Retail Sector
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Industry Overview
The US retail industry includes about 1 million outlets with combined annual revenue of more than $4 trillion. Major companies include Wal-Mart, Home Depot, Kroger, Costco, and Target. While large companies dominate some retail sectors (such as mass merchandisers and grocery stores), other sectors (such as auto dealers and convenience stores) are fragmented. Many specialty retailers are single-store operations.
The US retail industry includes auto dealers and Internet and catalog retailers and generally excludes food and drinking establishments, such as restaurants and bars.
Competitive Landscape
Personal income, consumer confidence, and interest rates drive demand. The profitability of individual companies depends on efficient supply chain management and effective merchandising and marketing. Large companies have advantages in purchasing, distribution, and marketing. Small companies can compete effectively by selling unique merchandise, providing superior customer service, offering a distinctive shopping experience, or serving a local market. Annual revenue per worker averages $250,000, but ranges from $600,000 for new car dealers to less than $200,000 for grocery stores.
Products, Operations & Technology
Major retail sectors include motor vehicles and parts dealers (25 percent of sales); general merchandise and food and beverage stores (15 percent each); convenience stores (10 percent); building material and garden supply stores and non-store retailers (8 percent each). Motor vehicles and parts dealers include new and used car dealers. General merchandise stores include department stores, discount department stores, warehouse clubs, and superstores. Food and beverage stores include grocery; specialty food; and beer, wine, and liquor stores. Convenience stores may sell gas. Non-store retailers include Internet retailers, mail order catalogs, vending machine operators, and fuel dealers. Other retail sectors include health and personal care stores (drugstores); clothing and accessory stores; furniture and home furnishings stores; electronics and appliances stores; and sporting goods, books, hobby, and music stores.
Retailers buy goods from suppliers or wholesalers and resell them for a profit. The industry includes national and regional chains, franchises, and independent retailers. Franchises allow independent operators to leverage a well-known brand name and benefit from the parent company's purchasing and operational efficiencies. Because franchise owners pay royalties and bear much of the financial burden of opening a retail outlet, franchising is a cost-effective way for companies to expand.
The degree of specialization differentiates types of retailers. Department and general merchandise stores offer a wide range of items, while specialty retailers offer a broad selection within a product category. Numerous market segments can exist within a category. For example, clothing stores may focus on a particular gender (men, women, children); price tier (high, medium, low); style (traditional, contemporary, designer); or size (petite, tall, plus-size). At some discount retailers, such as dollar stores, merchandise can vary from week to week.
For brick-and-mortar retailers (those with physical stores), location is key to driving customer traffic. Typical sites include enclosed, outdoor, and strip malls, and stand-alone sites. Large retailers typically occupy desirable anchor spots in shopping malls. When selecting locations, retailers consider local demographics (population growth, income); traffic patterns; proximity to complementary and competitive retailers; and lifestyle. Retail format can vary: gigantic superstores offer massive selections, while kiosks allow companies to set up scaled-down versions of retail operations in small spaces. Specialty retailers may also lease locations within larger retailers.
Selecting the appropriate merchandise is critical. Buyers may attend trade shows or search through product catalogs or supplier websites to review upcoming new products. Vendors may set up individual meetings with large retailers to review product offerings. Because most companies place orders many months in advance of product receipt, buyers must have thorough knowledge of market and consumer trends to make good buying decisions. Volume discounts are common and favor large retailers. In industries where suppliers are numerous, retailers often buy from distributors or wholesalers, which consolidate merchandise and simplify purchasing. Retailers with multiple stores often operate their own warehouses or distribution centers to receive and store merchandise from suppliers.
Effective supply chain management controls the flow of merchandise from suppliers to individual retail outlets and helps keep operating costs low. Many companies, particularly large retailers, have implemented sophisticated information systems that integrate data from manufacturers, distributors, warehouses, transporters, and retail outlets to track merchandise movement, monitor inventory levels, and ensure timely delivery of stock to stores. Inventory management helps companies identify slow- and fast-moving items and spot shrinkage due to damage, spoilage, or theft. Rapid inventory turnover is especially critical for retailers selling perishable items, such as fresh foods or dairy products. Retailers periodically discount or "mark down" items that aren't selling to clear floor space for new merchandise.
When developing store layouts, retailers allocate space to basic merchandise, special promotions, checkout, and storage. Companies evaluate how efficiently they're using space by monitoring sales per square foot. Most retailers group similar merchandise and may place complementary items adjacent to one another to generate incremental sales. Well-designed layouts and window displays attract and maximize store traffic. Store atmosphere can vary significantly, based on the type of shopping experience retailers want to deliver. For example, a high end clothing store may feature lavish decor and expensive fixtures, while warehouse clubs offer little more than the basics. Checkout procedures can also vary: high volume retailers, such as grocery stores, typically have a centralized checkout area with multiple lanes to process as many transactions as possible. Department stores usually have checkout stations throughout the store. Some retailers offer self-checkout.
Computer information systems generally support the most basic retail operations. Point-of-sale (POS) technology records sales transactions and processes payments. Fully integrated information systems link POS, inventory, forecasting, purchasing, and many backoffice functions, such as payroll, finance, and accounting. Electronic data interchange (EDI) allows retailers to place purchase orders electronically. Automatic replenishment systems help companies maintain desired inventory levels of key products. To access real-time sales data, large companies link individual store systems to corporate systems.
To better manage merchandise movement, many large retailers have implemented enterprise resource planning (ERP), which improves companies' visibility into the supply chain by connecting retailer systems with manufacturers, raw material suppliers, distributors, and transporters. Some companies participate in cooperative supply chain networks that share sales data and forecasts from retailers and supply and production data from raw material suppliers and manufacturers. Known as just-in-time (JIT) merchandising, coordinating demand and supply information allows supply chain participants (including retailers) to reduce inventory carry costs and minimize write-offs and discounting.
Universal product codes (UPC), implemented with bar codes on product packaging, provide standard identification for retail products and allow retailers to scan items electronically. In addition to bar codes, a growing number of retailers are using radio frequency identification (RFID) devices, which can transmit and store product information. While more expensive to implement than bar code processing, RFID gives companies greater tracking abilities since RFID codes can be unique to an individual item. In addition, RFID allows retailers to monitor product movement more efficiently because supply chain participants can scan merchandise by the pallet.
Advances in payment system technology have allowed many retailers to improve the checkout process. RFID allows retailers to offer contactless payment through special tags or cards. Some companies, such as grocery stores, have added self-checkout lanes. Biometric identification allows customers to pay with a fingerprint. Handheld checkout devices eliminate the need for dedicated stations.
