Discount and Variety Retailing Industry

Introduction

The discount and variety retailing industry is mainly comprised of department stores that are structured in the form of retail establishments. These stores specialize in dealing with a wide variety of products. There is not any store of this nature that specializes in selling a single merchandise line. The products which department stores sell vary from electronics, apparel, appliances, and furniture. Other lines of products that these stores sell include toys, jewelry, cosmetics, photographic equipment, paint, sporting goods, and hardware. Discount department stores normally have common customer checkout areas in front of the stores. In summary, department stores form part of retail chains of various stores located in many parts of the country or even sometimes internationally (David, 1984).

The industry’s Dominant economic features

The industry has continually continued to grow due to the favorable environment it experiences. With the ever-changing business environment and globalization, the industry is thriving and is headed for further growth in the future. The retail industry is very big with many players operating in it. Some of the major companies in the discount and retail industry include Wal-Mart, Target, Costco, Kmart, ShopKo, Bj’s Wholesale club just to mention but a few. There is very stiff competition in the industry due to the rivalry that exists between the companies. Wal-Mart and Costco have subsidiaries all over the world further making the industry very big. The expansion of the industry came about as a result of the increased demand for the products that these companies sell. (Barney, 1991). Approximately 100 million consumers in the U.S. visit Wal-Mart’s stores in the U.S. alone. The three companies have tried to custom-fit the products they deal in to be able to meet the needs of all six demographic groups in the market. These demographic groups consist of rural residents, African-Americans, Hispanics, Empty nesters, Suburbanites, and the affluent in the market (Ernest, et. al.1991).

Due to the rivalry present in the industry, the companies have been able to successfully establish different niches in the market for them to be able to co-exist. For example, dollar stores like Dollar General and Family Dollar have carved themselves a niche in the market and this has enabled them to successfully compete against Wal-Mart in selling home consumer products. In the late 1990s, Wal-Mart decided to deal in the grocery business which gave it a competitive advantage against other big departmental stores in Canada and the United States (Archer, 1994). The three companies have shown an improvement in their gross margins in the current fiscal year which translates to the growth rate of the industry. Target as a retail chain has depicted a 5.5% increase in twenty-two months which is a challenge to many departmental stores. The discount and variety retailing industry is growing at a steady pace since the companies have stated their goals for future expansion by opening many stores that would be based all over the world. For example, Target Corporation aims at establishing 2000 stores by the year 2010 which roughly can be translated to mean 8% growth rate. Wal-Mart has also continued to show improvement in the gross margin year over year. According to research carried out, it has been established that Costco has been in the quest of growing aggressively to be able to rival Wal-mart and Target in their marketing positions. It hopes to open a store in Melbourne, Australia in the coming year. In addition to this, there are further plans to open more stores in many parts of the world (Massingham, et al.1988). Therefore, it is quite evident that the industry is headed to another realm in its expansion. The industry can be considered to be at the exponential phase of growth headed for further expansion.

Wal-Mart is the largest chain of discount stores in the country. This is based on the fact it has recorded the highest amount of revenue compared to any other retail store. In the year 2006, during its last quarter, Wal-Mart made close to 60 billion dollars in revenue. The company has three retailing subsidiaries which include: Wal-Mart International, Wal- Mart stores Division U.S and Sam’s clubs. These subsidiaries have been delegated different products to improve the efficiency of the Company (Archer, 1994).

Target Corporation is the second-largest chain of discount stores and owns 1591 stores in various states in the country. The Company is based in Minneapolis, (Mn). Apart from providing differentiated merchandise at affordable prices, it also specializes in providing co-branded Visa credit cards that customers can use at the 24 million Visa merchants which are worldwide based. The minimum wage in the United States has been stagnating at $5.15 for the past 10 years but this changed in the year 1996. Costco competes against Walmart and Target. The company has a total of three hundred and fifty-nine department stores in the U.S. It can pay its worker’s high wages and still retain high profits. This has been attributed to the fact that it does not employ very many people because its business is not labor-intensive. Costco is a wholesale corporation having its headquarters in Issaquah, Washington. When Wal-Mart and Target are combined, they represent 2% and 10% of the retail sales in the U.S respectively (Archer, 1994).

Target has assumed a marketing position as a fashion retailer to ensure that its services and products are affordable to many of its customers. The Company relies on the marketing agreements it has with major designers such as Champion, and Michael Graves to be able to predict the trends in fashion correctly. There has to be a supplier who provides these stores with a constant supply of products. The suppliers are very reliable which is one of the factors that has contributed to the success of the discount and variety retail industry. The channels of distribution are perfect in that the suppliers play their part in supplying these stores with different products and the stores in turn sell these products to their customers who are the consumers. The relationship between a retailer and the wholesaler is very vital as the relationship that exists between the retailer and the consumer. The market is continuing to thrive and expand due to the healthy forward and backward integration that exists in the market (Massingham, et al.1988). Unlike Target and Costco chain retailers, Wal-Mart chain retailers do not ask for a slotting fee from the suppliers in exchange for their products to be displayed in their stores. More than 70% of the products that are sold by Wal-Mart are produced/manufactured in China. The Company focuses on making sure that their suppliers provide it with popular products which will sell quickly. (Massingham, et al.1988). The store managers are pressured to drop the unpopular products. The company employs a system known as cross-docking. In this system, suppliers are obliged to continuously deliver products to warehouses in which they are sorted and distributed to the company’s stores within one day. Therefore, for the other companies to survive in the market, they have to come up with a strategy that will ensure that speed is observed in its delivery of products to the market to be able to meet the increasing consumer demands. Costco gets its products delivered to its stores on shipping pallets which serve as displays. The unique thing about Costco is that it does not break down pallets and it specializes in selling products in large volumes (Archer, 1994).

The companies’ Technology is one of the things that has enabled the three companies to thrive in this kind of market. Wal-Mart uses the proprietary satellite-based mode of communication to be able to stay in touch with store managers on the requirements of each of its stores. Target, Costco, and Wal-Mart have a website through which customers can be able to find out the kind of products sold in these stores. At the same time, customers can book the stores’ products on the website to their convenience. Online shopping employed by Wal-Mart has enabled customers to shop for products online and get to spend quality time with their families. The companies are in the quest for carrying out their products’ development. This will enable them to increase their market positions in the industry. The three companies always find ways of developing their products so that they can easily lure their customers. They invest in good packaging materials and techniques to make their products sell more. Wal- Mart established that its Chinese customers preferred to choose their fish and seafood. Thus, in trying to attract and maintain this group of customers, it started to put uncovered meaty on its displays and went ahead to install fish tanks. This move on the part of the company was very successful as it was now able to increase its overall sales (Massingham, et al.1988).

The products in the discount and retailing industry are usually very varied as stated above. Target merchandise stores offer health and beauty products, décor, apparel, and consumer staples. Just recently, the store started dealing with electronics, canned goods cereals, and soups. The also handles perishables which include: dairy products, meat, and grocery items. Aside from this, the store offers credit card services to its customers. Wal-Mart also provides photo-developing services and a wide array of products with jewelry included. Costco sells a wide variety of items which range from furniture to perishables. Advertising of products is very important in this industry since it is already saturated with competitors. The three companies have to invest in coming up with powerful strategies in advertising their products as having the best quality at low prices. Target has been very successful in its advertising campaigns getting it rated as number four. This is because it does more advertising than both Costco and Wal-Mart. Wal-Mart and Costco have been rated 3 in this area. Customers tend to purchase more products from Target because it has the top most brand products. Wal-Mart ranks next in both product quality and customer loyalty. Despite this, competitive matrix analysis reveals that Wal-Mart as a chain store has a competitive edge over Target and Costco in the market. The three companies have a respectable financial position. They have continually reported an increase in their profit margins over the years. (Ernest, et al.1991) According to research carried out, Wal-Mart’s revenue has continued to increase since the year 2000. Target has also been able to get an increase of 5.5% in sales over the last twenty-two months. It can be established that the three companies have done considerably well in the industry. The industry has segments such as small retailers who compete with the bigger companies. Wal-Mart has five segments in its operations. These include Wal-Mart Stores division U.S, Wal-Mart discount stores, Wal-Mart Supercentre, Wal-Mart Neighborhood Market, and Sam’s club. Wal-Mart Stores Division has the greatest profitability shown by the 67.2% of net sales it achieved in 2006. The presence of the small retailers in the industry affects the big companies in that they have to develop strategies that will give them a competitive edge over the small upcoming retail stores. These include producing high-quality products and selling them at affordable prices. The companies also get motivated to adopting more powerful advertising strategies. The small retail stores are not as profitable as the big companies but they aim at expanding in the future (Archer, 1994).

Porter’s five forces

There is too much Competitive Rivalry within the Industry. Competition is often very stiff as many companies in the industry contend for making sales. A lot of finances are spent for marketing and promoting the products of the companies through various channels in a bid to communicate to the target consumers who channel their money to purchasing the products. The threat of Substitute goods is not very much experienced in the industry. The only thing that can pose a threat is the change in the packaging of the products sold by the companies. The packaging greatly determines whether a product is going to be bought or not. Another porter’s force is the Threat of New Entrants. There is a barrier for new entrants industry as a result of the research and development undertaken in the market. Any new entrant would require endorsements, promotions, and a well-established brand image which can prove to be expensive for new entrants to implement. New entrants are also threatened by low capital reserves and limited right of entry to retail space. Presently, there has not been any trade restriction, regulatory policies, or tariffs to bar entry. The bargaining Power of Suppliers is another porter’s force in the industry. Suppliers do not have any authority to affect the availability or the price of products. They are also not faced with a shortage of inputs or processing capacity. The performance and quality in manufacturing and raw materials is not a factor since the products’ quality is dependent on how it has been manufactured not the materials used. The bargaining Power of Customers is prevalent in the market. Customers do have power because of low switching costs. Most buyers however buy as individuals rather than a group. Price Negotiations are not applicable. The companies in this industry provide products at low costs which attract customers. Consumers have an array of choices in deciding the brand to purchase. The industry is quite attractive to those companies which are already established. However new entrants will have to overcome many obstacles before creating a niche in the market. The forces mean that the industry is very competitive and companies should come up with new advertising strategies and unique products and services to attract customers (Porter, 1985).

Drivers of change in the industry

Consumers in the industry determine which products are going to be stocked by the different companies. Customers keep the companies in business and therefore, the companies should be dedicated to meet the changing needs of the customers in the market. Technology has also played a major role in determining the performance in the industry. The satellite communication adopted by Wal-Mart and Online shopping has indeed led to the success of the industry. The industry has been described as a free trade zone where the government has played a part in encouraging globalization. This has led to stores in many countries stocking products of other companies in other countries, thus meeting the consumer needs. Wal-Mart faces the risk of being denied the chance to operate in China by the Chinese government. (Grant, 2005). Corruption is also one of the things that are likely to affect the industry in that there are some countries like China that have not accepted accounting principles. The advance in technology may also make some products in the industry obsolescent. Due to the rapid changes in customers’ lifestyles, traditional markets are being replaced by urban markets which can cater to the needs of consumers adequately (Ernest, et al.1991).

Companies strongest/Weakest positions

Wal-Mart and Target are both retail-variety discount stores while Costco is a wholesale corporation store. The companies have a global distribution apart from the target which means that they have stores in many countries. The companies provide high-quality services but at lower prices as a strategy to attract customers. (Grant, 2005). Costco recruits fewer employees than the other companies making it have a larger profit margin. Wal-Mart has been able to position itself very well in the market with its rate of expansion into foreign countries very high. Wal-Mart started dealing in grocery in 1990, giving it a competitive edge over other chain stores. It ensures that it deals with the newest and innovative products by instructing its store managers to get rid of unpopular products. The chain store’s suppliers are assured of constant orders because Wal-Mart makes large volumes of sales daily. It has been able to work at maintaining its leading market share. Costco prefers selling products that are bulk-packaged and it does not deal in a variety of brands especially when the item is the same to reduce marketing costs. Customers have to carry their bags for shopping and this saves the company from stocking extra bags. It does not break down pallets for its customers. Target mainly targets the affluent customers in the market. This is the major contributing factor that made it have low sales in 2006. Target has uniquely positioned itself in the market by achieving profits from trade-down purchases and at the same time having to maintain customers that can tolerate the increase in gasoline prices. Wal-Mart practices cross-docking which is an attractive distribution chain. Suppliers are reliable and the Company is assured of a constant supply of products. Target has not positioned itself very well in targeting affluent people (Anthony, 1998).

Key Success Factors for Competitive Success

Wal-Mart, Target, and Costco have powerful retail brands. They have a varied and wide range of products in their stores. These companies give customers value for their money. Global expansion of the companies has contributed to them having a competitive success. For example, Wal-Mart has expanded internationally and has its stores even in China. The three companies also make use of the evolving information technology in their operations. The online shopping adopted by the companies attracts customers who would want to shop while in their homes. Wal-Mart has satellite-based communication which can unite all the store managers together for them to know about the emerging consumer needs. The three companies especially Costco invests a lot of their resources in the training of their workforce (Grant, 2005). This ensures that its workforce provides quality services to the customers. The companies also struggle to provide high-quality products at low prices which attract many customers. The three companies are always competing to be known as the lowest-priced retailer. Target does a lot of advertising making it have a competitive edge over the other two companies. However, there is the risk of the companies’ products becoming obsolete due to the inability to cope with the rapidly changing technology. The changing customer needs are also supposed to be met by the companies. The low pricing of products may eventually change if the economy changes too. This may mean that in the future the companies may not be able to charge low prices for their products (Anthony, 1998).

Industry’s Attractiveness and Prospects for Long-Term Profitability

The retail industry can grow. The players in the industry are continually expanding into other areas thus seeing the growth potential of the industry. The competitive forces are bound to increase due to the increasing number of new stores that are developing every day. Globalization in the industry will increase the profitability of the companies (Ernest, et al.1991). Due to the new emerging customer tastes, the companies are struggling to create a niche in the market to be able to satisfy all the needs of the customers in the long run increasing their profitability. Wal-Mart is headed for further improvement as it has continued to expand internationally and it has opened new stores in various countries in the world charging the lowest prices. It has also expanded to cater to all the six customer demographic groups in the market. Target should expand to meet the needs of other customers in the market. Meeting the needs of the affluent in society alone will surely lead to the decline of the company (Michael, 1985). The companies are threatened by customer theft. To prevent this, manufacturers embed surveillance labels inside products and packaging. This will significantly boost sales. Wal-Mart faces strict Chinese regulations. China is a very conservative country that is not open to foreign investments. Some of the other potential problems that the companies in the industry have included: Non-unionization, and Slow Checkout service (Grant, 2005).

Conclusion

The strategies that Wal-Mart, Costco, and Target should adopt include Product development, market penetration, and market development. Good advertising strategies should be applied to be able to win more customers in the market. (Strickland, 2001) Target should be able to expand globally to be able to attract more customers. It should introduce its products to other new geographic areas. All three companies should work on modifying or improving their products to increase sales. In general, the industry is very attractive because of the healthy competition that exists and the support it gets from the government in creating the globalization culture (Cannon, 1986).

References

1. Archer (1994): Up Against the Wal-Marts; A journal by the American Management Association.
2. Aaker& David A. (1984): Strategic Marketing Management. New York: John Wiley.
3. Anthony C. (1998): SWOT Analysis; An explanation of the S.W.O.T. Analysis process; New York; Macmillan Press
4. Barney, J. B. (1991): Firm Resources and Sustained Competitive Advantage, Journal of Management, 1 (January).
5. Cannon, T. (1986): Basic marketing, principles and practice, 2nd edition, Holt, Rinehart and Winston, New York
6. Dyer, R. F. and Ernest H. F (1991): An Analytical Approach to Marketing Decisions. New Jersey: Prentice Hall.
7. Grant, R.M. (2005): Contemporary Strategy Analysis; Blackwell Publishing Ltd., Oxford (U.K.)
8. Lancaster, G.A. & Massingham, L.C (1988): The marketing environment in essentials of marketing, McGraw-hill, New Jersey
9. Michael J. B (1985): Marketing strategy and management, Macmillan publishers’ Ltd, London.
10. Porter, M.E. (1985): Competitive Advantage. The Free Press, New York.
11. Thompson, A. and Strickland, J (2001): Crafting and Implementing Strategy. Irwin McGraw-Hill.

Appendices

This is a representation of the number of stores that Wal-Mart, Costco and Target have.

Wal-Mart Stores

• 3,926

Target

• 1,444

Kohl’s

• 814

Sam’s Club

• 574

Costco

• 359

Source: Company Reports

This is a representation to show that Target outperformed Wal-Mart in almost all of its operations between the year 2004 and 2006.

Wal-Mart Gross Margin

• 23.1%
• 22.9%
• 23.6%

Wal-Mart Operating Margin

• 6.0%
• 6.0%
• 6.0%

Wal-Mart SSS Comps

• 3.3%
• 3.3%
• 1.7%

Target Gross Margin

• 31.2%
• 31.9%
• 33.0%

Target Operating Margin

• 7.7%
• 8.2%
• 8.5%

Target SSS Comps

• 5.3%
• 5.6%
• 4.6%

Source: Company Reports