain management systems
Locations Information systems
 Retail Market Strategy CHAPTER 5 147

Market Factors Competitive Factors Environmental Dynamics EXHIBIT 5–9

Opportunities and
Market size Barriers to entry New technology Threats
Market growth Bargaining power of vendors Economic conditions
Cyclicality of sales Competitive rivalry Changes in governmental regulations
Seasonality Social changes

External Environment The external analysis identifies the retailer’s opportu-

nities and threats—the aspect of the environment that might positively or
negatively affect the retailer’s performance. These factors associated with the
market, competition, and environment dynamics are typically beyond the retailer’s
control. Exhibit 5–9 outlines some issues to consider when doing an opportunities
and threats analysis.
Market Factors The attractiveness of a target market in which a retailer is
involved or considering is affected by the size of the market, market growth,
cyclicality of sales, and seasonality. Market size is important because it indicates a
retailer’s opportunity to generate revenues to cover its investment.
Growing markets are typically more attractive than mature or declining mar-
kets. For example, retail markets for limited-assortment, extreme-value retailers
are growing faster than are those for department stores. Typically, the return on
investment may be higher in growing markets because competition is less intense
than in mature markets. Because new customers are just beginning to patronize
stores in growing markets, they may not have developed strong store loyalties and
thus might be easier to attract to new retail offerings.
Firms are often interested in minimizing the business cycle’s impact on their
sales. Thus, retail markets for merchandise that is affected by economic conditions
(such as cars and major appliances) are less attractive than retail markets that are
less affected by economic conditions (such as food). In general, markets with
highly seasonal sales are unattractive because a lot of resources are needed to
accommodate the peak season and then the resources go underutilized the rest of
the year. Retailers can take steps to reduce seasonality; for instance, ski resorts can
promote summer vacations.
To conduct an analysis of the market factors for Gifts To Go, Kelly Bradford
went on the Internet to get information about the size, growth, and cyclical and
seasonal nature of the gift market in general and, more specifically, in Chicago. On
the basis of her analysis, she concluded that the market factors were attractive.
The market for more expensive gifts was large, growing, and not vulnerable to
business cycles. The only negative aspect was the high seasonality of gifts, with
peaks at Valentine’s Day, June (due to weddings), Christmas, and other holidays.
Competitive Factors The nature of the competition in retail markets is
affected by barriers to entry, the bargaining power of vendors, and competitive
rivalry.51 Retail markets are more attractive when competitive entry is costly.
Barriers to entry are conditions in a retail market that make it difficult for other
firms to enter the market. Some of these conditions are (1) scale economies,
(2) customer loyalty, and (3) the availability of great locations.
Scale economies are cost advantages due to a retailer’s size. Markets domi-
nated by large competitors with scale economies are typically unattractive because
the dominant firms have sustainable cost advantages. For example, an entrepre-
neur would view the drugstore market as unattractive because it is dominated by
three large firms: Walgreens, CVS, and Rite Aid. These firms have considerable
cost advantages over an entrepreneur because they have significant bargaining
power over suppliers and can buy merchandise at lower prices. They have the
resources to invest in the latest technology and can spread the fixed costs of such
investments across more outlets.
148 SECTION II Retailing Strategy

Retail markets dominated by a well-established retailer that has developed a

loyal group of customers also are unattractive. For example, Home Depot’s high
customer loyalty in Atlanta, where it has its corporate offices, makes it hard for a
competing home improvement center like Lowe’s to compete effectively in the
Atlanta market.
The availability of locations may impede competitive entry. Staples, for
instance, attributes part of its success over its rivals in the northeastern United
States to its first-mover advantage. The Northeast has a preponderance of mature
but stable retail markets, so finding new locations is more difficult there than it is
in most of the rest of the United States. Because Staples started in the Northeast,
it was able to open stores in the best available locations.
Entry barriers are a double-edged sword. A retail market with high entry barri-
ers is very attractive for retailers presently competing in that market, because
those barriers limit competition. However, markets with high entry barriers are
unattractive for retailers not already in the market.
Another competitive factor is the bargaining power of vendors. Markets are less
attractive when only a few vendors control the merchandise sold in the market. In
such situations, vendors have the opportunity to dictate prices and other terms (like
delivery dates), reducing the retailer’s profits. For example, the market for retailing
fashionable cosmetics is less attractive because two suppliers, Estée Lauder (Estée
Lauder, Clinique, Prescriptives, Aveda, Jo Malone, Bumble and Bumble, Tommy
Hilfiger, MAC, and Origins) and L’Oréal (Maybelline, Giorgio Armani, Redken,
Lancôme, Garnier, and Ralph Lauren) provide most of the desirable premium
brands. Because department stores need these brands to support a fashion image, the
vendors have the power to sell their products to retailers at high prices.
The final competitive factor is the level of competitive rivalry in the retail market.
Competitive rivalry is the frequency and intensity of reactions to actions undertaken
by competitors. When rivalry is high, price wars erupt, retailers attempt to “steal”
employees from one another, advertising and promotion expenses increase, and profit
potential falls. Conditions that may lead to intense rivalry include (1) a large number
of competitors that are all about the same size, (2) slow growth, (3) high fixed costs,
and (4) a lack of perceived differences between competing retailers. For example,
Home Depot and Lowe’s have an intense rivalry in many markets.
When Kelly Bradford started to analyze the competitive factors for Gifts To
Go, she realized that identifying her competitors wasn’t easy. Although there were
no gift stores carrying similar merchandise at the same price points in the Chicago
area, there were various other retailers from which a customer could buy gifts. She
identified her primary competitors as department stores, craft galleries, catalogs,
and Internet retailers. Kelly felt there were some scale economies in developing
customer databases to support gift retailing. The lack of large suppliers meant that
vendors’ bargaining power wasn’t a problem, and competitive rivalry was minimal
because the gift business was not a critical part of a department store’s overall
business. In addition, merchandise carried by the various retailers offered consid-
erable differentiation opportunities.

Environmental Dynamics Environmental dynamics that can affect market

attractiveness include technological, economic, regulatory, and social changes.
When a retail market is going through significant changes in technology, existing
competitors are vulnerable to new entrants that are skilled at using the new tech-
nology. Many traditional store-based retailers were slow to develop their multi-
channel strategies fully. For instance, even today, many multichannel retailers do
not offer customers the ability to purchase over the Internet and return merchan-
dise to a store. Retailing View 5.5 illustrates how changes in the competitive
environment forced Hot Topic to reevaluate its entire retail format.
Government regulations can reduce the attractiveness of a retail market. For
example, until recently, government regulations made it difficult for retailers to
 Retail Market Strategy CHAPTER 5 149
open big-box stores in France and Germany.52 Also, many local governments
within the United States have tried to stop Walmart from entering their markets
in an attempt to protect locally owned retailers.
Retailers need to answer three questions about each environmental factor:
1. What new developments or changes might occur, such as new technologies
and regulations or different social factors and economic conditions?
2. What is the likelihood that these environmental changes will occur? What key
factors affect whether these changes will occur?
3. How will these changes affect each retail market, the firm, and its competitors?
Kelly Bradford’s primary concern when she did an environmental analysis was
the potential growth of Internet gift retailers such as RedEnvelope. Gifts seem
ideal for an electronic channel, because customers can order the item over the
Internet and have it shipped directly to the gift recipient. Kelly also recognized
that the electronic channel could effectively collect information about customers
and then target promotions and suggestions to them when future gift-giving
occasions arose.

RETAI L ING V IEW Hot Topic Emphasizes Its Strength in Indie Music 5.5
Hot Topic, which started in the late 1980s,
differentiated itself from other mall-based
retailers targeting the Generation Y seg-
ment by offering an edgier alternative. It
offered goth merchandise in its stores,
which were frequented by customers and
sales associates with tattoos, multiple pierc-
ings, spiked hair, and all-black clothing.
Over time, Hot Topic looked like an also-
ran in the crowded teen-retailer market.
The tastes of fickle teens had changed. Its
sales were stagnant. Mall foot traffic was
down.
Hot Topic analyzed its situation and dis-
covered that its basis of advantage among
teens wasn’t its goth image but its connec-
tion to the indie music scene—the small
avant-garde bands it promoted with its
private-label T-shirts. So it repositioned
itself, reducing its emphasis on goth-look
apparel and placing more emphasis on
merchandise linked to cutting-edge music
and entertainment.
Today, its stores feel more like campus
student centers with loud music, dark
When Hot Topic’s market declined, it altered its strategic positioning to target
walls, and bulletin boards crammed with young consumers that prefer local bands.
concert flyers and staff music picks. Hot
Topic began hosting free acoustic shows,
called Local Static, featuring bands chosen by salespeo- Sources: Schuyler Velasco, “How ‘The Hunger Games’ Scored a Marketing
ple in its local stores. The company stresses its connec- Win,” Christain Science Monitor, March, 2012, p. 10; Nivedita Bhattacharjee,
“And Hot Topic Gets Hunger Games Lift but May Not Last,” March, March
tion with music through its music download site, 2012: and http://community.hottopic.com/content/about-hot-topics,
ShockHound. accessed September 6, 2012.
It also licensed exclusively Twilight’s four-book-and-
film franchise about teen vampire love. The movie’s DISCUSSION QUESTION
stars did a national tour of Hot Topic stores, and the
Describe Hot Topic’s target market. How has this
retailer supplied hot chocolate and pizza to thousands
changed over time?
of fans.
150 SECTION II Retailing Strategy

Step 3: Identify Strategic Opportunities

After completing the SWOT analysis, the next step is to identify opportunities for
increasing retail sales. Kelly Bradford presently competes in gift retailing using a
specialty store format. The strategic alternatives she is considering are defined in
terms of the growth opportunities in Exhibit 5–4. Note that some of these growth
strategies involve a redefinition of her mission.

Step 4: Evaluate Strategic Opportunities

The fourth step in the strategic planning process is to evaluate opportunities that
have been identified in the SWOT analysis. The evaluation determines the re-
tailer’s potential to establish a sustainable competitive advantage and reap long-
term profits from the opportunities being evaluated. Thus, a retailer must focus
on opportunities that utilize its strengths and its competitive advantage.
Both the market attractiveness and the strengths and weaknesses of the retailer
need to be considered in evaluating strategic opportunities. The greatest invest-
ments should be made in market opportunities for which the retailer has a strong
competitive position. Here’s Kelly’s informal analysis:

Market Competitive
Growth Opportunity Attractiveness Position

Increase size of present stores and amount of merchandise in stores Low High
Open additional gift stores in Chicago area Medium Medium
Open gift stores outside the Chicago area (new geographic segment) Medium Low
Sell lower-priced gifts in present stores or open new stores selling Medium Low
low-priced gifts (new benefit segment)
Sell apparel and other nongift merchandise to same customers in same High Medium
or new stores
Sell similar gift merchandise to same market segment using High Low
the Internet
Open apparel stores targeted at teenagers High Low
Open a category specialist selling low-priced gifts High Low

Step 5: Establish Specific Objectives and

Allocate Resources
After evaluating the strategic investment opportunities, the next step in the strategic
planning process is to establish a specific objective for each opportunity. The retail-
er’s overall objective is included in the mission statement; the specific objectives are
goals against which progress toward the overall objective can be measured. Thus,
these specific objectives have three components: (1) the performance sought, includ-
ing a numerical index against which progress may be measured; (2) a time frame
within which the goal is to be achieved; and (3) the level of investment needed to
achieve the objective. Typically, the performance levels are financial criteria such
as return on investment, sales, or profits. Kelly’s objective is to increase profits by
20 percent in each of the next five years. She expects she will need to invest an
additional $25,000 in her apparel and other nongift merchandise inventory.

Step 6: Develop a Retail Mix to Implement the Strategy

The sixth step in the planning process is to develop a retail mix for each opportunity
in which an investment will be made and control and evaluate performance. Deci-
sions related to the elements in the retail mix are discussed in Sections III and IV.

Step 7: Evaluate Performance and Make Adjustments

The final step in the planning process is to evaluate the results of the strategy and
implementation program. If the retailer is meeting or exceeding its objectives,
 Retail Market Strategy CHAPTER 5 151
changes aren’t needed. But if the retailer fails to meet its objectives, reanalysis is
required. Typically, this reanalysis starts with reviewing the implementation pro-
grams, but it may indicate that the strategy (or even the mission statement) needs
to be reconsidered. This conclusion would result in starting a new planning pro-
cess, including a new SWOT analysis.

Strategic Planning in the Real World

The planning process in Exhibit 5–7 suggests that strategic decisions are made in a
sequential manner. After the business mission is defined, the SWOT analysis is per-
formed, strategic opportunities are identified, alternatives are evaluated, objectives
are set, resources are allocated, the implementation plan is developed, and, finally,
performance is evaluated and adjustments are made. But actual planning processes
have interactions among the steps. For example, the SWOT analysis may uncover a
logical alternative for the firm to consider, even though this alternative isn’t included
in the mission statement. Thus, the mission statement may need to be reformulated.
The development of the implementation plan might reveal that the resources allo-
cated to a particular opportunity are insufficient to achieve the objective. In that case,
the objective would need to be changed, the resources would need to be increased, or
the retailer might consider not investing in the opportunity at all.

SUMMARY
LO1 Define the retail strategy. approaches to build as high a wall around their po-
A retail strategy is a statement that identifies (1) the sition as possible.
retailer’s target market, (2) the format and re- LO3 Classify the different strategic growth
sources the retailer plans to use to satisfy the target opportunities retailers pursue.
market’s needs, and (3) the bases on which the re-
tailer plans to build a sustainable competitive ad- Four types of growth opportunities that retailers
vantage. The target market is the market segment(s) may pursue are market penetration, market expan-
toward which the retailer plans to focus its re- sion, retail format development, and diversification.
sources and retail mix. A retail format describes the The success in pursuing these growth opportuni-
nature of the retailer’s operations—its retail mix. A ties is the synergies between the retailer’s present
sustainable competitive advantage is an advantage markets and the growth opportunity—whether the
the retailer has over its competition that is not opportunity involves markets the retailer is pres-
easily copied by competitors and thus can be ently pursuing or new markets—and the synergies
maintained over a long period of time. between the retailer’s present retail mix and the
retail mix of the growth opportunity—whether the
LO2 Illustrate how retailers build a sustainable opportunity exploits the retailer’s skills and knowl-
competitive advantage. edge in operating its present format or requires
Three approaches for developing a sustainable new capabilities to operate a new format.
competitive advantage are (1) building strong
relationships with customers, (2) building strong LO4 Identify issues that arise as domestic retailers
relationships with suppliers, and (3) achieving become global retailers.
efficient internal operations. Each of these By expanding internationally, retailers can increase
approaches involves developing an asset—loyal their sales, leverage their knowledge and systems
customers, strong vendor relationships, committed across a greater sales base, and gain more bargaining
effective human resources, efficient systems, and power with vendors. But international expansion is
attractive locations—that is not easily duplicated risky because retailers must deal with different
by competitors. Three approaches for developing a government regulations, cultural traditions, con-
sustainable competitive advantage are (1) building sumer preferences, supply chains, and languages. The
strong relationships with customers, (2) building attractiveness of international opportunities is as-
strong relationships with suppliers, and (3) achiev- sessed by (1) the potential size of the retail market in
ing efficient internal operations. To build an the country, (2) the degree to which the country does
advantage that is sustainable for a long period of and can support the entry of foreign retailers engaged
time, retailers typically cannot rely on a single in modern retail practices, and (3) the risks or uncer-
approach, such as good locations or excellent tainties in sales and profits. The most attractive inter-
customer service. Instead, they use multiple national markets are India, China, and Brazil.
152 SECTION II Retailing Strategy

LO5 Know the steps retailers go through to develop Potential strategic directions are generated by people
a strategic plan. at all levels of the organization and then evaluated by
Strategic planning is an ongoing process. Every senior executives and operating personnel to ensure
day, retailers audit their situations, examine con- that the eventual strategic direction is profitable in
sumer trends, study new technologies, and monitor the long run and can be implemented.
competitive activities. But the retail strategy state- The strategic planning process consists of a
ment does not change every year or every six sequence of steps: (1) define the business mission,
months; the strategy statement is reviewed and (2) conduct a SWOT analysis, (3) identify strate-
altered only when major changes in the retailer’s gic opportunities, (4) evaluate the alternatives,
environment or capabilities occur. (5)  establish specific objectives and allocate
When a retailer undertakes a major reexamina- resources, (6) develop a retail mix to implement
tion of its strategy, the process for developing a the strategy, and (7) evaluate performance and
new strategy statement may take a year or two. make adjustments.

KEY TERMS
bargaining power of vendors, 148 market penetration growth retail strategy, 124
barriers to entry, 147 opportunity, 135 scale economies, 147
competitive rivalry, 148 mission statement, 145 SWOT analysis, 146
cross-selling, 136 opportunities and threats store brand, 130
customer loyalty, 127 analysis, 147 strategic alliance, 144
customer relationship management own brand, 130 strategic retail planning
(CRM) program, 131 perceptual map, 128 process, 144
direct investment, 144 positioning, 128 strengths and weaknesses
diversification growth private-label brand, 130 analysis, 146
opportunity, 136 related diversification growth sustainable competitive
franchising, 144 opportunity, 137 advantage, 124
frequent shopper program, 131 retail community, 131 target market, 124
joint venture, 144 retail format, 124 unorganized retailing, 140
loyalty program, 131 retail format development growth unrelated diversification growth
market expansion growth opportunity, 136 opportunity, 137
opportunity, 136 retail market, 125 vertical integration, 137

GET OUT AND DO IT!

1. CONTINUING CASE ASSIGNMENT Prepare (www.carrefour.fr), Royal Ahold (www.ahold.com),
an analysis of the company you selected for the con- and Metro AG (www.metro.de). Which chain has the
tinuing assignment. Identify its direct competitors, its most global strategy? Justify your answer.
target market and positioning, its strategy with respect 4. GO SHOPPING Visit two stores that sell similar
to its competitors, its retail format (the elements in merchandise categories and cater to the same target
its  retail mix—merchandise variety and assortment, segment(s). How are their retail formats (the elements
pricing, locations), and its bases for developing a com- in their retail mixes) similar? Dissimilar? On what bases
petitive advantage relative to its competitors. Outline do they have a sustainable competitive advantage?
the retailer’s strengths, weaknesses, opportunities, and Explain which you believe has a stronger position.
threats relative to its competitors. Pick a specific 5. WEB OLC EXERCISE Go to the student side of the
country in which the firm does not operate, and make a book’s website, and click on “Market Position Matrix.”
recommendation about whether the retailer should
Exercise 1: This spreadsheet describes an analysis of
enter the country and, if so, how it should do so.
international growth opportunities. What numbers in
2. INTERNET EXERCISE Visit the websites for the matrices would have to change to make China and
IKEA (www.ikea.com) and Starbucks (www.starbucks. France more attractive opportunities? To make Brazil
com). Are the look and feel of these Internet sites con- and Mexico less attractive opportunities? Change the
sistent with the in-store experience of these retailers? numbers in the matrices, and see what effect this has
3. INTERNET EXERCISE Go to the websites for on the overall position of the opportunity in the grid.
Walmart (www.walmartstores.com), Carrefour
 Retail Market Strategy CHAPTER 5 153
Exercise 2: The market attractiveness/competitive Exercise 3: Think of another investment decision that
position matrix can also be used by a department a retailer might make, and analyze it using the strate-
store to evaluate its merchandise categories and gic analysis matrix. List the alternatives and the char-
determine how much it should invest in each category. acteristics of the alternatives, and then put in the
Fill in the importance weights (10 5 very important, importance weights for the characteristics (10 5 very
1 5 not very important) and the evaluations of the important, 1 5 not very important) and the evaluation
merchandise categories (10 5 excellent, 1 5 poor), of each alternative on each characteristic (10 5
and then see what is recommended by the plot on the excellent, 1 5 poor).
opportunity matrix.

DISCUSSION QUESTIONS AND PROBLEMS

1. For each of the four retailers discussed at the beginning planning process shown in Exhibit 5–7. Focus on con-
of the chapter (Chipotle Mexican Grill, Lululemon, ducting a SWOT analysis of the local restaurant market,
Chico’s, and Save-A-Lot), describe its strategy and the identifying and evaluating alternatives, and selecting a
basis of its competitive advantage. target market and a retail mix for the restaurant.
2. Choose a retailer, and describe how it has developed a 8. The Gap owns several chains, including Old Navy,
competitive strategic advantage. Banana Republic, Piperlime, and Athleta. What type
3. Give an example of a market penetration, a retail for- of growth opportunity was The Gap pursuing when it
mat development, a market expansion, and a diversifi- opened each of these retail concepts? Which is most
cation growth strategy that Best Buy might use. synergistic with the original Gap chain?
4. Choose your favorite retailer. Draw and explain a 9. Identify a store or service provider that you believe has
positioning map, like that shown in Exhibit 5–3, that an effective loyalty program. Explain why it is effective.
includes your retailer, retailers that sell the same types 10. Choose a retailer that you believe could be, but is not
of merchandise, and the target customer segments yet, successful in other countries. Explain why you
(ideal points). think it could be successful.
5. Do a SWOT analysis for McDonald’s. What is its 11. Amazon.com started as an Internet retailer selling
mission? What are its strengths and weaknesses? books. Then it pursued a variety of growth opportuni-
What opportunities and environmental threats might ties, including expanding to groceries, DVDs, apparel,
it face over the next 10 years? How could it prepare software, and travel services; introducing e-readers
for these threats? (Kindle); operating the Internet channel for other re-
6. What are Neiman Marcus’s and PetSmart’s bases for tailers; and hosting virtual stores for small, independent
sustainable competitive advantage? Are they really retailers. Evaluate these growth opportunities in terms
sustainable, or are they easily copied? of the probability that they will be profitable businesses
7. Assume you are interested in opening a restaurant in for Amazon.com. What competitive advantages does
your town. Go through the steps in the strategic Amazon.com bring to each of these businesses?

SUGGESTED READINGS
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Journal of Asia-Pacific Business 11, no. 1 (2010), pp. 6–27. 2010, pp. 15–30.
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London: Routledge, 2012. Planning, 8th ed. Burr Ridge, IL: McGraw-Hill/Irwin, 2010.
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National Cultural Dimensions and Retail Format Strategies.” Research: Introduction to the Special Section on Retailing
Journal of Retailing and Consumer Services 18, no. 5 (2011), Research,” Journal of Business Research 64, no. 6 (2011),
pp. 397–404. pp. 541–542.
Fox, Edward J., and Raj Sethuraman. “Retail Competition.” In Rothaermel, Frank T. Strategic Management: Concepts. New York:
Retailing in the 21st Century—Current and Future Trends, McGraw-Hill, 2013.
2nd ed., eds. Manfred Kraft and Murali Mantrala. Berlin: Zentes, Joachim, Dirk Morschett, and Hanna Schramm-Klein.
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Advantage, 3rd ed. New York: McGraw-Hill, 2013.