Unit L.07 – Retailers As Channels of Distribution

What you’ll learn to do: describe types of retailers and explain how they are used as a channel of distribution

Retailing is important for marketing students to understand for two main reasons. First, most channel structures end with a retailer. While products may pass through a wholesaler or involve a broker or agent, they also include a retailer. Second, retail offers an immense number of job opportunities. Today in the U.S., there are 3,793,621 retail establishments that support 42 million jobs. Retail also contributes $2.6 trillion to the U.S. gross domestic product.^[1]

You can view the number of jobs and retail presence in your state at the National Retail Federation (NRF).

Who are these retailers? The NRF posts an annual list of the top one hundred retailers by retail sales. The top ten are listed in the table below.^[2]

Rank	Retailer	U.S. Headquarters	2018 Retail Sales (billions)
1	Walmart Stores	Bentonville, Arkansas	$387.66
2	Amazon.com	Seattle, Washington	$120.93
3	The Kroger Co.	Cincinnati, Ohio	$119.70
4	Costco	Issaquah, Washington	$101.43
5	Walgreens	Deerfield, Illinois	$98.39
6	The Home Depot	Atlanta, Georgia	$97.27
7	CVS Health Corporation	Woonsocket, Rhode Island	$83.79
8	Target	Minneapolis, Minnesota	$74.48
9	Lowe’s Companies	Mooresville, North Carolina	$64.09
10	Albertsons Companies	Boise, Idaho	$59.71

In this section you’ll learn more about the retail channel and the strategies that drive its growth.

Retailing

Retailing involves all activities required to market consumer goods and services to ultimate consumers who are purchasing for individual or family needs.

By definition, B2B purchases are not included in the retail channel since they are not made for individual or family needs. In practice this can be confusing because many retail outlets do serve both consumers and business customers—like Home Depot, which has a Pro Xtra program for selling directly to builders and contractors. Generally, retailers that have a significant B2B or wholesale business report these numbers separately in their financial statements, acknowledging that they are separate lines of business within the same company. Those with a pure retail emphasis do not seek to exclude business purchasers. They simply focus their offering to appeal to individual consumers, knowing that some businesses may also choose to purchase from them.

We typically think of a store when we think of a retail sale, even though retail sales occur in other places and settings. For instance, they can be made by a Pampered Chef salesperson in someone’s home. Retail sales also happen online, through catalogs, by automatic vending machines, and in hotels and restaurants. Nonetheless, despite tremendous growth in both nontraditional retail outlets and online sales, most retail sales still take place in brick-and-mortar stores.

The Retail Industry

The retail industry covers an enormous range of consumer needs. In reporting on common trends across the major retail segments, the National Retail Federation covers sixteen different categories. As shown below, these categories are not necessarily store types, but they show the breadth of products offered through the retail chain.^[3]

Category	Sample Retailers
Auto Aftermarket	Advance Auto Parts, AutoZone, Pep Boys
Department Stores	Kohl’s, Macy’s, Nordstrom, Saks Fifth Avenue
Drug Stores	CVS, Rite Aid, Walgreen’s
Entertainment and Consumer Electronics	AT&T, Apple, Barnes & Noble, BestBuy, GameStop, Toys R Us
Footwear	DSW, Foot Locker
General Apparel	Forever 21, Gap, H&M, Old Navy, TJ Maxx, Urban Outfitters
Health and Beauty	Bath and Body Works, Sally Beauty, Sephora, Ulta
Hobby and Craft	Michael’s, Guitar Center, Jo-Ann Fabrics
Home Improvement and Hardware	Home Depot, Ikea, Pier 1 Imports, True Value, Williams-Sonoma
Jewelry and Accessories	Charming Charlie’s, Coach, Piercing Pagoda, Signet, Tiffany & Co.
Mass Merchants	Amazon, Costco, Target, Walmart
Restaurants	Chipotle, KFC, McDonald’s, Olive Garden, Starbucks
Small-Format Value	Big Lots, Dollar General, Dollar Tree, Family Dollar
Sporting Goods and Outdoor	Bass Pro Shops, Cabela’s, Dick’s, Sports Authority, REI
Supermarkets	Albertson’s, Kroger, QFC, Safeway, Publix, Whole Foods
Women’s Apparel	Ann Taylor, Lane Bryant, Talbot’s, Victoria’s Secret

The retail industry is designed to create contact efficiency—allowing shoppers to buy what they want efficiently with a smaller number of transactions. This design doesn’t come from a master retail plan. It’s driven by market forces. When a retailer sees an opportunity to expand its offering to increase purchases from customers in one location, it will expand its offering to meet the opportunity. When Barnes & Noble adds Starbucks coffee shops to its locations, customers visit more frequently and stay longer, increasing the chance of additional purchases. Costco recognized that busy holiday shoppers would rather buy a Christmas tree as part of a larger convenience purchase than have a focused (and less convenient) buying experience at a Christmas tree lot. Such opportunities cause retailers to expand their offerings, creating greater contact efficiency for consumers.

Given this logic and opportunity, why doesn’t every retailer become a Walmart Super Store filled with every possible product? Like all organizations that market effectively, retailers shape their offerings to a target buyer. Retailers must also consider the particular shopping experience a buyer is seeking in that moment or context. One experience isn’t right for everyone at the same time; nor are all “experiences” compatible. For example, a buyer is expecting a different buying experience when she fills her car’s gas tank and when she stays at a luxury resort.

Retailers define their target buyer segments, identify the service outputs that those segments require, and match their offerings to provide value to each target segment.

Types of Retailers

Beyond the distinctions in the products they provide, there are structural differences among retailers that influence their strategies and results. One of the reasons the retail industry is so large and powerful is its diversity. For example, stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry, and in their ownership and management structures.

The U.S. Census Bureau indicates that 94.5 percent of retail companies have only one location or store.^[4] More than one million retail businesses in the U.S. have fewer than one hundred employees. Most retail outlets are small and have weekly sales of just a few hundred dollars. A few are extremely large, having sales of $500,000 or more on a single day. In fact, on special sale days, some stores exceed $1 million in sales.

This diversity in size and earnings is reflected in the range of different ownership and management structures, discussed below.

Department Stores

Department stores are characterized by their very wide product mixes. That is, they carry many different types of merchandise, which may include hardware, clothing, and appliances. Each type of merchandise is typically displayed in a different section or department within the store. The depth of the product mix depends on the store, but department stores’ primary distinction is the ability to provide a wide range of products within a single store. For example, people shopping at Macy’s can buy clothing for a woman, a man, and children, as well as house wares such as dishes and luggage.

Chain Stores

The 1920s saw the evolution of the chain store movement. Because chains were so large, they were able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lowered their cost compared to costs of single unit retailers. As a result, they could set retail prices that were lower than those of their small competitors and thereby increase their share of the market. Furthermore, chains were able to attract many customers because of their convenient locations, made possible by their financial resources and expertise in selecting locations.

Supermarkets

Supermarkets evolved in the 1920s and 1930s. For example, Piggly Wiggly Food Stores, founded by Clarence Saunders around 1920, introduced self-service and customer checkout counters. Supermarkets are large, self-service stores with central checkout facilities. They carry an extensive line of food items and often nonfood products. There are 37,459 supermarkets operating in the United States, and the average store now carries nearly 44,000 products in roughly 46,500 square feet of space. The average customer visits a store just under twice a week, spending just over $30 per trip. Supermarkets’ entire approach to the distribution of food and household cleaning and maintenance products is to offer large assortments these goods at each store at a minimal price.

Discount Retailers

Discount retailers, like Ross Dress for Less and Grocery Outlet, are characterized by a focus on price as their main sales appeal. Merchandise assortments are generally broad and include both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes. Traditional stores are usually large, self-service operations with long hours, free parking, and relatively simple fixtures. Online retailers such as Overstock.com have aggregated products and offered them at deep discounts. Generally, customers sacrifice having a reliable assortment of products to receive deep discounts on the available products.

Warehouse Retailers

Warehouse retailers provide a bare-bones shopping experience at very low prices. Costco is the dominant warehouse retailer, with $138.4 billion in sales in 2018. Warehouse retailers streamline all operational aspects of their business and pass on the efficiency savings to customers. Costco generally uses a cost-plus pricing structure and provides goods in wholesale quantities.

Franchises

The franchise approach brings together national chains and local ownership. An owner purchases a franchise which gives her the right to use the firm’s business model and brand for a set period of time. Often, the franchise agreement includes well-defined guidance for the owner, training, and on-going support. The owner, or franchisee, builds and manages the local business. Entrepreneur magazine posts a list each year of the 500 top franchises according to an evaluation of financial strength and stability, growth rate, and size. The 2019 Top 500 Franchises list by Entrepreneur magazine is led by McDonald’s, Dunkin’ Donuts, Sonic Drive-In, Taco Bell, and the UPS Store.

Malls and Shopping Centers

Malls and shopping centers are successful because they provide customers with a wide assortment of products across many stores. If you want to buy a suit or a dress, a mall provides many alternatives in one location. Malls are larger centers that typically have one or more department stores as major tenants. Strip malls are a common string of stores along major traffic routes, while isolated locations are freestanding sites not necessarily in heavy traffic areas. Stores in isolated locations must use promotion or some other aspect of their marketing mix to attract shoppers.

Online Retailing

Online retailing is unquestionably a dominant force in the retail industry, but today it accounts for only a small percentage of total retail sales. Companies like Amazon and Geico complete all or most of their sales online. Many other online sales result from online sales from traditional retailers, such as purchases made at Nordstrom.com. Online marketing plays a significant role in preparing the buyers who shop in stores. In a similar integrated approach, catalogs that are mailed to customers’ homes drive online orders. In a survey on its Web site, Land’s End found that 75 percent of customers who were making purchases had reviewed the catalog first.^[5]

Catalog Retailing

Catalogs have long been used as a marketing device to drive phone and in-store sales. As online retailing began to grow, it had a significant impact on catalog sales. Many retailers who depended on catalog sales—Sears, Land’s End, and J.C. Penney, to name a few—suffered as online retailers and online sales from traditional retailers pulled convenience shoppers away from catalog sales. Catalog mailings peaked in 2009 and saw a significant decrease through 2012. In 2013, there was a small increase in catalog mailings. Industry experts note that catalogs are changing, as is their role in the retail marketing process. Despite significant declines, U.S. households still receive 11.9 billion catalogs each year.^[6]

Nonstore Retailing

Beyond those mentioned in the categories above, there’s a wide range of traditional and innovative retailing approaches. Although the Avon lady largely disappeared at the end of the last century, there are still in-home sales from Arbonne facial products, cabi women’s clothing, WineShop at Home, and others. Many of these models are based on the idea of a woman using her personal network to sell products to her friends and their friends, often in a party setting.

Vending machines and point-of-sale kiosks have long been a popular retail device. Today they are becoming more targeted, such as companies selling easily forgotten items—such as small electronics devices and makeup items—to travelers in airports.

Each of these retailing approaches can be customized to meet the needs of the target buyer or combined to span a range of needs.

Retail Strategy

Just when we have finally mastered the marketing mix that includes the four Ps, we arrive at the retail strategy. The retail marketing strategy includes all of the elements of the traditional marketing mix:

• Retailers buy product from producers or wholesalers that will most appeal to their target market.
• Retailers set a price that delivers value for the product and the complete shopping experience.
• Retailers promote their offering, which includes the shopping experience, the products, the pricing, and broadly, the retail brand.
• Retailers create the right place, which is the point of purchase for the buyer.

In delivering the best retail experience through the right place, two additional Ps come into play: presentation and personnel.

Presentation

Think of a physical store where you enjoy shopping. What is it about the store that you like? You might like the way the store looks, feels, sounds, or smells. It might have products that draw you in and make you want to interact with them. You may just like the store because it’s familiar and convenient—you know where to find the things you need. All of these descriptions fall into two categories. They refer either to the atmosphere of the store or the layout of the store.

The atmosphere describes the feeling, tone, or mood of the store. Often, as a shopper it is difficult to identify exactly what creates the atmosphere in a good shopping experience. (It is much easier in a bad shopping experience.) The store’s decor plays a role in the atmosphere. Are the fixtures decorative or merely functional? Is the shopper invited to linger on a couch or inviting chair, or is he encouraged to simply purchase and leave?

One important element of the atmosphere is density. How has the retailer packed elements into the space? Retailers manage the density of employees, fixtures, and merchandise. The shopping experience requires more employees if there is a high need for service or information. High-end clothing sales generally provide a higher level of service, with sales associates available to advise on fit and fashion choices and to bring the shoppers different sizes and clothing options in the dressing room. A car purchase is not one that generally involves the same type or style of service, but there is a high need for information that translates to a higher density of sales employees to explain features, financing, and availability.

The density of merchandise and fixtures also has a significant impact on the atmosphere of the store. If the shoppers value service, or the retail brand requires a high-end experience, then the retailer generally has less density of merchandise and fixtures. If the shopper most values service outputs of assortment and convenience, then the retailer will use a higher density of merchandise. For example, grocery shoppers may have different standards for the quality of fixtures they prefer relative to the price of the grocery items, but generally they prefer a higher-density shopping experience. The shopper is trying to collect many different products from all areas of the store and would rather have shelves stacked than have to wander much farther through a store with more empty space. Convenience is the dominant factor driving the presentation of products.

Finally, the layout, display, and positioning of the merchandise have a significant impact on sales behaviors. Grocers have conducted studies to optimize the layout of the store and the position of items on the shelves. Stores are designed in a logical pattern, so that they are easy to navigate and optimize spending. Higher-margin items are placed at eye level, while those that are inexpensive and commonly purchased are at the bottom of the shelf. The produce section was once the entry point for every grocery store. Today, that spot is more likely to be occupied by high-end novelty items (expensive chocolates, clothing, paper items, floral arrangements). Still, the produce section continues to be the first food section that buyers are steered toward. This is intended to facilitate meal planning before the shopper arrives at the meat and dairy departments.

In a retail environment, the layout is designed to create comfort and convenience and, at the same time, drive sales.

Online Presentation

Moving the presentation to an online shopping experience can be even more difficult. Retail Web sites emphasize site design, navigation, information, and checkout experience. Amazon has set the standard for ease of purchase with its one-click checkout solution. Zappos is well known for providing through, accurate product photos that give a complete view of each product from every angle. Still, the online atmosphere is more difficult to differentiate than the traditional in-store experience.

Personnel

Retail employees are the face of the brand to the shopper. This is true of a sales associate who helps with a purchase decision, a waitperson in a restaurant, a hotel check-in clerk, or a checker in a grocery store who efficiently rings up purchases. Retail employees fill a weighty role in the brand for two reasons. First, they do work that has the potential to add immense value to the purchase process. When an employee is helpful and efficient with the selection and/or purchase of a product, it’s an important and necessary aspect of the buyer’s retail experience. The retail employees working directly with customers have a much more personal and profound impact on the brand experience of each shopper than the senior executives of the company or even store managers, who have less customer contact.

In order to support employees to be successful, effective retailers will:

• Demonstrate care in hiring to ensure that customer-facing employees will represent the retailer’s brand values
• Train employees to be knowledgeable about the products and efficient in their jobs
• Carefully manage operations so that staffing levels match the desired retail experience
• Compensate employees in a way that rewards good service and effective sales

Sales employees are most likely to have some variable compensation or have some portion of their paycheck tied to their ability to drive sales. These incentives can be a direct commission on sales or a less direct financial or benefits bonus for the store meeting its goals.

The following video shares how one retail giant, Costco, understands the importance of treating its employees well in order to ensure good customer service and a positive shopping experience every time.

Read the transcript for the video “Success for CostCo.”

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