Retail Strategy

Retail Strategy
Dr. Parveen Nagpal

Retail Strategy
Retail Strategy: A statement identifying
(i) the retailer’s target market,
(ii) the format the retailer plans to use to satisfy the target market’s
needs, and
(iii) the bases on which the retailer plans to build a sustainable
competitive advantage.
Retailers formulate merchandise strategy, promotion strategy, location
strategy, branding strategy and so on.

Retail Strategy
• Target Market is the market segment toward which the retailer plans to
focus its resources and retail mix.
• Retail Format describes the nature of retailer’s operations—its retail mix
(type of merchandise and services offered, pricing policy, advertising and
promotion programs, store design and visual merchandising, locations, and
customer services)—that it will use to satisfy the needs of its target market.
• Sustainable Competitive Advantage is an advantage the retailer has over its
competitors that is not easily copied and thus can be maintained over a long
period of time.

Retail Strategy
Three approaches for developing a sustainable competitive advantage are
(1) building strong relationships with customers
Customer Loyalty – brand image, positioning, unique merchandise, customer
service, CRM programs.
(2) building strong relationships with suppliers – vendor relations
(3) achieving efficient internal operations - Larger retailers have more
bargaining power with vendors and thus can buy merchandise at lower costs,
invest in developing sophisticated systems, better human resource
management and information and supply chain management systems.
Each of these approaches involves developing an asset—loyal customers,
strong vendor relationships, committed effective human resources and
efficient systems, and attractive locations—that is not easily duplicated by
competitors.

Retail Strategy – Growth Strategy
Growth strategies are basically about decisions related to allocating available
resources among different target markets and retail formats, transferring
resources from one set of merchandise to others and managing and
nurturing the firm’s portfolio in such a way that the overall organizations
objectives are obtained.

Four types of growth opportunities that retailers may pursue -

1. Market Penetration
• A market penetration growth opportunity is a growth opportunity directed
toward existing customers using the retailer’s present retailing format.
• Such opportunities involve either attracting new consumers from the
retailer’s current target market who don’t patronize the retailer currently or
devising approaches that get current customers to visit the retailer more
often or buy more merchandise on each visit.
• Market penetration approaches include opening more stores in the target
market and/or keeping existing stores open for longer hours.
• Other approaches involve displaying merchandise to increase impulse
purchases and training salespeople to cross-sell.
(Cross-selling means that sales associates in one department attempt to sell
complementary merchandise from other departments to their customers)

2. Market Expansion
• A market expansion growth opportunity involves using the retailer’s existing
retail format in new market segments.
• A market expansion opportunity exists when a retailer sells the same
product range with no/some alteration in the new market.
• It means that merchandise will remain the same but will be marketed to a
new customer group.
• Retailers can expand the markets by entering a new market to sell, either by
exporting or by entering into a totally new market.

3. 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. For example, Amazon.com began selling
electronic items such as CDs, videos, pen drives and other electronic items
in addition to books and literature.
• These stores are located close to where customers live and work.

4. Diversification
A diversification growth opportunity is one in which a retailer introduces a
new retail format directed towards a market segment that is not currently
served by the retailer.
Diversification opportunities are either related or unrelated -
• Related Diversification Growth Opportunity – Here, the retailer’s present
target market or retail format shares something in common with the new
opportunity. This commonality might necessitate purchasing from the same
vendors, operating in similar locations, using the same distribution or
management information system, or advertising in the same newspapers to
similar target markets.
• Unrelated Diversification Growth Opportunity - This has little commonality
between the retailer’s present business and the new growth opportunity.

• Vertical Integration
This describes diversification by retailers 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 manufacturer’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.
However, designing private-label merchandise is a related diversification
because it builds on the retailer’s knowledge of its customers, but actually
making the merchandise is an unrelated diversification.

Retailers have the greatest competitive advantage and most success when they
engage in opportunities that are similar to their present retail operations and
markets.
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.

Global Growth Opportunities
• 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.
• International expansion is risky, because retailers must deal with different
government regulations, cultural traditions, consumer preferences, supply
chains, languages etc.
• The two factors that are often used to determine the attractiveness of
different international opportunities 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 (political stability, urban population, better infrastructure, ease of
doing business etc.)

• The most attractive countries are those with large and growing potential
sales as indicated by the level and growth rate of present retail sales and the
amount of money people have in the country to spend on services and
merchandise
• Most retailers considering entry into foreign markets are successful retailers
that use sophisticated management practices. Thus they would find
countries that support modern retailing, have more advanced
infrastructure, and have significant urban population to be more attractive.
• The emerging international markets that receive the most attention from
global retailers are India, China, Russia, and Brazil, collectively referred to as
“the BRIC” (Brazil, Russia, India, China) countries. China and India are by far
the largest retail markets in emerging economies.

The characteristics of retailers that have successfully exploited international
growth opportunities are:
1. Globally Sustainable Competitive Advantage
Entry into non-domestic markets is most successful when the expansion
opportunity builds on the retailer’s core bases of competitive advantage. For
example, Walmart has a significant cost advantage and is most successful in
international markets in which price plays an important role in consumer
decision making. It also has a distribution infrastructure that enables 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.

2. Adaptability - Although successful global retailers build on their core
competencies, they also recognize cultural differences and adapt their core
strategy to the needs of local markets.
3. Global Culture - It is not sufficient to transplant a home-country culture
and infrastructure to another country. Big retailers encourage the rapid
development of local management and retain few expatriates in its overseas
operations. They have a global management structure of regional
committees, which meet regularly, advance the awareness and
implementation of global best practices.
4. Financial Resources - Expansion into international markets requires a long-
term commitment and considerable planning. Large firms are in a strong
financial position and therefore have the ability to keep investing in projects
long enough to become successful.

Entry Strategies in Global Market
1. 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 highest 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.

2. 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, such as India, require that foreign entrants partner
with domestic firms.
• Problems with this entry approach can arise if the partners disagree or the
government places restrictions.

3. Strategic Alliance
• It 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 logistical and
warehousing activities.
4. Franchising
• It offers the lowest risk and requires the least investment.
• However, the retailer has limited control 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.

Strategic Retail Planning
• Strategic retail planning process is the set of steps a retailer goes
through to develop a strategy and plan.
• It describes how retailers select target market segments, determine the
appropriate retail format, and build sustainable competitive advantage.
• The planning process can be used to formulate strategic plans at
different levels within a retail corporation

Stages in Strategic Retail Planning

1. Define Business Mission
• Mission statement is a broad description of a retailer’s objectives and
the scope of activities it plans to undertake.
• 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?

Examples - Business Mission:
1. Café Coffee Day
To be the best Cafe chain by offering a world class coffee experience at affordable
prices.
2. Amazon
“To be Earth’s most customer-centric company, where customers can find and
discover anything they might want to buy online, and endeavors to offer its
customers the lowest possible prices.”
3. D – Mart
At DMart, we research, identify and make available new products and categories
that suit the everyday needs of the Indian family. Our mission is to provide the best
value possible for our customers, so that every rupee they spend on shopping with
us gives them more value for money than they would get anywhere else.

2. Conduct a Situation Audit
An analysis of the opportunities and threats in the retail environment
and the strengths and weaknesses of the retail business relative to its
competitors. It may include SWOT Analysis, PESTLE Analysis.
Elements in Situation Audit

I. Market Factors
Market size, measured in retail sales rupees, is important because it indicates a
retailer’s opportunity to generate revenues to cover its investment. Growing
markets are more attractive than mature or declining markets. 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.
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). 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.

II. Competitive Factors
The nature of the competition in retail markets is affected by barriers to entry,
the bargaining power of vendors, and competitive rivalry.
Barriers to entry - Conditions in a retail market that make it difficult for other
firms to enter the market. Some of these conditions are –
Scale economies: Cost advantages due to a retailer’s size. Markets dominated by
large competitors with scale economies are typically unattractive because the
dominant firms have sustainable cost advantages
Customer loyalty: Retail markets dominated by a well-established retailer that
has developed a loyal group of customers also are unattractive.
Availability of good locations

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
Competitive Rivalry
Frequency and intensity of reactions to actions undertaken by competitors.
When rivalry is high, price wars erupt, advertising and promotion expenses
increase, and profit potential falls.
Conditions that may lead to intense rivalry include - large number of
competitors that are all about the same size, slow growth, high fixed costs,
and lack of perceived differences between competing retailers.

III. Environmental Factors - include technological, economic, regulatory,
and social changes (trends in demographics, lifestyles, attitudes etc.).
IV. Analysis of Strength and Weaknesses - indicates how well the business
can seize opportunities and avoid harm from threats in the
environment

3. Identify Strategic Opportunities
After completing the situation audit, the next step is to identify opportunities
for increasing retail sales. E.g.: Increase assortments, Increase the size of
stores…
4. Evaluate Strategic Opportunities
It determines the retailer’s potential to establish a sustainable competitive
advantage and reap long-term profits from the opportunities being
evaluated. Retailer must focus on opportunities that utilize its strengths and
its competitive advantage.
Market attractiveness and the strengths and weaknesses of the retailer need
to be considered in evaluating strategic opportunities and investments should
be made in market opportunities for which the retailer has a strong
competitive position.

5. Establish Specific Objectives and Allocate Resources
The retailer’s overall objective is included in the mission statement; specific
objectives are goals against which progress towards the overall objective can
be measured.
Specific objectives have three components:
(i) the performance sought
(ii) Time frame within which the goal is to be achieved
(iii) Level of investment needed to achieve the objective.
6. Develop a Retail Mix to Implement the Strategy
Next retailers should develop a retail mix for each opportunity in which an
investment will be made and control and evaluate performance

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, changes are not needed.
But if the retailer fails to meet its objectives, reanalysis is required.
Reanalysis starts with reviewing the implementation programs, 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 process, including a
new situation audit.

References
1. Michael Levy & Barton A Weitz, “Retailing Management”, 8th Edition, Tata
Mc Graw Hill.
2. Swapna Pradhan, “Retailing Management – Text and Cases”, 4th Edition,
Tata Mc Graw Hill.
3. Nagpal, Sharma, Kukreja “Retail Management”, Vipul Prakashan

Retail Strategy

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