CHAPTER 2
TYPES OF RETAILERS
ANNOTATED OUTLINE
INSTRUCTOR NOTES
I. Retailer Characteristics
• The 1.1 million U.S. store-based retailers range from street
vendors selling hot dogs to omnichannel retailers that offer
thousands of products in their stores, through catalog and
Internet channels.
• Four elements of the retail mix that are particularly useful
for classifying retailers are: (1) the type of merchandise
sold, (2) the variety and assortment of merchandise and/or
services sold, (3) the level of customer service, and (4) the
price of the merchandise.
LO 2-1 List the different
characteristics that define
retailers.
Ask students to compare the four
elements of the retail mix — the
type of merchandise sold, the
discount store (e.g., Walmart).
Use this comparison to illustrate
how the competition between the
two specialty stores is stronger
than the competition between the
specialty store and the discount
store.
PPT 2-5 illustrates classification of
retailers by merchandise offering
and by variety and assortment.
A. Type of Merchandise
B. Variety and Assortment
• Variety is the number of merchandise categories a retailer
offers. Assortment is the number of different items in a
merchandise category. Each different item of merchandise
is called a SKU (stock-keeping unit).
See PPT 2-7
Ask students to give examples of
local retailers with low variety and
high assortment, and retailers
with high variety and low
assortment.
and assortment is referred to as the depth of merchandise.
offer to customers? What is the
benefit of high assortment?
Ask student to give an example of
an SKU.
C. Services Offered
• Retailers also differ in the services they offer customers.
Customers expect retailers to provide some services—
accepting credit cards, displaying merchandise, providing
parking, and being open long and convenient hours.
See PPT 2-9
Discuss the different customer
service policies of a specialty store
like Apple and a local department
store or an Internet retailer.
D. Prices and the Cost of Offering Breadth and Depth of
Merchandise and Services
• Stocking a deep and broad assortment is appealing to
customers but costly for retailers. When a retailer offers
many SKUs, inventory investment increases because the
retailer must have back-up stock for each SKU.
• A critical retail decision involves the trade-off between
costs and benefits of maintaining additional inventory or
providing additional services.
See example in PPT 2-10 for
illustration
Customers like wide variety, deep
assortments, and a lot of service,
though some customers
appreciate having the retailer edit
the assortment for them. Ask
Why don’t discount stores offer
more services? (They appeal to a
target segment that does not
want to pay the cost for more
service options.)
II. Food Retailers
• Twenty years ago, consumers purchased food primarily at
conventional supermarkets. Now conventional
supermarkets account for less than 65 percent of food
sales.
LO 2-2 Categorize the various
types of food retailers.
See PPT 2-13
Where do students make the
A. Supermarkets
• A conventional supermarket is a self-service food store
offering groceries, meat, produce, and limited nonfood
items.
• A limited-assortment supermarket (also called an
extreme-value food retailer) only stocks about 1,500 SKUs.
The two largest US examples of these stores are Save-A-Lot
See PPT 2-14
Ask students to consider the retail
mixes of the major supermarkets
in the area surrounding campus.
Which compete on price? On
merchandise? On service? A
combination?
1. Trends in Supermarket Retailing
• Today, conventional supermarkets are under substantial
competitive pressure on multiple sides: from supercenters,
online retailers, warehouse clubs, extreme-value retailers,
convenience stores, and even drugstores. All these types of
retailers have increased the amount of space (virtual or
physical) that they devote to consumables.
See PPT 2-17
Ask students about why they
would continue to shop at
conventional supermarkets.
Alternatively, why would they
shop for food at supercenters,
warehouse clubs, or convenience
stores? What types of needs are
• To compete successfully with intrusions by other types of
retailers, conventional supermarkets have taken steps to
differentiate their offerings by (1) emphasizing fresh
formats? Based on these
discussions, will conventional
supermarkets be driven out of
2. Fresh Merchandise
• Fresh-merchandise categories are located in the areas
around the outer walls of a supermarket, known as the
power perimeter, and include the dairy, bakery, meat,
florist, produce, deli, and coffee bar.
3. Green Merchandise
• Conventional supermarkets are offering more fair trade,
natural, organic, and locally sourced foods for the growing
segment of consumers who are health and
environmentally conscious.
Discuss if students would pay
more for local produce, and if by
doing so, it would improve the
carbon footprint in the world.
Does paying more for fair trade
make students feel like they are
4. Ethnic Merchandise
• Retailers are adding more ethnic merchandise in
conventional supermarkets, and opening supermarkets
targeting certain ethnic markets.
• Conventional supermarket chains are leveraging their
quality reputation to offer more private-label merchandise
which helps build store loyalty, earn higher margins, and
differentiate stores from their competitors.
stores that are “private label.”
Discuss if quality or price plays a
greater role in their decision to
purchase these products.
6. Improving the Shopping Experience
• Creating an enjoyable shopping experience through better
store ambience and customer service is used to
differentiate supermarket chains from low-cost, low-price
competitors.
Ask students to list what types of
experiences they have seen in the
food retailers they visit. Discuss if
these experiences motivate them
to continue to shop there.
B. Supercenters
• Supercenters are the fastest growing retail category. At
160,000 to 20,000 square feet, these stores offer a wide
variety of food and non-food merchandise. The largest
supercenters are Walmart supercenters, Meijer, Super
Kmart (Sears Holding), Fred Meyer (a division of Kroger),
and SuperTarget.
• However, since supercenters are very large, some
customers find them inconvenient because it can take a
long time to find the items they want.
• Hypermarkets are also large, about the same size as
supercenters, and have a combination of food and general
merchandise. Hypermarkets typically stock fewer SKUs
See PPT 2-18 for an illustration of
the characteristics of supercenters
and warehouse clubs.
The supercenter is one of the
fastest growing retail formats.
Why is the supercenter more
attractive than a hypermarket in
the U.S., but not in Europe? What
supermarket. How do students
feel about the growth of
Walmart? Do students prefer
Walmart’s format over Target?
Why?
than supercenters.
• Although supercenters and hypermarkets are the fastest
growing categories in global retailing today, these retailers
do face challenges in finding and acquiring appropriate
land for building (particularly in Europe and Japan), along
with backlash against these large stores, particularly in the
U.S.
C. Warehouse Clubs
• Warehouse clubs reduce prices by using low-cost locations
and inexpensive store designs, and offering little customer
service. They reduce inventory holding costs by carrying a
limited assortment of fast-selling items and buying
merchandise opportunistically.
• Warehouse clubs accordingly have had substantial
influences on retailing and its structure. Between 1992 and
2013, warehouse club sales increased from $40 billion to
$420 billion.
See PPT 2-18 for an illustration of
Are warehouse clubs wholesalers
or retailers? (When they sell to
small businesses they are
wholesalers. When they sell to
individual members for personal
or household use, they are
retailers.)
Ask students if they are members
of a warehouse club. Do they
prefer warehouse clubs to
D. Convenience Stores
• Convenience stores provide a limited variety and
See PPT 2-19 for an overview of
the characteristics of convenience
assortment of merchandise at a convenient location in a
3,000-to-5,000-square-foot store with a speedy checkout,
with higher prices than supermarkets. They are a modern
version of the neighborhood mom-and-pop
grocery/general store.
• Convenience stores are facing increasing competition from
other retail formats, especially from supercenters and
supermarket chains who have added gasoline to their
merchandise offerings, often tying gasoline sales to their
frequent-shopper programs.
stores
Ask students to give examples of
local convenience stores.
What do they like/dislike about
them? In general, what is so
“convenient” about convenience
stores?
E. Online Grocery Retailers
• Time-poor customers are willing to pay more to access
options for ordering groceries online and having them
delivered.
• Consumers thus rely on online grocers for lower-profit-
margin nonperishable items, rather than higher-margin
fresh fruit or meats. Therefore, slim margins continue to be
a problem for both retailers and delivery services.
• Delivery costs are also a factor that might reflect a barrier
to the industry’s growth.
III. General Merchandise Retailers
LO 2-3 Identify the various types of
retailers, off-price retailers, and outlet stores.
types of general merchandise
retailers along several
characteristics.
A. Department Stores
• Department stores are retailers that carry a broad variety
and deep assortment, offer some customer services, and
are organized into separate departments for displaying
merchandise.
• Each department within the store has a specific selling
space allocated to it as well as salespeople to assist
customers, often resembling a collection of specialty
shops.
conscious consumers (Sears, Kohl’s and JCPenney).
• Today many customers question the benefits of shopping
at department stores due to: (1) lack of convenient
locations, (2) decreases in customer service, and (3)
relatively high prices.
• To deal with their eroding market share, department stores
are (1) increasing the amount of exclusive merchandise
they sell, (2) increasing their use of private-label
merchandise, and (3) expanding their omnichannel
presence.
See PPT 2-21, 2-22, 2-23
Ask students to give examples of
local department stores. Why do
customers go to department
stores? What do they like/dislike
about them?
Where do students buy business
suits, dresses, jeans, computers,
and electronics? Why do they go
to that type of store?
B. Full-Line Discount Stores
See PPT 2-24
store chains (Walmart, Target,
They offer both private and national brands.
• The big three full-line discount store chains are Walmart,
Target, and Kmart (Sears Holding).
• Target is becoming one of the most successful retailers in
terms of sales growth and profitability, succeeding because
its stores offer fashionable merchandise at low prices in a
pleasant shopping environment.
and Kmart). How will the category
specialists (Staples, Best Buy,
Home Depot) affect the retail
strategy of full-line discount store
that contribute to the success of
discount stores despite increasing
competition from other formats?
C. Category Specialist
• A category specialist is a big-box discount store that offers
a narrow variety but deep assortment of merchandise.
These retailers predominantly use a self-service approach,
but they offer assistance to customers in some areas of the
store.
• One of the largest and most successful types of category
specialist is the home improvement center. A home
improvement center is a category specialist offering
equipment and material used by do-it-yourselfers and
contractors to make home improvements.
• While merchandise in home-improvement centers is
displayed in a warehouse atmosphere, salespeople are
available to assist customers in selecting merchandise and
to tell them how to use it.
See PPT 2-25
Ask students to give local
examples of category specialists.
How are they similar to specialty
stores? Discuss the differences
and similarities with discount
stores.
improvement center such as Home
Depot or Lowe’s in terms of
merchandise, atmosphere, and
customer service.
resulting in reduced profits because the competitors have
difficulty differentiating themselves on other elements of
the retail mix.
D. Specialty Stores
• A specialty store concentrates on a limited number of
complementary merchandise categories and provides a
high level of service in a relatively small store.
• Many manufacturers have opened their own specialty
stores. Consider, for instance, Levi’s (jeans and casual
apparel), Godiva (chocolate), Cole Haan (shoes and
accessories), Lacoste (apparel), Coach (purses and leather
accessories), Tumi (luggage), Wolford (intimate apparel),
Lucky Brand (jeans and casual apparel), Samsonite
(luggage), and Polo/Ralph Lauren (apparel and home).
• Another growing specialty store sector is the resale store.
Resale stores are retailers that sell secondhand or used
merchandise and include thrift stores or consignment
See PPT 2-26
Why do customers go to specialty
stores? What do they like/dislike
about them?
E. Drugstores
See PPT 2-27
Chapter 02 – Types of Retailers
• Drugstores are specialty stores that concentrate on health
and beauty care (HBC) products. Many drugstores have
steadily increased the space devoted to cosmetics, but
prescription pharmaceuticals still represent a substantial
and growing portion of drugstore sales.
• In response, drug store chains are building larger stand-
alone stores offering a wider assortment of merchandise,
more frequently purchased food items, drive-through
windows for picking up prescriptions, in-store medical
clinics, and even makeovers and spa treatments.
Although drugstores thus offer major advantages,
especially in terms of convenience, they suffer from a price
comparison when it comes to their grocery merchandise
Ask students if they have shopped
online for drugstore products.
What has been their experience?
Do they think the Internet is a
viable channel for drugstore
merchandise?
F. Extreme-Value Retailers
• By offering limited assortments and operating in low-rent
locations, extreme-value retailers can reduce costs and
maintain very low prices.
• Despite some of these chains’ names, few just sell
merchandise for $1. Rather, the names imply a good value
but do not limit prices to the arbitrary dollar price point.
See PPT 2-28 for a summary of
issues facing extreme-value
types of merchandise? What is the
primary appeal of these retailers?
offering exciting bargains and unique merchandise.
G. Off-Price Retailers
• Off-price retailers, offer an inconsistent assortment of
brand-name merchandise at low prices.
• End-of-season merchandise that will not be used in
following seasons is called close-outs. The merchandise
may be in odd sizes or unpopular colors or styles, or it may
be irregulars, merchandise that has minor mistakes in
construction.
• Typically, merchandise is sold at prices that are20 to 60
percent lower than the manufacturer’s suggested retail
price. Off-price retailers can buy at low prices because
they do not ask suppliers for advertising allowances, return
privileges, markdown adjustments, or delayed payments.
• Outlet stores are off-price retailers owned by
manufacturers, or by department or specialty store chains.
• Outlet stores owned by manufacturers are frequently
referred to as factory outlets.
Ask students to give examples of
local off-price retailers. What do
consumers like about off-price
Ask students which type of off-
IV. Service Retailing
• Service retailers, or firms that primarily sell services rather
than merchandise, are a large and growing part of the
retail industry.
LO 2-4 Explain the differences
between service and
merchandise retailers.
PPT 2-30
A. Differences between Service and Merchandise Retailers
1. Intangibility
• Services are generally intangible — customers cannot see,
touch, or feel them. Services are performances or actions
rather than objects.
• Service retailers also have difficulty in evaluating the
quality of services they are providing. To evaluate the
quality of their offering, service retailers place emphasis on
soliciting customer evaluations and complaints.
Ask students how customers can
evaluate the quality of an
intangible service offering. What
problems does intangibility cause
2. Simultaneous Production and Consumption
• Service providers create and deliver the service as the
customer is consuming it. The simultaneity of production
and consumption creates some special problems for
services retailers.
• Finally, the service retailer often does not get a second
chance to satisfy the needs of their customers. While
customers can return damaged merchandise to a store,
customers that are dissatisfied with services have limited
What problems does simultaneous
production cause for the service
retailer?
3. Perishability
• Because the creation and consumption of services is
inseparable, services are perishable. They can’t be saved,
stored, or resold. This contrasts with merchandise, which
can be held in inventory until a customer is ready to buy it.
• Service retailers use a variety of programs to match
demand and supply. They also attempt to make customer
waiting time more enjoyable.
Give examples of retailers for
which perishability is a real
problem. (movie theaters,
airlines, cruise lines, public golf
courses) What do these retailers
waiting time more enjoyable for
customers?
4. Inconsistency
• Thus, an important challenge for service retailers is
providing consistently high-quality services.
What problems does inconsistency
V. Types of Ownership
• Another way to classify retailers is by their ownership. The
major classifications of retail ownership are: (1)
independent, single-store establishments, (2) corporate
chains, and (3) franchising.
LO 2-5 Explain the types of
ownership for retail firms.
See PPT 2-34
.
A. Independent, Single-Store Establishments
Ask students to give examples of
quickly to those customers’ needs.
• While single-store retailers can tailor their offering to their
customers’ needs, corporate chains can more effectively
negotiate lower prices for merchandise and advertising due
to their larger size.
chains will drive all independents
out of business?
B. Corporate Retail Chains
• A retail chain is a company operating multiple retail units
under common ownership and usually having some
centralization of decision making in defining and
implementing its strategy.
Walmart has pursued a strategy
of opening stores on the outskirts
of small rural towns with
populations between 25,000 and
50,000. These stores offer
broader selection of merchandise
at much lower prices than
C. Franchising
• Franchising is a contractual agreement between a
franchisor and a franchisee that allows the franchisee to
operate a retail outlet using a name and format developed
and supported by the franchisor. Approximately 40
percent of all U.S. retail sales are made by franchisees.
• In a franchise contract, the franchisee pays a lump sum
plus a royalty on all sales for the right to operate a store in
Ask students to give examples of
local franchises. If they wanted to
own a retail business, would they
want a franchise or their own
store? Why? What are the
advantages of being a franchisee?
PPT 2-35 provides a brief
introduction to the Franchising
VI. Summary
• Over the past 30 years, U.S. retail markets have been
characterized by the emergence of many new retail
institutions. Traditional institutions have been joined by
ANSWERS TO SELECTED “GET OUT AND DO IT!” QUESTIONS
2. GO SHOPPING Go to an athletic footwear specialty store such as Foot Locker, a department
store, and a discount store. Analyze their variety and assortment of athletic footwear by
creating a table similar to that in Exhibit 2–2.
Students should be able to fill in this type of table and explain their findings.
Variety of Athletic Footwear
Breath of Merchandise
Assortment of Athletic
Footwear
Depth of Merchandise
Foot Locker
3. GO SHOPPING Keep a diary for two weeks of where you shop, what you buy, and how
much you spend. Get your parents to do the same thing. Tabulate your results by type of
retailer. Are your shopping habits significantly different from or are they similar to those of
your parents? Do you and your parents’ shopping habits coincide with the trends discussed in
this chapter? Why or why not?
Students should keep a list of places shopped. Results can be compared to a parent or
another classmate. This assignment should give students insight into their own
4. GO SHOPPING Describe how the supermarket where you shop is implementing organic,
locally grown, ethnic, and private-label merchandise. If any of these categories of
merchandise are missing, explain whether you believe it could be a potential opportunity for
growth for this supermarket. Then describe any strategies or activities that you believe are
providing a better shopping experience than its competition. If you believe that competing
stores are providing a better shopping experience than your store, explain what they are
doing, and evaluate whether or not these activities would benefit your supermarket.
Chapter 02 – Types of Retailers
Responses here will vary. Some stores have a big commitment to organic, locally grown,
5. INTERNET EXERCISE Data on U.S. retail sales are available at the U.S. Bureau of the Census
Internet site at www.census.gov/retail. Look at the unadjusted Retail and Food services
monthly sales by NAICS (found in the Monthly Retail Trade Report section). Which categories
of retailers have the largest percentage of sales in November and December (the holiday
season)? Do your findings make sense to you? Why or why not?
Students will notice that many retail categories generate their largest percentage of sales in the
fourth quarter. Some are:
(443) Electronics and Appliance Stores
6. INTERNET EXERCISE Three large associations of retailers are the National Retail Federation
(www.nrf.com), the Food Marketing Institute (www.fmi.org), and the National Association of
Convenience and Petroleum Stores (www.nacsonline.com). Visit these sites and report on
the latest retail developments and issues confronting the industry.
Information on these sites will change daily. The National Retail Federation will likely have
information on trends in retailing like showrooming and omnishopping. Similarly, the NRF will
also report on federal regulations, like taxes and swipe fees, that impact retailing. The Food
7. INTERNET EXERCISE Go to Entrepreneur franchise zone web page at
http://www.entrepreneur.com/franchise500 and view the top 500 franchises for the past
year. How many of these retailers in the top 10 have you patronized as a customer? Did you
know that they were operated as a franchise? Finally, what is the nature of the business that
seems to lend themselves to franchising?