- Nov 3, 2010
Retail Store Positioning and Competitive Strategy
As was discussed earlier, Michael Porter’s competitive strategy theory argues that there are two major long-term competitively defensible strategies that retailers can pursue: (1) low cost and (2) differentiation. Low-cost retailers such as Aldi and Costco have succeeded by reducing product choice (this translates into savings due to faster inventory turnover, lower rental costs, and greater bargaining power with individual suppliers), use of a self-service shopping environment, and an absence of services that their consumers view as secondary in importance (such as home delivery, custom cutting of meats, no try-on rooms, and an absence of in-store displays), as well as through low rental costs (due to their ability to generate store traffic). Amazom.com is also a low-cost retailer due to its ability to minimize its inventory investment through drop shipping, the absence of physical stores, and the use of consumer ratings by shoppers and excellent photographic images that can be used by consumers as a substitute for sales assistance.
At the other end of the positioning spectrum are retailers such as L.L.Bean, Nordstrom, Trader Joe’s, Wegmans, and Whole Foods. These retailers have succeeded through a differentiation strategy that combines high levels of sales assistance by a dedicated and trained staff, specialized merchandise (much of it being private label), and a shopping environment that is viewed by many consumers as exciting, entertaining, and fun.
In contrast to the cost and differentiation strategies, value strategies pursue elements of cost and differentiation strategies at the same time. Trader Joe’s, for example, offers distinctive foreign foods in easy-to-prepare formats. Its products are low cost, and its stores are fun to shop due to its sampling stations (staffed by knowledgeable personnel), free coffee, and the availability of balloons and small shopping carts for children. Costco also offers low prices, as well as a differentiation strategy based on a well-developed private label program, the use of co-branding on many of its private label products, a very liberal return policy, and a treasure hunt atmosphere (due to Costco’s use of an opportunistic buying strategy). Amazon.com offers low prices and an extensive selection, suggests books and other products based on a customer’s recent purchases, has a simplified checkout procedure, and provides unedited product reviews from past purchasers.
According to Porter’s competitive strategy theory, the least-defensible competitive strategy is being “stuck in the middle.” These retailers offer no long-term benefit in terms of offering consumers low prices or a highly differentiated retail strategy. This book is offered as a guide to these “stuck-in-the-middle” retailers. The first part of dealing with a “stuck-in-the-middle” strategy is a retailer’s recognizing its true positioning in the marketplace. Obviously, what is crucial is the customer’s positioning of the retailer, not the retailer’s idealized positioning. The second part of the change process is for the retailer to formulate short- and long-term plans to implement the recommended changes.
Recognizing the Need to Change
A central issue to be covered in this section is how a retailer can determine whether a cost, value, or differentiation strategy is most suitable. As in all forms of self-analysis, a retailer needs to honestly evaluate its strengths and weaknesses.
Here are a number of questions a retailer needs to ponder in assessing the use of low cost as a competitive advantage:
- What is the retailer’s cost of goods sold as a percent of sales versus its key competitors?
- What are the retailer’s operating costs as a percent of sales relative to its key competitors?
- Does the retailer have special competencies in the management of opportunistic buying (bankrupt stocks, manufacturer overruns, closeouts, broken lots, canceled orders, refurbished products, and so on)?
- Does the retailer have opportunities to significantly reduce its costs (through reducing organization hierarchies, subletting extra space, reducing product proliferation, reducing services that are regarded as unnecessary or of low value by its target market, centralizing functions, increasing labor proficiency, using self-checkouts, selling select merchandise on the Web, using drop shipping, shifting to an everyday low pricing format, and so forth)?
- Can the retailer effectively reposition empty or low-performing stores as a discount operation? Can these stores use existing store fixtures to reduce investments? Is the retailer able to effectively manage multiple formats (one of which is a low-cost operation)?
In contrast, there are a number of questions a retailer needs to ponder in assessing the use of differentiation-based strategies as a competitive strategy, as follows:
- Does the retailer’s sales personnel have specialized product knowledge or skills that are especially relevant to the goods and services sold (such as “foodies” working in a grocery, sports enthusiasts working in a sporting goods store, or interior decorators working in a furniture store)?
- Is the store’s atmosphere viewed as “fun,” “entertaining,” or “exciting” by its customers? Can the store’s atmosphere easily be repositioned as “fun,” “entertaining,” or “exciting” through sampling stations, demonstrations, or short classes on using equipment?
- Does the retailer have special customer services or can it effectively develop services (such as need assessment, alterations, delivery, installation, troubleshooting, and repair) that can be used as a major competitive advantage?
- Does the retailer have access to unique goods through arrangements with specialized vendors, foreign sources of supply, and private label supplier contacts?
- Does the retailer have the competency and resources to successfully implement a distinctive private label program (including customer need assessment, product development, and product testing and tasting)?
The answers to the preceding questions may suggest that the retailer needs to further develop its core competencies around low cost or differentiation. Some of these questions need to be answered by a store’s middle and top management, as well as its board of directors. Others require questioning shoppers via surveys or focus groups.
Formulating Short- and Long-Term Strategies to Effectively Implement Change
According to a Harvard Business Review article, retailers should focus their strategies around where the true “headroom” lies. The authors defined headroom as “market share you don’t have minus market share you won’t get.”36 Consumers loyal to your competitors represent market share you will not likely achieve. In contrast, a retailer is most likely to retain its most loyal customers. Headroom represents “switchers” loyal to neither you nor your competitors. The choice of a low-cost, value, or differentiation strategy also has to consider the needs and size of this switcher segment, as well as a retailer’s ability to attract and maintain this group of customers.
There are many different paths to developing and implementing repositioning strategies based on low cost, value, or differentiation. These include the use of existing middle management, retaining consultants, hiring executives with specialized talents, outsourcing key tasks (such as hiring a firm with significant private label experience to develop and manage these goods), and merging or acquiring retailers that have special strengths.
There are several major caveats in repositioning for any retailer. One, a retailer may not possess the core competencies to effectively carry out the repositioned strategy. Two, consumers’ perceptions about a retailer’s key strengths have been formed over years and are very difficult to change. When Sears decided several years ago to sell more costly lines of clothing, its previous customers of inexpensive apparel simply switched to other retailers. To make matters worse, Sears was also unsuccessful in attracting new customers to purchase the higher-cost apparel at its stores. Generally, positioning changes need to occur slowly. This slow pace enables a retailer to communicate and reinforce its repositioned strategy over a long time period.
In pursuing a low-cost strategy, retailers need to be careful that services that a retailer’s target market views as critical not be significantly reduced or eliminated. One way of reducing this risk is to use unbundled pricing. In this way, an appliance retailer can charge separate prices for an appliance, delivery, installation, and carting away of the old appliance. This unbundling strategy satisfies the needs of both the low-cost segment (which is willing to do some or all of the services) and full-service customer segments (which are looking to do none of these tasks). Unbundled pricing also enables a retailer to match the price of low-cost retailers that do not provide ancillary services. It also charges customers for only those services that they desire.
A retailer needs to be careful in formulating its differentiation strategy so that its new strategy is not based upon a niche. One way to effectively address a differentiation strategy is to use micromarketing, where stores are clustered into groupings based on their specialized markets. In this way, an appliance chain may offer compact appliances (such as 10-cubic-foot refrigerators) in its central city stores, and 23-cubic-foot refrigerators, lawn mowers, and snow blowers in its suburban and rural store units. A supermarket can utilize micromarketing by offering six-packs of lamb chops for stores in family-oriented neighborhoods and prepared single-serving portions for stores with a high proportion of single residents.
Retailers can also establish different organizational units for each major market segment. This strategy is most difficult to implement since each segment has very different needs that top management needs to recognize and appeal to. Although Aldi and Trader Joe’s are both owned by the Albrecht brothers, their strategies are quite different. Aldi appeals more to the extreme value customer who is more willing than the Trader Joe’s customer to forgo certain services for a lower price. The Trader Joe’s customer is also much more likely to be a “foodie” who loves to experiment with exotic foreign foods, multiple coffees, teas, and olive oils. Likewise, Nordstrom and Nordstrom Rack are different retail operations in terms of their selection, pricing, store service, and store atmosphere. And Publix has a Publix Sabor division with four stores that caters to a Caribbean and South American population with a special selection of foods and all advertising and product information provided in both English and Spanish.
Many bricks-and-mortar retailers have web sites that offer a different selection of goods and services. Some retailers use the Web as a means of promoting the sale of closeouts and broken lots. Others use the Web as a means of selling distinctive merchandise that appeals to markets too small for their traditional store-based channel.