Ebook Essentials of marketing (15th edition): Part 2

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C H A P T E R T W E LV E

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Retailers, Wholesalers,
and Their Strategy
Planning
From 1843 to 1855 Rowland Hussey Macy opened—and
closed—four general stores that specialized in “dry goods,”
mainly textiles and ready-to-wear clothing. Learning from
those early failures, Macy finally hit on a formula that worked
with the R.H. Macy Dry Goods store he opened in New York
City in 1858. Macy was soon adding departments with new
product lines and moving into nearby buildings. Resembling
a collection of specialty shops, Macy’s became one of the
world’s first department stores. Innovative from the start,
Macy’s was the first store to offer visits with Santa Claus. It
also led the way in illuminating window displays to lure customers into its stores. In 1902, the original store moved uptown to Herald Square, where it remains today as the flagship
in the 800+ store Macy’s chain.
Department stores proved to be popular with American
shoppers; the concept was in the growth stage of its life
­cycle for more than a century before sales topped out in
the 1970s. Department stores’ large product assortment
and attentive customer service appealed to many customers. Typically located in city centers or regional malls, department stores pulled customers from a wide geographic

area. In the early 1900s, Sears and Marshall Field’s branched
out with mail-order catalogs and brought the department
store to rural America. In the 1970s, department stores began to lose market share; first to mass-merchandisers and
later to supercenters such as Target and Walmart, which
­offered convenient neighborhood locations and lower
prices. To compete, department stores pushed sale prices,
but profits declined and customer service suffered. Many
thought the arrival of Internet retailing in the late 1990s signaled the death knell for department stores. But some department stores successfully adapted their marketing
mixes, making them relevant again. Macy’s has been particularly successful.
Macy’s revival stems from changes across its marketing
strategy. Macy’s started by clearly defining its target markets. Macy’s saw an opportunity with teens and the slightly
older millennials (ages 19–30), who spend $60 billion a year
and 50 percent more per person than the average population. Within that segment, Macy’s defined four distinct

t­arget markets: teen girls, teen boys, millennial women,
and millennial men. Each segment has unique needs and
shopping behaviors.
High school age teens want stylish clothes and spend a
lot of time online. So Macy’s connects with them through
Tumblr, Pinterest, Facebook, and text messages. Macy’s social media feauture a mix of content that appeals to teens:
videos with the latest fashion trends, online shopping, and
m.mix, where teens can discover new bands, download music, and get tips on decorating a college dorm room. Macy’s
has also developed exclusive lines for this market, including
Marilyn Monroe clothing (for girls), G-Star Raw clothing (for
boys), Keds collection shoes, and a Glee-themed line based
on the popular television program. In the store, this group
prefers to “self-serve,” so Macy’s trained its sales staff to be
available but not pushy with teens.
The millennial market might be found in college, starting a
career, or maybe having a family. These customers prefer to

hear from Macy’s via e-mail, catalog, or direct mail. Macy’s
created its Impulse Shop with products for this group. Shoppers will find Inglot Cosmetics, DV by Dolce Vita Shoes, and
Else from Joe’s Jeans here. This target market favors fastfashion retailers such as Zara and H&M that produce a collection of clothes and get it into a store in just a couple of
weeks. Macy’s needed to do the same and spurred its supply
chain to respond quickly to fashion trends. These customers
appreciate suggestions and advice from Macy’s salespeople.
So in the Impulse Shop at Macys.com, a black handbag might
be suggested to complement the black shoes a shopper puts
into her shopping cart. And in the store, Macy’s salespeople
are friendlier and offer more suggestions to millennials than
to teens.
The My Macy’s program mines customer data to adapt
marketing communications to individual customers. Macy’s
customer relationship management database includes a
great deal of insight about each customer: previous purchases, responses to e-mails, online shopping behavior, and
other information collected over time. Macy’s uses these
data to customize promotions in e-mails and direct mail. For
example, Macy’s sent out 30,000 different versions of a

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clothing and unsold merchandise to clearance centers or
­ irect mailing; the pieces varied from 32 to 76 pages long
d
other countries.
and featured merchandise designed to appeal to each cusMacy’s is leading a department store revival with its
tomer. As a result, footwear fanatics saw more shoes and

blend of online, mobile, and 800+ stores, an ability to transmoms saw more kids’ clothes.
form big data into personalized shopping experiences, and
Macy’s recognizes that teens and millennials are multia focus on the needs of its teen and millennial target marchannel shoppers, and Macy’s wants to be in all those
kets. Still, Macy’s faces fierce competition from department
channels. Macy’s developed its “omnichannel” strategy to
stores such as Nordstrom and Kohl’s, specialty shops such
create a seamless shopping experience across its mobile,
as Buckle and American Eagle, and online stores such as
online, and brick-and-mortar stores. So when the shoes a
eBay and Zappos. To keep growing, Macy’s must continue
customer loves at the store are not in stock in his size, they
adapting its marketing mix to meet its customers’ evolving
are delivered to the customer’s home two days later direct
needs.1
from Macys.com. When a customer finds Macys.com
doesn’t have a navy blue
Lacoste polo shirt he wants
to buy in stock, the order
LEARNING OBJECTIVES
can be shipped today from
a local store that has one on
Retail and wholesale organizations exist as members of marketing channel systems. But
its shelf.
they also do their own strategy planning as they compete for target customers. As the
In retail, not everything
Macy’s case shows, these firms make decisions about Product, Place, Promotion, and Price.
goes out the front door.
This chapter overviews the strategy planning decisions of different types of retailers and
Sometimes even Macy’s Onewholesalers. The chapter shows how retailing and wholesaling are evolving—to give you a
Day Sale prices don’t move

sense of how things may change in the future.
the merchandise. When that
happens, or when returns
When you finish this chapter, you should be able to
cannot be restocked, other
1 Understand the nature and basic structure of retailing. 
channels of distribution are
needed. Macy’s Wholesale
2 Understand how retailers plan their marketing strategies.
sells pallet loads of returned

3 Know about the many kinds of retailers that work with producers and
wholesalers as members of channel systems.
4 Understand what is different about retailing on the Internet. 
5 Understand how and why retailers evolve, including the roles of
technology, scrambled merchandising, and the “wheel of retailing.”
6 Understand some of the differences in retailing in different nations.
7 Know what progressive wholesalers are doing to modernize their
operations and marketing strategies.
8 Know the various kinds of merchant and agent wholesalers and the
strategies they use.
9 Understand important new terms (shown in red).

Retailers and Wholesalers Plan Their Own Strategies
As we saw in Chapter 10, retailers and wholesalers perform a vital role in channel
systems. Now we’ll look at the decisions that retailers and wholesalers make in developing their own strategies. But first, study Exhibit 12–1 for a visual of how everything fits together.
Producers can choose a variety of different paths to deliver products to target
customers (see Exhibit 12–2). In Chapter 10 we discussed how some producers
deliver goods or services directly to customers. We also saw how in some i­ ndustries,

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Exhibit 12–1  Marketing Strategy Planning for Retailers and Wholesalers
CHAPTER 12

PL
A
CE

307

Chapter 11
Distribution Customer
Service and Logistics

Strategy planning for
retailers
• Product offering
• Expand assortment and
service; increase price
• Mass-merchandise retailers
• Competing on convenience
• Retailing on the Internet

Chapter 12
Retailers, Wholesalers, and
Their Strategy Planning

Nature of retailing
• Evolution of
retailing
• Differences in
retailing in
different nations

retailers and/or wholesalers add value so it makes
sense to use indirect channels. And of course,
many producers use more than one of these paths
to get products to customers.
When marketing managers decide to use intermediaries in their marketing strategy, they can
choose among many different types of retailers
and wholesalers. Retailers and wholesalers have
different target markets and different marketing
mixes, and a producer should select intermediaries
that best facilitate its strategy.
To better understand these options, we begin
the chapter with a discussion of strategy planning
for retailers (back to Exhibit 12–1). Retailers must
create a marketing mix that provides value for a
target market. We also discuss how retailing has
evolved and where it stands today, including some
important international differences. Chapter 12
concludes by considering strategy planning
and the services offered by different types of
wholesalers.

Strategy planning for

wholesalers
• Evolution of
wholesaling
• How wholesalers
add value
• Merchant
wholesalers
• Agent wholesalers

Exhibit 12–2 Wholesalers
and Retailers in a Typical
Channel of Distribution
Producer

Wholesaler

Retailer

Customer

Retailers, Wholesalers, and Their Strategy Planning

Chapter 10
Place and Development of
Channel Systems


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The Nature of Retailing

LO 12.1

Retailing covers all of the activities involved in the sale of products to final consumers.

Retailers range from large chains of specialized stores, such as Toys “R” Us, to individual merchants like the woman who sells baskets from an open stall in the central
market in Ibadan, Nigeria. Some retailers operate from stores and others operate without a store—by selling online, on TV, with a printed catalog, from vending machines,
or even in consumers’ homes. Most retailers sell physical goods produced by someone
else. But in the case of service retailing—such as dry cleaning, fast food, tourist attractions, online bank accounts, or hair salons—the retailer is often the producer. Because
they serve individual consumers, even the largest retailers face the challenge of handling many small transactions.
The nature of retailing and its rate of change are generally related to the stage and
speed of a country’s economic development. In the United States, retailing is more
varied and dynamic than in most other countries. By studying the U.S. system, you
will better understand where retailing is headed in other parts of the world.

Retailing is big business. 

Retailing is crucial to consumers in every macro-marketing system. For example,
consumers spend about $4.7 trillion (that’s $4,700,000,000,000!) a year buying goods
and services from U.S. retailers.

A few big retailers do
most of the business

There are more than a million retailers in the United States, but most of these retailers are small; more than half report annual sales of less than $1 million. The larger
retail stores—those selling more than $5 million annually—do most of the business.
Less than 15 percent of the retail stores are this big, yet they account for almost
75 percent of all retail sales.2

Big chains have market
clout

One reason for the dominance of large retailers is that many achieve economies
of scale from a corporate chain. A corporate chain is a firm that owns and manages
more than one store—and often it’s
many.  Chains—including Nordstrom’s,
Walmart, Kroger, 7-11, and Chipotle—
have grown rapidly and now account for
about half of all retail sales. Chains can
buy in larger quantities and earn lower
prices, they get operational efficiencies
from running many stores, and they can
apply advertising and other promotion
costs over many stores. You can expect
chains to continue to grow and take business from independent stores.3

Retail through
cooperatives and
franchisors

Because size offers such an advantage, many retailers not connected to a
chain join cooperatives or franchises.
­Retailers’ cooperatives pool purchasing
and marketing expenses to increase efficiency and effectiveness. Piggly Wiggly
grocery, Ace Hardware, NAPA Auto
Parts stores, and Carpet One are examples of cooperatives.
In a franchise operation, the franchisor develops a good marketing strategy,
and the retail franchise holders carry out
the strategy in their own units. Each

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Some businesspeople like to open retail
franchises with brand names consumers
already know—brands with track records of
success, like Dunkin’ Donuts and Baskin
Robbins.
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Small retailers specialize

Planning a Retailer’s Strategy
LO 12.2

Retailers interact directly with final consumers—so strategy planning is critical to
their survival. If a retailer loses a customer to a competitor, the retailer is the one who
suffers. Producers and wholesalers still make their sale regardless of which retailer
sells the product. So let’s look closer at strategy planning for retailers. 

Consumers have reasons
for buying from
particular retailers

Different consumers prefer different kinds of retailers. But many retailers either
don’t know or don’t care why. All too often, beginning retailers just rent a store and
assume customers will show up. As a result, in the United States about three-fourths
of new retailing ventures fail during the first year. Even an established retailer will
quickly lose if its customers find a better way to meet their needs. To avoid this

fate, a retailer should carefully identify possible target markets and try to understand why these people
buy where they do. In this way, the retailer can finetune its marketing mix to the needs of specific target markets.6

Retailers make decisions
about the whole
marketing mix

Like other organizations, retailers make marketing
mix decisions about target market, Product, Place,
Promotion, and Price (see Exhibit 12–3). For retailers, some of the Product decisions include choices
about what products to carry, how wide an assortment
to offer, and which services to support. Place decisions include where stores will be located (online
and/or brick-and-mortar), the number of stores, as
well as store layout and design. Promotion involves
Retailers make decisions about the whole marketing mix.
Drugstore CVS created its myCVS smartphone app that
helps its customers manage and quickly refill their
prescriptions, find out about deals, place orders for
merchandise to be picked up later, and much more.
© 2013 CVS Caremark; Phone image: © Jacek Lasa/Alamy.

309

Retailers, Wholesalers, and Their Strategy Planning

While big chains and franchises dominate the sales volume, 85% of all retailers
are small. But it is not easy for small retailers; the failure rate of small retailers is
high. A recent study found less than half were operating four years after starting in
business. Without the same economies of scale, small retailers that survive usually
develop a specialty and become highly knowledgeable about a market niche. For

example, online retailer Wicker Central specializes in outdoor wicker furniture.
With four toy stores in Charleston, South Carolina, Wonder Works survives because
it offers visitors a unique experience on each visit. These stores compete with larger
competitors based on intimate knowledge of their markets and high levels of customer service.5

CHAPTER 12

franchise holder benefits from its relationship with the larger company and its experience, buying power, promotion, and image. In return, the franchise holder signs a
contract, agreeing to pay fees and commissions and strictly follow franchise rules
designed to continue the successful strategy. Franchise holders’ sales account for
about a third of all retail sales. Hampton Hotels, Anytime Fitness, Subway, and
­Supercuts are examples of franchises.4


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Exhibit 12–3  Examples of Marketing Strategy Decisions for Retailers
Product
• Product selection (width and depth
of assortment, brands, quality)
• After-sale service
• Special services (special orders,
entertainment, gift wrap)

Place
• Physical stores and/or sales over
the Internet
• Number and location of stores
• Shopping atmosphere (comfort,
safety)

• Store
S
size, layout, and design
• Store
S
hours

Price
• Credit cards—whether to offer a
store card
• Discount policies
• Frequency and level of sales prices
• Charge (or not) for delivery or other
services

Promotion
•A
Advertising
• PPublicity (Facebook, Twitter,
PPinterest)
• Salespeople (number and training)
• Helpful information
(demonstrations, displays, online
videos, online reviews)

letting customers know about the business and the goods and services offered through
its in-store and out-of-store signage, advertising, salespeople, publicity (including social media), and other approaches. Price decisions are varied as well, and include, for
example, whether to accept credit cards or charge for delivery, and how frequently to
offer products at discounted sales prices.

Strategy requires
carefully setting policies

310

In developing a strategy, a retailer should consciously make decisions that set policies on all of these marketing mix issues. Each of them can impact a customer’s view
of the costs and benefits of choosing that retailer. The combination of these marketing
mix decisions differentiates one retailer’s offering from another. These decisions affect
its positioning in the market—how customers think about the retailer compared to others. A retailer must consider its target customers’ economic, social, and emotional
needs. If the combination doesn’t provide superior value to some target market, the
retailer will fail.
Consider the marketing strategies for two very different, yet successful, shoe retailers. Usually located in malls and shopping centers, Payless ShoeSource’s primary
target market is families looking for moderately priced shoes. Although its shoes can
be ordered online, most sales occur in one of its 4,500 brick-and-mortar stores. The
stores have a self-service design that encourages customers to select and try on shoes
without the help of a salesperson. Even though each store carries an average of 500
styles and 6,700 pairs of shoes—including dress, casual, boots, and athletic—for
men, women, and children, Payless’ product line is relatively narrow for a shoe
­retailer and includes mostly lesser-known brands. Payless’ advertising in local newspapers emphasizes value and usually promotes its low prices. Further, Payless’ Facebook page, with more than 750,000 “likes,” keeps its most ardent fans informed
of the next deal.7
Zappos.com offers a different marketing mix that appeals to a different target
­market. Zappos operates several online storefronts in addition to Zappos—including
Zappos Couture with high fashion shoes and Zappos Running. Although Zappos
­recently added clothing, handbags, housewares, and beauty supplies to its product
­assortment, its core product line remains shoes. Zappos’ wide product line includes


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CHAPTER 12

Zappos creatively utilizes its
advertising budget—in this
case, placing ads at the bottom
of airport security bins. Payless
advertises in local newspapers,
promoting the value of its fine
shoes at low prices.
© 2009–2015 Zappos.com or its
affiliates, 400 E. Stewart Avenue,
Las Vegas, NV. 89101; © 2014 Payless
Shoesource Inc. All Rights reserved.

311

Different types of
retailers emphasize
different strategies

Retailers have an almost unlimited number of ways in which to alter their offerings—
their marketing mixes—to appeal to a target market. Because of all the variations,
it’s  oversimplified to classify retailers and their strategies on the basis of a single
­characteristic—such as merchandise, services, sales volume, or even whether they
­operate in cyberspace. But a good place to start is by considering basic types of retailers
and some differences in their strategies.

Conventional Retailers—Try to Avoid Price Competition
LO 12.3

Single-line, limited-line

retailers specialize by
product

About 150 years ago, general stores—which carried anything they could sell in reasonable volume—were the main retailers in the United States. But with the growing
number of consumer products after the Civil War, general stores couldn’t offer enough
variety in all their traditional lines. So some stores began specializing in dry goods,
apparel, furniture, or groceries.

Retailers, Wholesalers, and Their Strategy Planning

more than 150,000 styles and 1,400 brands—including many styles in well-known
brands such as Nike, Timberland, and Bandolino. Because shoppers are understandably reluctant to buy shoes without first trying them on, Zappos devotes a
whole page to each shoe. There it provides eight or more photos from different angles, customer reviews, videos, and detailed descriptions. Zappos also offers free
shipping and free returns—for up to 365 days after purchase! The retailer wins
praise for its customer service, available 24/7 on the phone or the web. That service
helps build positive word-of-mouth for Zappos, and more than 75 percent of its customers are repeat b­ uyers. It has a relatively small budget for its advertising on television, print, online, and the bottom of the plastic bins in airport security lines. A
free monthly digital magazine for tablet computers, Zappos Now, keeps customers
informed about fashion trends and offers tips about Zappos products. CEO and author Tony Hsieh’s Twitter feed has more than 2.8 million followers. Zappos and
Payless ShoeSource developed very different marketing mixes, but each keeps
­target customers coming back.8


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Exhibit 12–4  Types of Retailers and the Nature of Their Offerings (with examples)

Conventional Single- and
limited-line
Offerings
stores

Expanded assortment
and service

Specialty shops and
department stores

(Ritz Camera, Coach,
Gap, Macy’s, Kohl’s)

Expanded assortment
and/or reduced
margins and service

Supermarkets, discount
houses, massmerchandisers,
superstores, club stores,
single-line mass retailers

(Safeway, American
Furniture Warehouse,
IKEA, Costco, Home
Depot)

Added convenience
and higher than
conventional
margins, usually
reduced assortment

Convenience stores,
(7-11, Pepsi vending
vending machines, door- machines, Avon, QVC,
to-door, cable TV,
Lands' End)
shopping channels,
catalogs

Expanded assortment,
reduced margins, and
more information

Internet

(eBay, Amazon, Zappos,
Netflix, Dell)

Now most conventional retailers are single-line or limited-line stores—stores that
specialize in certain lines of related products rather than a wide assortment. Many
specialize not only in a single line, such as clothing, but also in a limited line within
the broader line. Within the clothing line, a retailer might carry only shoes, formal
wear, or even neckties but offer depth in that limited line.

Single-line, limited-line
stores are being
squeezed

The main advantage of limited-line retailers is that they can satisfy some target
markets better. Perhaps some are just more conveniently located. But most adjust to
suit specific customers. They build a relationship with their customers and earn a position as the place to shop for a certain type of product. But these retailers face the costly

problem of having to stock some slow-moving items in order to satisfy their target
markets. Many of these stores are small—with high expenses relative to sales. So they
try to keep their prices up by avoiding competition on identical products.
Conventional retailers like this have been around for a long time and are still found
in every community. They are a durable lot and clearly satisfy some people’s needs. In
fact, in most countries conventional retailers still handle the vast majority of all retailing sales. However, this situation is changing fast. Nowhere is the change clearer than
in the United States. Conventional retailers are being squeezed by retailers who modify their mixes in the various ways suggested in Exhibit 12–4. Let’s look closer at some
of these other types of retailers.

Expand Assortment and Service—To Compete at a High Price
Specialty shops usually
sell shopping products

312

A specialty shop—a type of conventional limited-line store—is usually small and has
a distinct “personality.” Specialty shops sell special types of shopping products, such
as high-quality sporting goods, exclusive clothing, baked goods, or even antiques.
They aim at a carefully defined target market by offering a unique product assortment,
knowledgeable salesclerks, and better service.
Catering to certain types of customers whom the management and salespeople
know well simplifies buying, speeds turnover, and cuts costs due to obsolescence and


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Department stores
combine many limitedline stores and specialty
shops

313

Specialty shops and department
stores often rely on well-trained
salespeople who deliver expertise
and customer service.
John Henley/Getty Images

Evolution of Mass-Merchandising Retailers
Mass-merchandising is
different from
conventional retailing

The conventional retailers just discussed think that demand in their area is fixed—and
they have a “buy low and sell high” philosophy. Many modern retailers reject these
ideas. Instead, they accept the mass-merchandising concept—which says that retailers
should offer low prices to get faster turnover and greater sales volumes—by appealing to
larger markets. The mass-merchandising concept applies to many types of retailers,
­including both those that operate stores and those that sell online. But to understand massmerchandising better, let’s look at its evolution from the development of supermarkets and
discounters to modern mass-merchandisers such as Walmart in the United States, Tesco
in the U.K., and Amazon.com on the Internet.

Supermarkets started
the move to massmerchandising

The basic idea for supermarkets, large stores specializing in groceries with selfservice and wide assortments, developed in the United States during the 1930s Depression. In earlier days, customers entered a store and a clerk, from behind a counter,
fetched requested items. Then some innovators introduced self-service as a way to cut
costs while also providing a broad assortment in large bare-bones stores.11
Today’s supermarkets carry 20,000 to 40,000 items and per-store sales are about
$20 million a year, with about 75 percent of that in food. The average size of a supermarket

is 40,000 square feet. In the United States, there are about 35,000 supermarkets, and
­competition in most areas is intense. More recently, supermarket operators have opened
superstores of 50,000 to 100,000 square feet with extensive selection.12
Supermarkets are planned for maximum efficiency. Scanners at checkout make it
possible to carefully analyze the sales of each item and allocate more shelf space to
faster-moving and higher-profit items. Survival depends on efficiency and high sales
volume. Net profits in supermarkets usually run a thin 1 to 2 percent of sales or less!

Discount houses upset
conventional retailers

After World War II, some retailers started to focus on discount prices. These
­discount houses offered “hard goods” (cameras, TVs, and appliances) at substantial

Retailers, Wholesalers, and Their Strategy Planning

Department stores are larger stores that
are organized into many separate departments and offer many product lines. Each
department is like a separate limited-line
store and handles a wide variety of shopping
products, such as men’s wear or housewares.
They are usually strong in customer services,
including credit, merchandise return, delivery,
and sales help.
Department stores are still a major force in
big cities. Although they have staged a bit of a
comeback recently in the United States, the
number of department stores, the average
sales per store, and their share of retail business has declined significantly since the
1970s. Well-run limited-line stores compete

with good service and often carry the same
brands. In the United States and many other
countries, mass-merchandising retailers have
posed an even bigger threat.10

CHAPTER 12

style changes. Specialty shops probably will
continue to be a part of the retailing scene as
long as customers have varied tastes and the
money to satisfy them.9


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price cuts to customers who would go to the discounter’s low-rent store, pay cash, and
take care of any service or repair problems themselves. These retailers sold at 20 to
30 percent off the list price being charged by conventional retailers.
In the early 1950s, with war shortages finally over, manufacturer brands became
more available. The discount houses were able to get any brands they wanted and to
offer wider assortments. At this stage, many discounters turned respectable—moving
to better locations and offering more services and guarantees. It was from these origins
that today’s mass-merchandisers developed.

Mass-merchandisers are
more than discounters

Mass-merchandisers are large self-service stores with many departments that emphasize “soft goods” (housewares, clothing, and fabrics) and staples (like health and
beauty aids) but still follow the discount house’s emphasis on lower margins to get
faster turnover. Mass-merchandisers, such as Walmart and Target, have checkout counters in the front of the store and little sales help on the floor. Today, the average massmerchandiser has nearly 60,000 square feet of floor space, but many new stores are

100,000 square feet or more. Mass-merchandisers grew rapidly—and they’ve become
the primary place to shop for many frequently purchased consumer products. To move
into new markets—big cities or small towns—some of these retailers are opening
stores with smaller footprints. 

Supercenters meet all
routine needs

Some supermarkets and mass-merchandisers have moved toward becoming supercenters (hypermarkets)—very large stores that try to carry not only food and drug

New massmerchandising formats
keep coming

The warehouse club is another retailing format that quickly gained popularity.
Sam’s Club and Costco are two of the largest. Consumers usually pay an annual
membership fee to shop in these large, no-frills facilities. Among the 3,500 items per
store, they carry food, appliances, yard tools, tires, and other items that many consumers see as homogeneous shopping items and want at the lowest possible price.
The growth of these clubs has also been fueled by sales to small-business customers.
That’s why some people refer to these
outlets as wholesale clubs. However,
when half or more of a firm’s sales are to
final consumers, it is classified as a retailer, not a wholesaler.14

Single-line massmerchandisers rise
and fall

Since 1980, many retailers focusing on
single product lines have adopted the
mass-merchandisers’ approach with great
success. Toys “R” Us pioneered this

trend. Similarly, IKEA (furniture), Home
Depot (home improvements), Best Buy
(electronics), and Staples (office supplies) attract large numbers of customers

314

items but all goods and services that the consumer purchases routinely. These superstores look a lot like a combination of the supermarkets, drugstores, and mass-­
merchandisers from which they have evolved, but the concept is different. A
supercenter is trying to meet all the customer’s routine needs at a low price. Supercenter operators include Meijer, Fred Meyer, Target, and Walmart. In fact, Walmart’s
supercenters have turned it into the largest food retailer in the United States.
Supercenters average more than 150,000 square feet and carry about 50,000
items. Their assortment in one place is convenient, but many time-pressured consumers think that the crowds, lines, and “wandering around” time in the store are
not. Some supercenters have responded by reducing product line depth. For example, Walmart recently decided that it didn’t need to carry 24 tape measures and now
carries just four.13

Warehouse club store Costco offers its
target customers a limited assortment,
warehouse ambiance, and low prices.
AP Photo/Rick Bowmer.


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Some Retailers Focus on Added Convenience
Convenience (food) stores are a convenience-oriented variation of the conventional

Vending machines are
convenient

Automatic vending is selling and delivering products through vending machines.

Vending machine sales account for only about 1.5 percent of total U.S. retail sales. Yet
for some target markets this retailing method can’t be ignored.
Although vending machines can be costly to operate, consumers like their convenience. Many vending machines are becoming more convenient by accepting credit
cards and mobile payment. Traditionally, soft drinks, candy bars, and snack foods have
been sold by vending machines. Now some higher-margin products are beginning to
use this channel. For example, Standard Hotels uses poolside vending machines to sell
bathing suits.17

Stores come to the
home—in person, on
television, and in
catalogs

In-home shopping in the United States started in the pioneer days with door-todoor selling—a salesperson going directly to the consumer’s home. Variations on this

limited-line food stores. Instead of expanding their assortment, however, convenience
stores limit their stock to pickup or fill-in items such as bread, milk, beer, and eat-onthe-go snacks. Many also sell gas. Stores such as 7-Eleven and Stop-N-Go aim to fill
consumers’ needs between trips to a supermarket, and many of them are competing
with fast-food outlets. They offer convenience, not assortment, and often charge prices
10 to 20 percent higher than nearby supermarkets. However, as many other retailers
have expanded their hours, intense competition is driving down convenience store
prices and profits.16

approach are still important for firms such as Amway Global and Mary Kay. It meets
some consumers’ need for convenient personal attention. Although gaining popularity
in some international markets such as China and parts of Africa, it now accounts for
less than 1 percent of retail sales in the United States.

Some target markets value the convenience of automatic vending and door-to-door selling.
Left: Used with permission of Utique, Inc.; Right: Bloomberg/Getty Images.

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Retailers, Wholesalers, and Their Strategy Planning

Convenience (food)
stores must have the
right assortment

CHAPTER 12

with their large assortment and low prices in specific product categories. These stores
are called category killers because it’s so hard for less specialized retailers to compete.
Now online retailers offering greater assortment and even lower prices threaten the
category killers.15


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Customers can also shop at home by watching cable television channels dedicated to
shopping and then calling in their orders by phone. QVC and Home Shopping Network
operate in the United States, Japan, and some European countries. Similarly, catalogs
allow customers to page through merchandise and place orders on the phone or online.
Deliveries will usually occur a few days later, handled by shippers UPS or FedEx. Both
of these home shopping methods use a multichannel approach by adding a website.18
Internet retailing has quickly become the most popular way to shop at home (and
sometimes at work). Let’s take a closer look at online retailing.

Retailing and the Internet
LO 12.4

Internet retailing is
growing fast

Online retail offers low
prices and wide
assortment

Internet retailing is still in the growth stage. In 2015, online sales in the United States
topped $350 billion and grew to more than 7 percent of all retail sales. Online sales are
predicted to top 10 percent of all U.S. sales by 2018. Online sales are growing about
15 percent per year whereas total retail sales grow less than 2 percent. In some categories, the share of online sales is even greater; more than half of all computer hardware
and software, and more than a quarter of all books, are sold online. The impact of the
­Internet on retail sales is even greater—as many shoppers go to the Internet (often
visiting online retail sites) for information before buying in a physical store.
Internet retailers and physical (sometimes called brick-and-mortar) stores are waging an intense battle for consumer shopping attention. See Exhibit 12–5 for a comparison of these two shopping methods.19 Innovative Internet retailers are finding ways to
offset some of the advantages of physical stores—and physical stores are figuring out
how to use the Internet to their advantage. This battle between online and offline
­retailers has fueled a period of innovation unlike anything retailing has ever seen—and
it is likely to continue. Let’s take a closer look at how retailers are adapting their strategies for the online customer.20
With no storefront and limited sales help, online retailers usually have lower operating costs than brick-and-mortar stores. Customers may not have to pay sales taxes
either—though that is changing. These advantages lead many online stores to use low
prices to attract customers. But because the Internet makes it easy to compare products
and prices from different online sellers, price-sensitive shoppers usually choose the
store with the lowest price. That puts constant price pressure on Internet sellers to figure out how to differentiate their offerings.
Online stores offer a very wide assortment of products—often from different sellers.
It is easy to click from site to site or simply conduct a search for a specific brand/

Exhibit 12–5  Comparing the Advantages of Shopping Online with Shopping at a Physical Store
Advantages of Shopping Online

Advantages of Shopping at a Physical Store

• Rich variety of product information from many sources

• Ability to hold, try on, or test products before purchase

• Reviews and tips from customers who’ve already used
the product

• Personal help and interaction

• Wide assortment

• Edited assortment—easier to decide

• Fast and convenient purchase/checkout

• Convenient product returns

• Simplified price and product feature
comparison

• Help with setup and ongoing service needs

• Anytime and anywhere access

• Instant access to products and instant gratification
• Shopping with friends or family is a social activity

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317

Left: © 2002–2015 by Wayfair LLC, 4 Copley Place, Floor 7, Boston, MA. 02116.; Right: © 2012 Zibbet Pty Ltd.

model and find multiple sites offering the same thing. Sites such as Amazon.com and
eBay bring different sellers together to offer customers even more choices. To counter
that online advantage, many brick-and-mortar stores are adding in-store computer terminals so customers can buy online what they might not find in the store.

Lowering the risk of
shopping online

Although customers can find low prices online, sometimes prices aren’t what they
seem. Many online retailers add charges for handling and delivery. Returns and exchanges can create more expense and hassle. Customer concerns about fraud and security create hidden costs. Some customers worry about how an online retailer handles
personal information such as e-mail addresses and credit card numbers.
The most successful online retailers have found ways to overcome these customer
concerns. Many offer free shipping. Some offer free exchanges or returns and pack
bar-coded return labels with the original shipment to make returns easy. Other stores
provide excellent customer service and build a good reputation, because word-ofmouth matters online. Organizations such as TRUSTe place a seal of approval on sites
that meet certain privacy standards, and sites such as ResellerRatings and Google
Shopping collect customer reviews of retailers. Together these efforts help lower the
costs, worries, and hassles of online shopping.

Obtaining purchase

information

For many purchases, consumers seek information to help them make the purchase
decision. It used to be inconvenient to shop online because there just wasn’t a lot of
product information available. That has changed. In many physical retail stores costcutting measures have resulted in fewer or less-well-trained salespeople, making it
difficult to get helpful buying information. Online it can be easy to learn about a
product; with the click of a mouse, an online shopper can access product descriptions and specifications, photos and videos, and reviews posted by other consumers.
Some sites make virtual salesclerks available to chat—online or on the phone—at
any time.
However, for some purchases the ultimate information comes from physically inspecting a product before purchase. That is one reason that clothing sells best in physical stores—about 30 percent of clothing bought online is returned. To try to
overcome this limitation, many online stores show photos and videos that demonstrate its products. At eyeglass retailer EyeBuyDirect.com, customers can upload a
photo of themselves and then see what they look like when they virtually “try on”

Retailers, Wholesalers, and Their Strategy Planning

Online retailers have different marketing strategies. Wayfair specializes in furniture and other products for the home. Its
family of brands includes AllModern.com, which specializes in modern design, and Birch Lane, which offers classic furnishings
and timeless home décor. Zibbet is an online global marketplace that connects buyers and sellers of handmade goods, fine
art, vintage items, and crafting supplies.


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different eyeglass frames. Another online eyeglass retailer, Warby Parker, allows customers to select up to five frames to try on at home before placing an order.21

What is convenience?

Traditional thinking about retail stores considered shopping convenience from the
perspective of product assortment, store location, and store hours. On the Internet, by
contrast, a customer can get to a very wide assortment on a single retailer’s site or by

clicking from one website to another. Product assortment on the Internet can be almost
unlimited. And of course online stores are open 24 hours a day 7 days a week.
The Internet makes shopping inconvenient in other ways however. You have to plan
ahead. When you buy something, you’ve actually just ordered it and you have to wait
for d­ elivery. Online retailers are trying to overcome these disadvantages with faster
­shipping. It started with low-cost two-day shipping, then one-day shipping became
more reasonable. Now some online retailers offer same-day delivery.

Online retailers use big
data to personalize
shopping

Online retailers have lots of information on their customers’ shopping behavior. For
example, an online retailer can see just how customers move through its website, what
information about each product is being consumed (do they watch videos or read reviews?), what competitive products are considered, and what (if anything) is ultimately
purchased. Cookies (small data files placed on a customer’s computer) can even tell a
retailer what a shopper does at a competitor’s site and pull information from a
­customer’s Facebook page. All those data offer a retailer a great deal of insight into
each of its customers.
The ability to collect and analyze big data in real time (while customers are shopping) gives online retailers the opportunity to provide a more personalized shopping
experience. So for example, a customer known to have shopped at a competitor’s site
might be seen as a “price-oriented shopper” and could receive a targeted discount.
Knowing that a customer previously purchased a sweater from the store, an online retailer might show more sweaters of a similar style on the front page when the customer
returns. When a customer shops for a DVD at Amazon.com, the site makes recommendations for other videos based on that customer’s previous purchases and past purchases of movie buyers with similar interests. That intimate knowledge should make
such recommendations more on-target and relevant. All of these activities provide customers with a shopping experience tailored to their needs and interests.

Shoppers go mobile with
tablets and smartphones

As consumers get more comfortable with

multichannel shopping, many access the Internet “on the go” with their mobile device.
Physical retailers see an opportunity to leverage this trend with websites and apps that
work with tablet computers and smartphones. For example, ShopRite Supermarkets
developed an app for iPhone and Android
that allows users to buy groceries, check out
the weekly sales, manage their shopping lists, © Joseph P. Cannon Ph.D.
clip coupons, and discover new recipes. The
app also allows customers to shop from home; they can even scan items currently in
their pantries, and then send their order to ShopRite for pickup or delivery. Shopping
on mobile devices is a new consumer behavior, and leading retailers are watching
closely for opportunities to develop services that enhance target customers’ shopping experience.
Customers expect to use the larger screen on tablet computers differently from the
way they use their smartphones. Retailers such as Amazon, IKEA, Fab, and Nordstrom
have created tablet computer apps that turn traditional catalogs into more interactive
­experiences. Consumers appear to put their feet up, relax, and shop on their tablets.
Many use the apps to discover new products or to gather information for future p­ urchases.
This creates a different shopping experience than sitting at a desk with a computer.

318


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Multichannel shoppers
shop many stores but
buy at only one

Many brick-and-mortar retailers view these trends—shopping on mobile devices
and webrooming—as an opportunity. Some brick-and-mortar retailers are using their
physical stores as a source of competitive advantage. These retailers use a strategy

called omnichannel. Omnichannel is a multichannel selling approach where a single
retailer provides a seamless customer shopping experience from desktop computer,
mobile device, telephone, or brick-and-mortar store. We talked about multichannel
distribution in Chapter 10, and omnichannel is an example of multichannel with a high
level of coordination across the channels.
So for example, when an online shopper at Crate & Barrel’s website moves from
desktop to mobile device—anything placed in the cart while on a smartphone will still
be there when they open the site on their desktop computer. Websites for Best Buy and
Home Depot allow customers to view the actual inventory of particular items at a local
store—customers know what is in stock before they arrive. Both stores let customers
buy online and pick up in the store. Omnichannel strategies are winning over multichannel shoppers.23

Why Retailers Evolve and Change
LO 12.5

The Internet and online shopping and the competitive threat it poses to traditional retailing has been a big motivator of change in retailing. In this section, we discuss some
broader retailing trends and consider how technology influences the in-store shopping
experience. 

319

Retailers, Wholesalers, and Their Strategy Planning

The seamless
multichannel shopping
experience

Some customers are multichannel shoppers who use different channels as they
move through the purchase process. This can occur within the same retailer, like
when a customer goes to Home Depot to buy an electronic light switch, and while

standing at the shelf, pulls out their smartphone, opens the Home Depot site, and
reads reviews of the product. Another a multichannel shopper seeking a new tennis
racquet might read customer reviews of the Wilson Blade tennis racquet at TheTennis-Store.com, go to a pro shop at a local tennis club to hit some balls with the
Blade, and then ultimately purchase the tennis racquet at a steep discount from
­another online retailer.
Multichannel shopping can cause problems for retailers. When consumers go to a
brick-and-mortar store to inspect a product (a showroom) and then purchase from an
online retailer with a lower price, this practice is called showrooming. Smartphone
apps make the practice easy, allowing customers to scan products in a retail store
and then see prices from across the web. As online stores offer more information to
consumers, the trend has started flowing in the other direction. Many shoppers are now
webrooming—gathering
information at an online
Online Toolkit
store and then purchasing
at the brick-and-mortar
The Amazon App for iPhone (and Android) allows
store. Unfortunately, the
a shopper in a physical store to scan a product’s
only retailer making
bar code and then check prices for the product
money on this shopping
at Amazon.com. Go to Amazon’s website and read
trip is the one the cusabout this app ( How
tomer buys from, not the
will this type of application affect retailers and their
others from whom the
marketing mix decisions? Which types of stores will
customer gleaned inforsee Amazon App as a threat? How is this an
mation along the purchase

opportunity for Amazon.com?
journey.22

CHAPTER 12

­ etailers that figure out ways to provide target customers with improved shopping
R
experiences on their tablets will grow sales.


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The wheel of retailing
keeps rolling

The wheel of retailing theory says that new types of retailers enter the market as
low-status, low-margin, low-price operators and then, if successful, evolve into more
conventional retailers offering more services with higher operating costs and higher
prices. Then they’re threatened by new low-status, low-margin, low-price retailers—
and the wheel turns again. Department stores, supermarkets, and mass-merchandisers
went through this cycle. Some Internet sellers are on this path.
The wheel of retailing theory doesn’t explain all major retailing developments.
Vending machines enter as high-cost, high-margin operations. Convenience food
stores are high-priced. Suburban shopping centers don’t emphasize low price.

Scrambled
merchandising—mixing
product lines for higher
profits

Conventional retailers tend to specialize by product line. But many modern retailers
are moving toward scrambled merchandising—carrying any product lines they think
they can sell profitably. Supermarkets and drugstores sell anything they can move in
volume—panty hose, phone cards, one-hour photo processing, motor oil, potted plants,
and computer software. Mass-merchandisers don’t just sell everyday items but also
cell phones, computer printers, and jewelry.24

Product life-cycle
concept applies to
retailer types too

A retailer with a new idea may have big profits—for a while. But if it’s a really
good idea, the retailer can count on speedy imitation and a squeeze on profits. Other
retailers will copy the new format or scramble their product mix to sell products that
offer them higher margins or faster turnover. That puts pressure on the original firm to
change or lose its market.
Some conventional retailers are in decline as these life and death cycles continue.
Recent innovators, like the Internet merchants, are still in the market growth stage (see
Exhibit 12–6). Some retailing formats that are mature in the United States are only
now beginning to grow in other countries.

Technology drives retail
evolution

Retailers are also using technology to enhance the in-store shopping experience—
and this is motivating further evolution and change in retailing. You can read more
about that in “What’s Next?  Technology derives strategy changes in brick-andmortar retail.”

Ethical issues for
retailers

Let’s look more closely at the ethical challenges that emerge from these new technologies and other retail practices. As you read in our discussion of online retailing
and in the What’s Next? box, retailers gather and use information to offer customers a

Exhibit 12–6 Retailer
Life Cycles—Timing
and Years to Market
Maturity

Department
stores

100 years
Variety stores

60 years
Supermarkets

30 years

Discount department stores

20 years

Mass-merchandisers

15 years

Fast-food outlets

15 years

Catalog showrooms

15 years

Supercenters

20 years

Single-line mass-merchandisers

15 years

Internet merchants
1850

320

1870

1890

1910

1930

1950

1970

1990

? years
2010


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What’s Next?Technology drives strategy

changes in brick-and-mortar retail
Technology has often fueled evolution in retail. We
have already seen how the Internet and the collection and
analysis of customers’ online activity are changing retailing. Brick-and-mortar retail stores are also leveraging technology to improve the in-store shopping experience. To
get an idea of where in-store retailing might be heading
next, let’s take a look at some leaders in this area.
Kroger is a forerunner in the use of technology to
enhance the customer shopping experience. A few
years ago, the average wait in a checkout line at its supermarkets was four minutes. Then Kroger installed
special infrared cameras at each store entrance and
above cash registers. A computer algorithm interprets
the camera data and software automatically signals a
manager when more than two customers are waiting in
line. The store manager can then open additional checkout lanes—and the home office monitors service levels
at every Kroger store. Average wait time fell to less than
30 seconds.
Walmart is testing a different way to keep customers
out of lines. Its “Scan & Go” program lets customers scan
bar codes of items while they shop—putting them right

into bags already in their shopping cart. At the self-checkout lane, they simply wave their iPhone at the screen, wirelessly pay, and walk out the door. Starbucks’ smartphone
app lets customers skip the line altogether. With Order
Ahead, a customer places an order and indicates the time
they want to pick it up. Payment occurs automatically
through the app.

In-store tracking provides retailers with information
useful for store layout, merchandising, and sales promotion. Some stores utilize video cameras, others use sensors
or track cell phones to monitor customer movement
around stores. Jeweler Alex & Ani learned where customers lingered longer and which items were picked up most
often—leading to changes in product placement. Other
retailers are testing targeted promotions based on tracking data. For example, a customer who has visited a store
three times without making a purchase might be targeted
with a 10 percent off coupon.
Other retailers are enhancing the in-store experience
with technology. Designer Rebecca Minkoff’s new stores in
New York and San Francisco provide a glimpse into the
future. Customers can browse merchandise on an oversized touchscreen, tapping to request specific items and
sizes to try on. A text message lets a customer know when
the items are waiting in a fitting room. Inside the fitting
room, customers tap a touchscreen mirror to request further assistance or additional merchandise. Sales clerks
tote iPads that allow them to respond to customer requests or to check out anywhere in the store.
Technologies that save customers money or time, or
create a more pleasant in-store shopping experience, are
changing the future of shopping. Consider a McDonald’s
restaurant and a college bookstore—how could some of
the ideas discussed above be used to improve customer
experiences at each of these locales? What other technologies could they employ?25

more personalized shopping experience, which appears consistent with the marketing

concept. But is it ethical to monitor customers’ shopping behavior without their knowledge? Do retailers need customers’ permission? Does it depend on how this information is used?
Most retailers face intense competitive pressure. The desperation that comes with
such pressure has pushed some retailers toward questionable marketing practices.
Critics argue, for example, that retailers too often advertise special sale items to
bring price-sensitive shoppers into the store or to a website but then don’t stock enough
to meet demand. Other retailers are criticized for pushing consumers to trade up to
more expensive items. What is ethical and unethical in situations like these, however,
is subject to debate. Retailers can’t always anticipate demand perfectly, and deliveries
may not arrive on time. Similarly, trading up may be a sensible part of a strategy—if
it’s done honestly.
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Many retailers use technology to enhance the shopping experience. In South Korea, Homeplus wanted to expand its
market share without the high cost of opening new stores. So Homeplus placed “virtual stores” in subway stations in
Korean cities. The stores have no actual stock, only images with QR codes. On their way home from work, customers scan
the QR codes of items they wish to purchase. Shortly after they arrive home, their order is delivered. Intel is working on
developing signage that recognizes the age and gender of customers standing in front of its signs. The signs can then
display messages tailored to each customer.
Left: Rex Features via AP Images.; Right: © Intel Corporation.

Ethical Dilemma

The marketing concept should guide firms away from unethical treatment of customers. However, a retailer on the edge of going out of business may lose perspective
on the need to satisfy customers in both the short and the long term.26
What would you do? Farmers in poor countries get very little money for crops—such as
coffee, cocoa, and bananas—that they grow for export. Some consumers in prosperous
nations are willing to pay retailers higher prices for “fair trade” goods so that the farmers

receive greater compensation. But critics question whether fair trade works as it should.
For example, Sainsbury’s is a popular British food retailer. It was charging $2.74 per pound
for “fair trade” bananas versus only $0.69 per pound for regular bananas. Farmers, however, only got $0.16 extra from that $2.05 price premium. Critics charge that Sainsbury’s
makes more from the “fair trade” promotion than the farmers it is supposed to help. Many
retailers have similar programs. Do you think that Sainsbury’s is acting ethically? What do
you think Sainsbury’s and other similar retailers should do? Why?27

Differences in Retailing in Different Nations
LO 12.6

New ideas spread across
countries
Mass-merchandising
requires mass markets

322

New retailing approaches that succeed in one part of the world are often quickly
adapted to other countries. Self-service approaches that started with supermarkets in
the United States are now found in retail operations worldwide. The supercenter concept, on the other hand, initially developed in Europe.
The low prices, selections, and efficient operations offered by mass-merchandisers
might be attractive to consumers everywhere, but consumers in less-developed nations
often don’t have the income to support mass distribution. The small shops that survive
in these economies sell in very small quantities, often to a small number of consumers.


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323

Left: © Joel Rafkin/PhotoEdit.; Middle: Photo by Marco Di Lauro/Getty Images.; Right: AP Photo/Peter Morgan.

Retailers moving to
international markets
must adapt marketing
strategies

Slow growth at home has prompted some large retail chains to move into international markets. They think that the competitive advantages that worked well in one
market can provide a similar advantage in another country. But legal and cultural differences in international markets can make success difficult. Despite success in Latin
America and Canada, Walmart has struggled in Germany and Japan. Similarly, French
mass-merchandiser Carrefour expanded in Europe and South America, but its U.S.
stores failed and it experienced legal problems in Indonesia.
Other retailers, such as California-based My Dollarstore, have successfully adapted
for quick international growth. My Dollarstore franchises the “dollar store” concept
worldwide and adapts its marketing strategy to local markets. In India, the price of
each product is 99 rupees or about two dollars. Dollar stores in the United States target
lower-income consumers, but in India the “Made in America” label attracts many
higher-income consumers. Initially the merchandise in the Indian stores was the same
as in U.S. stores. However, My Dollarstore quickly discovered what sold (Hershey’s
syrup is a hit) and what didn’t (papaya and carrot juice). It also offered money-back
guarantees, an unusual practice in India. Adaptations like these helped entice consumers into My Dollarstore’s Indian franchises.28

Online retailing varies
across nations

Online shopping behavior, and therefore online retailing, varies considerably
across countries. For example, in the United Kingdom about half of all consumers
regularly purchase online, whereas in emerging markets online sales are almost nonexistent. The most obvious prerequisite for online retailing is access to the Internet—

in particular, broadband (fast) connections. Chapter 3  discussed technology and the
uneven adoption of the Internet and mobile phones across the globe. A reliable national postal system (lacking in many countries) is also needed for delivering online
purchases.
Even when infrastructure is in place, cultural factors influence preferences for online shopping. For example, a European study of 20,000 clothing shoppers identified
seven segments based on their shopping needs. One segment, nicknamed “timepressed optimizers,” was particularly interested in online shopping. With very busy
lives, this group had less time for in-store shopping so they sought the best possible
product by doing research online. Yet only 3 percent of Italian shoppers and 6 percent
of French shoppers fell into this segment—as compared to 16 percent of Brits and
18 percent of Germans. Another segment, “price-oriented bargain hunters,” enjoyed
going to many stores and rummaging to find bargain merchandise. This group was
most common in Italy (31 percent of shoppers), and helps to explain why only about
10 percent of Italians regularly purchased online.29

Retailers, Wholesalers, and Their Strategy Planning

Coca-Cola’s desire to put its products “within an arm’s reach of desire” anywhere in the world requires selling through a
variety of different retail channels.


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What Is a Wholesaler?
LO 12.7

It’s hard to define what a wholesaler is because there are so many different wholesalers
doing different jobs. Some of their activities may even seem like manufacturing. As a
result, some wholesalers describe themselves as “manufacturer and dealer.” Some like
to identify themselves with such general terms as merchant, agent, dealer, or distributor.
And others just take the name commonly used in their trade—without really thinking
about what it means.

To avoid a long technical discussion on the nature of wholesaling, we’ll use the
U.S. Census Bureau definition:
Wholesaling is concerned with the activities of those persons or establishments that
sell to retailers and other merchants, or to industrial, institutional, and commercial users, but that do not sell in large amounts to final consumers. So wholesalers are firms
whose main function is providing wholesaling activities. Wholesalers sell to all of the
different types of organizational customers described in Chapter 6.
Wholesaling activities
are just variations of the basic marketing functions—
Online Toolkit
gathering and providing
China-based Alibaba is the world’s largest B2B trading
information, buying and
platform for small businesses. Go to the Alibaba
selling, grading, storing,
website (www.alibaba.com). Search for an “iPhone
transporting, financing,
case.” Check out three different cases. What are
and risk taking—we disthe prices for each? What are the minimum order
cussed in Chapter 1. You
quantities? Notice the Response Rate information to
can understand wholesalthe right of many cases—click on the rate. How much
ers’ strategies better if you
of an impact do you think this has on the decision to
look at them as members of
buy? Then look around at other product categories.
channels. They add value
What kinds of business product classes (see
by doing jobs for their
Exhibit 8–7) do you think Alibaba would best support?
customers and for their

­
suppliers.

Wholesaling Is Changing with the Times
A hundred years ago wholesalers dominated distribution channels in the United States
and most other countries. The many small producers and small retailers needed their
services. This situation still exists in less-developed economies.

Wholesaling is in decline

324

However, in developed nations, as producers became larger many bypassed the
wholesalers. Cost-conscious buyers at some large retail chains, including Walmart and
Lowe’s, even refuse to deal with some wholesalers who represent small producers. Efficient delivery services
from UPS and FedEx
make it easier for many
producers to ship directly to their customers,
even those in foreign
markets. The Internet
also puts pressure on
wholesalers whose primary role is providing
information to bring
buyers and sellers together. These factors
With permission of Fear No Fruit Productions.


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Opportunities remain

for progressive
wholesalers

Progressive wholesalers need to be efficient, but that doesn’t mean they all have low
costs. Some wholesalers’ higher operating expenses result from the strategies they select, including the special services they offer to some customers. Let’s look more
closely at different types of wholesalers and the different ways they add value to channels of distribution.

Wholesalers Add Value in Different Ways
LO 12.8

Exhibit 12–7 compares the number, sales volume, and costs of some major types of
wholesalers. The differences in operating costs suggest that each of these types performs, or does not perform, certain wholesaling functions. But which ones and why?
And why do manufacturers use merchant wholesalers—costing 13.1 percent of sales—
when agent wholesalers cost only 3.7 percent?
To answer these questions, we must understand what these wholesalers do and don’t
do. Exhibit 12–8 gives a big-picture view of the major types of wholesalers we’ll be

325

Retailers, Wholesalers, and Their Strategy Planning

Wholesalers need to
add value

Those that have survived are adapting their marketing strategies and finding new
ways to add value in the channel. Progressive wholesalers are becoming more concerned with their customers and with channel systems. Many are using technology to
offer better service. Some of the biggest B2B e-commerce sites on the Internet are
wholesaler operations, and many wholesalers are enjoying significant growth. Others
develop voluntary chains that bind them more closely to their customers.
Frieda’s, Inc., is a good example; it is a wholesaler that each year supplies supermarkets and food-service distributors with $30 million worth of exotic fruits and

­vegetables. It was started by Frieda Caplan in 1962; today her daughters Karen and
Jackie run the company. It is a sign of the marketing savvy of these women that
­artichokes, Chinese donut peaches, alfalfa sprouts, and spaghetti squash no longer
seem very exotic. All of these crops were once viewed as unusual. Few farmers grew
them, supermarkets didn’t handle them, and consumers didn’t know about them.
­Caplan helped to change all of that. She realized that some supermarkets wanted to
attract less price-sensitive consumers who preferred more interesting choices in the
hard-to-manage produce department. So she looked for products that would help her
retailer-customers meet this need. For example, the funny looking kiwi fruit with its
fuzzy brown skin was popular in New Zealand but virtually unknown to U.S. consumers.
Caplan worked with small farmer-producers to ensure that she could provide her retailercustomers with a steady supply. She packaged kiwi with interesting recipes and promoted it to consumers. Because of her efforts, demand has grown and most
supermarkets now carry kiwi. That has attracted competition from larger wholesalers.
But that doesn’t bother the Caplans. When one of their specialty items becomes a
­commodity with low profit margins, another novel item replaces it. In a typical year,
Frieda’s introduces about 40 new products—such as Asian pears, kiwano melons,
­sun-dried yellow tomatoes, and hot Asian chiles.
Frieda’s also has an advantage because of the special services it provides. It was
the first wholesaler to routinely use airfreight for orders and send produce managers
a weekly “hot sheet” about the best sellers. The Caplans also use seminars and press
­releases to inform produce buyers about how to improve sales. For example, one
­attention-getting story about Frieda’s “El Mercado de Frieda” line helped retailers do
a better job serving Hispanic customers. Similarly, Frieda’s website attracts final
­consumers with helpful tips and recipes. And now that more consumers are eating
out, Frieda’s has established a separate division to serve the special needs of foodservice distributors.30

CHAPTER 12

have combined to decrease the number of wholesalers in the United States; there are
about 400,000 wholesalers today—following a steady decline over the last 20 years.

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Exhibit 12–7 U.S.
Wholesale Trade by Type
of Wholesale Operation

Percent of
wholesale
establishments

84.9%
10.4%
4.7%
64.1%

Percent of all
wholesale
sales

Costs as a
percent of sales

9.6%
26.3%
Merchant wholesalers

13.1%
3.7%
7.9%

0.0%

20.0%

Agent wholesalers
Manufacturer sales branches

40.0%

60.0%

80.0% 100.0%

discussing. There are lots more specialized types, but our discussion will give you a
sense of the diversity. Note that a major difference between merchant and agent wholesalers is whether they own the products they sell. Before discussing these wholesalers,
we’ll briefly consider producers who handle their own wholesaling activities.

Manufacturers’ sales
branches are considered
wholesalers

Manufacturers who just take over some wholesaling activities are not considered
wholesalers. However, when they have manufacturers’ sales branches—warehouses
that producers set up at separate locations away from their factories—they’re classified
as wholesalers by the U.S. Census Bureau and by government agencies in many other
countries.
In the United States, these manufacturer-owned branch operations account for about
4.7 percent of wholesale facilities—but they handle 26.3 percent of total wholesale
sales. One reason sales per branch are so high is that the branches are usually placed in

Exhibit 12–8  Types of Wholesalers
Does wholesaler
own the products?
Yes (merchant wholesalers)

No (agent wholesalers)

How many functions does
the wholesaler provide?

Agent wholesalers
Auction companies
Brokers
Manufacturers’ agents
Selling agents

All the functions

Some functions

Service merchant wholesaler
General merchandise
wholesalers (or mill supply
houses)
Single-line or general-line
wholesalers
Specialty wholesalers

Limited-function merchant

wholesaler
Cash-and-carry wholesalers
Drop-shippers
Truck wholesalers
Rack jobbers
Catalog wholesalers

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Merchant Wholesalers Are the Most Numerous

CHAPTER 12

the best market areas. This also helps explain why their operating costs, as a percent of
sales, are often lower. It’s also easier for a manufacturer to coordinate information and
logistics functions with its own branch operations than with independent wholesalers.31

Merchant wholesalers own (take title to) the products they sell. They often specialize

Service wholesalers
provide all the functions

Service wholesalers are merchant wholesalers that provide all the wholesaling
functions. Within this basic group are three types: (1) general merchandise, (2) singleline, and (3) specialty.
General merchandise wholesalers are service wholesalers that carry a wide variety
of nonperishable items such as hardware, electrical supplies, furniture, drugs, cosmetics, and automobile equipment. With their broad line of convenience and shopping
products, they serve hardware stores, drugstores, and small department stores. Mill

supply houses operate in a similar way, but they carry a broad variety of accessories
and supplies to serve the needs of manufacturers.
Single-line (or general-line) wholesalers are service wholesalers that carry a narrower line of merchandise than general merchandise wholesalers. For example, they
might carry only food, apparel, or certain types of industrial tools or supplies. In consumer products, they serve the single- and limited-line stores. In business products,
they cover a wider geographic area and offer more specialized service.
Specialty wholesalers are service wholesalers that carry a very narrow range of
products and offer more information and service than other service wholesalers. For
example, a firm that produces specialized lights for vehicles might rely on specialty
wholesalers to help reach automakers in different countries. A consumer products specialty wholesaler might carry only health foods instead of a full line of groceries.
Some limited-line and specialty wholesalers are growing by helping independent retailer-customers compete with mass-merchandisers. But in general, many consumerproducts wholesalers have been hit hard by the growth of retail chains that set up their
own distribution centers and deal directly with producers.
A specialty wholesaler of business products might limit itself to fields requiring
special technical knowledge or service. Richardson Electronics is an interesting example. One of its specialties is in distributing replacement parts, such as electron
tubes, for old equipment that many manufacturers still use on the factory floor.
­Richardson describes itself as “on the trailing edge of technology,” but many of its
customers operate in countries where new technologies are not yet common. Richardson
gives them easy access to information from its website (www.rell.com) and makes its
products available quickly by stocking them in locations around the world.34

Limited-function
wholesalers provide
some functions

Limited-function wholesalers provide only some wholesaling functions. In the
f­ollowing paragraphs, we briefly discuss the main features of these wholesalers.
­Although less numerous in some countries, these wholesalers are very important for
some products.

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Retailers, Wholesalers, and Their Strategy Planning

by certain types of products or customers. For example, Fastenal is a wholesaler that
specializes in distributing threaded fasteners used by a variety of manufacturers. It
owns (takes title to) the fasteners for some period before selling to its customers. If you
think all merchant wholesalers are fading away, Fastenal is proof that they can serve a
needed role. In the last decade Fastenal’s profits have grown at about the same pace as
Microsoft’s.32
Exhibit 12–7 shows that almost 85 percent of the wholesaling establishments in the
United States are merchant wholesalers—and they handle more than 64 percent of
wholesale sales. Merchant wholesalers are even more common in other countries.
­Japan is an extreme example. Products are often bought and sold by a series of
­merchant wholesalers on their way to the business user or retailer.33


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Henry Schein is the largest
distributor of health care
products and services to
office-based practitioners in
North America. It also serves
many international countries.
It operates as a full-service
wholesaler for medical, dental,
and veterinary professionals.
Copyright © Henry Schein, Inc. All
rights reserved.

Cash-and-carry

wholesalers want cash

Cash-and-carry wholesalers operate like service wholesalers—except that the customer must pay cash. In the United States, big warehouse clubs have taken much of
this business. But cash-and-carry operators are common in less-developed nations
where very small retailers handle the bulk of retail transactions. Full-service wholesalers often refuse to grant credit to small businesses that may have trouble paying
their bills.

Drop-shippers do not
handle the products

Drop-shippers own (take title to) the products they sell—but they do not actually
handle, stock, or deliver them. These wholesalers are mainly involved in selling. They
get orders and pass them on to producers. Then the producer ships the order directly to
the customer. Drop-shippers commonly sell bulky products (like lumber) for which
additional handling would be expensive and possibly damaging. Drop-shippers in the
United States are already feeling the squeeze from buyers and sellers connecting
­directly via the Internet. But the progressive ones are fighting back by setting up their
own websites and getting fees for referrals.

Truck wholesalers
deliver—at a cost

Truck wholesalers specialize in delivering products that they stock in their own
trucks. Their big advantage is that they promptly deliver perishable products that regular wholesalers prefer not to carry. A 7-Eleven store that runs out of potato chips on a
busy Friday night doesn’t want to be out of stock all weekend! They help retailers keep
a tight rein on inventory, and they seem to meet a need.

Rack jobbers sell hardto-handle assortments

Rack jobbers specialize in hard-to-handle assortments of products that a retailer

doesn’t want to manage—and rack jobbers usually display the products on their own
wire racks. For example, a grocery store or mass-merchandiser might rely on a rack
jobber to decide which paperback books or magazines it sells. The wholesaler knows
which titles sell in the local area and applies that knowledge in many stores.

Catalog wholesalers
reach outlying areas

Catalog wholesalers sell through catalogs that may be distributed widely to
smaller industrial customers or to retailers that might not be called on by other
wholesalers. Customers place orders at a website or by mail, e-mail, fax, or telephone. These wholesalers sell lines such as hardware, jewelry, sporting goods, and

328