TXMI 5250 Exam 2 Chapter 4 Evaluating the Competition in Retailing Models of Retail Competition Many people believe that local retailers cannot compete with the large discounters but this isn t true o Ex small appliance store owner would benefit by understanding that these chains usually carry only a limited selection within a product category and provide little personalized or specialized service o Other chains have created a niche that has worked well against these discounters ex Dollar General o Also smaller stores can learn that their store would not be price competitive in certain areas ex health and beauty items and they can offer more products in areas that the local WalMart doesn t have as much merchandise in No retailer no matter how cleaver can design a strategy that will completely insulate it from competition o Competition will always remain as other retailers seek to copy a profitable strategy o Competition in retailing involves interplay of supply and demand The Competitive Marketplace o A retailer must be clear about what advantages it will emphasize and where its resources will have the greatest impact in attracting and satisfying customers o Retailers compete for target customers on five major fronts or factors The price for the benefits offered Service level Product selection merchandise line width and depth Location or access overall convenience of shopping the retailer Customer experience the customer s positive feelings and behaviors in the purchase process o Retailers must clear a minimum threshold on each of these criteria in order to stay in business o They also must distinguish themselves in the marketplace by dominating on one key factor and differentiate themselves on a secondary factory Market Structure o Pure Competition Occurs when a market has homogenous products and many buyers and sellers all having perfect knowledge of the market and ease of entry for both buyers and sellers Each retailer faces a horizontal demand curve and must sell its products at the going market or equilibrium price Rare in retailing Neither customers nor retailers know all the prices in the marketplace without investing extensive time and effort to acquire this knowledge Also not all customers value an item similarly o Pure Monopoly Occurs when there is only one seller for a product or service As the retailer seeks to sell more units it must lower the selling price Customers who already have one unit will tend to place a lower value on an additional unit Called the law of diminishing returns or declining marginal utility o Monopolistic Competition Occurs when the products offered are different yet viewed as substitutable for each other and the sellers recognize that they compete with sellers of these different products Occurs in two types of situations Retailers sell different heterogeneous products in the eyes of consumers that are still substitutes for each other Here two or more retailers may be selling the same product but one retailer is able to differentiate itself on another dimension Thus consumers perceive the retailers as selling different products given the totally shopping experience Sellers may be the only ones selling a particular brand but face competition from other retailers selling similar goods and services Ex Pepsi vs Coke The degree of the seller s control depends on the extent to which customers view the competition s product as similar Why retailers in monopolistic competition attempt to differentiate themselves on the products they offer o Oligopolistic Competition Occurs when relatively few sellers or many small firms who follow the lead of a few larger firms offer essentially homogenous products and any action by one seller is expected to be noticed and reacted to by the other sellers End up selling at a similar price since everybody knows what others are doing Retailing is often characterized as monopolistic competition or in rare cases oligopolistic competition For an oligopoly to occur the top four firms must control 60 80 of the market Oligopolistic competition is more common at a local level When retailing becomes concentrated at the local level there are several checks on the retailers power one being nonstore shopping Internet Outshopping Occurs when a household travels outside their community of resident or uses the internet to shop in another community The Demand Side of Retailing o In a Monopolistic Competition the retailer will be confronted with a downward sloping demand curve demand is higher as price is lower o Customers who have greater knowledge of available alternatives and the differences in product features will often patronize a wider range of retailers The Internet has made more consumers aware of other options Non price Decisions o Many customers place a high value on attributes other than price when selecting a place to shop o Non price variables are directed at enlarging the retailer s demand by offering customers benefits beyond simply the lowest price o Certain non price variables will be more successful than others given the market segments they choose to target o Competing on price alone is a no win situation because price is the easiest variable for competitors to copy o Ways to use non price variables to achieve a protected niche The retailer could position itself as different from the competition by altering its merchandise mix to offer higher quality goods greater personal service special orders handling or a better selection of large sizes Store positioning when a retailer identifies a well defined market segment using demographic or lifestyle variables and appeals to this segment with a clearly differentiated approach The retailer can offer private label merchandise that has unique features or offers better value than do competitors The retailer could provide other benefits for the customer The retailer could master stock keeping with its basic merchandise assortment o Most retail decision variables whether price or non price are directed at influencing demand Competitive Actions o Overstored A condition in a community where the number of stores in relation to households is so large that to engage in retailing is usually unprofitable or marginally profitable Implement both price and non price actions in an attempt to increase both sales and profits Competition is most intense here because many retailers are achieving an inadequate return on investment o Understored A condition in a community where the number of