Retail: Background

Industry Composition:

The retail industry is the last step in the process of getting products to customers efficiently, and should not be confused with the wholesale activities which precede it. The difference between the two is that wholesalers are companies that sell their products to businesses, whereas in retail, the goods are sold directly to the consumer. Wholesale establishments play an important role for retail establishments, as they generally provide retailers with the resources they need to run their business in addition to the goods and products they sell.

Any business that sells goods to individual consumers is a retail establishment. There are many kinds of retail establishments:

• Department stores: a large retail store organized into departments offering a variety of merchandise and often forms the cornerstone of a mall, such as J.C. Penney's
• Discount stores: mass-merchandisers or membership warehouses, such as Costco
• Category killers: large stores that specialize in one type of merchandise, such as Home Depot
• E-tailers: sell goods online, such as Amazon
• Specialty stores: concentrate on one product type and sell it in a way that makes it unique, such as The Body Shop
• Grocery stores: provide food and beverage, such as Kroger and Jumbo
• Convenience stores: include gas stations and corner stores

Retail establishments are a huge industry with $4 trillion of revenue in the United States alone. There are many different retail sectors: motor vehicles and parts, which involves the sale of new and used cars and comprises 25% of sales in this industry; specialty stores that make up 19% of sales; general merchandise and food and beverage, each of which composes 15% of sales; convenience stores that account for 10%; and building material and non-store retailers; each comprises 8% of the sales for the industry.

History:

The retail industry has changed greatly in the last two decades. It used to be comprised of a wealth of small, often family-operated shops, department stores, and shopping malls. Today, however, it is increasingly more common to see people doing their shopping in large mass merchandise stores, specialty stores, or online.

Leaders:

Among retail establishments, the obvious leader is Wal-Mart. Due to its large size, it is capable of economies of scale surpassing those of other companies, with the clout in the bargaining room to match. The closest behind Wal-Mart in terms of sales is The Home Depot, though their sales were only 25 percent of those of Wal-Mart. The Kroger Co. and Target Corporation fall just behind The Home Depot. However, despite Wal-Mart's impressive sales, the profit margins for that genre of mass-merchandiser are under six percent. In luxury stores, where the goal is not to have the lowest price, profit margins can exceed 15 percent.

Trends:

The industry has recently seen a rise in the use of consumer resource management (CRM) and radio frequency identification (RFID). With CRM, companies can use the data collected about their customers to suggest other products that might interest them. RFID allows a company can precisely track their inventory, knowing when more of something is needed as well as how much, thus making supply chain management more efficient. This is done by placing a small chip on the packaging of the item itself.

Another recent trend is lifestyle retailing, in which stores will sell both apparel and household items of the same style, i.e. Urban Outfitters. Ecologically friendly products are also an emerging trend, with items are made through sustainable practices, are environmentally friendly, energy efficient, or “green” in other ways rising in popularity. Lastly, self-checkout in large stores is also on the rise, reducing the need for labor.

Due to the recent economic downturn, consumers have become more price conscious. This has created an environment in which discount retailers have become the stores to prosper. Additionally, in many department stores, private labels (i.e. store brands) have started exploding with sales growth. So much so, name brand companies such as Heinz have signed contracts with department stores to bottle the private labels. The explosion in sales is mainly due to the similar quality at a much better price. The last major trend in this area has been the comeback of coupons. The price conscious consumer wants to know they are getting the best deal around, and this is the simplest route to appease their desire.

Another major trend has been the move towards direct retailing. Direct retailing is the process of advertising and selling a product directly to a customer. The most identifiable version of this is with infomercials. However, the largest segment by far of this industry is E-commerce, or online shopping. Online shopping has boomed in the last few years with online juggernauts like Amazon taking a large portion of the pie. Between the specific advertising generated by companies such as Google and the lower prices online retailers are able to offer, brick and mortar retailers are having a hard time competing. Additionally, with cell phone applications that allow consumers to walk into a store, scan a barcode, and then buy the product online at a lower price, this trend is developing at an ever increasing rate.

Future Outlook:

Due to the downturn in the many global economies, the future of companies in the retail industry is currently rather shaky. Many consumers are curbing their spending, especially discretionary spending, as much more of a bargain shopping attitude has emerged. Department stores are already suffering a decrease in popularity, with the strong companies growing stronger, and the less competitive ones being swallowed up, with the bad economy only making matters worse. Category killers, specialty stores, and e-tailers may have to adjust their strategy to make extra effort induce consumers to part with their money, whether through upstream measures such as alternate sourcing, or downstream measures such as increased sales. Discount retailers such as mass merchandisers and membership warehouses are expected to have the strongest showing as price-sensitive shoppers adjust their spending habits. The future outlook comes down to brick and mortar retailers doing poorly and e-retailers having exponential growth.