CHAPTER 4: RETAIL

INSTITUTIONS BY
OWNERSHIP
Presented by
Dr. Alphonse Aklamanu
GIMPA BUSINESS SCHOOL
Email : aaklamanu@gimpa.edu.gh
Office : D Block 24

4-11
 Chapter Objectives
• To show the ways in which retail
institutions can be classified
• To study retailers on the basis of
ownership type and to examine the
characteristics of each
• To explore the methods used by
manufacturers, wholesalers, and
retailers to exert influence in the
distribution channel

©2013 Pearson Education 4-2

 I
Ownership

II
Store-Based
Retail Strategy Mix

III
Nonstore-Based
Retail Strategy Mix
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 Ownership Forms
• Independent
• Chain
• Franchise
• Leased department
• Vertical marketing system
• Consumer cooperative

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 Independent Retailers
• 2.2 million independent U.S. retailers
• Account for one-third of total store sales
• 70% of independents operated by owners
and their families
• Why so many? Ease of entry

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 Competitive State of Independents
• Advantages • Disadvantages
• Flexibility in formats, • Lack of bargaining
locations, and strategy power
• Control over investment • Lack of economies
costs, personnel of scale
functions, and strategies • Labor intensive
• Personal image operations
• Consistency and • Over-dependence
independence on owner
• Strong entrepreneurial • Limited long-run
leadership planning

©2013 Pearson Education 4-6

 Chain Retailers
• Operate multiple outlets under
common ownership
• Engage in some level of
centralized or coordinated
purchasing and decision making
• In the U.S., there are roughly
110,000 retail chains operating
about 900,000 establishments
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 Competitive State of Chains
Advantages Disadvantages
• Bargaining power • Limited flexibility
• Cost efficiencies • Higher investment costs
• Efficiency maintained
• Complex managerial
by computerization,
control
warehouse sharing,
and other functions • Limited independence

• Defined management among personnel

philosophy • Excessive
• Considerable efforts in standardization due to
long-run planning extreme concern for
bargaining power
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 Figure 4-3: Louis Vuitton – A
Powerhouse of Upscale Retailing

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 Franchising
• A contractual agreement between a
franchisor and a retail franchisee that
allows the franchisee to conduct business
under an established name and according
to a given pattern of business
• Franchisee pays an initial fee and a
monthly percentage of gross sales in
exchange for the exclusive rights to sell
goods and services in an area

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 International Franchising

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 Franchise Formats
Product/ Trademark
Business Format
• Franchisee acquires • Franchisee receives
the identity of a assistance: location, quality
franchisor by agreeing control, accounting systems,
to sell products and/or startup practices,
management training
operate under the • Common for restaurants,
franchisor name food outlets, real-estate,
• Franchisee operates service retailing
autonomously • More interactive relationship
• Accounts for 80 percent of
• Represent 2/3 of retail franchised outlets, but only
franchising sales 40 percent total sales
• E.g. auto dealers, gasoline • www.macdonals.com/corp/franchise/
service stations franchisinghome.html

©2013 Pearson Education 4-13

 Figure 4-5: Business Qualifications
Sought by McDonald’s for Potential
Franchisees
Experience Financial resources

Growth capability Strong credit

Ideal
Franchisee Customer and
Planning ability
employee focus
Ability to manage Willingness to
finances complete training
Full-time
commitment

©2013 Pearson Education 4-14

 Franchise Disclosure
Document Contents
• The Franchisor and Any Predecessors
• Litigation History
• Bankruptcy (i.e., any franchisees who may
have filed)
• Listing of the Initial Franchise Fee and Other
Initial Payments
• Other Fees and Expenses
• Statement of Franchisee's Initial Investment
• Obligations of Franchisee to Purchase or
Lease from Designated Sources
• Obligations of Franchisee to Purchase or
Lease in Accordance with Specifications or
from Authorized Suppliers
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 Franchise Disclosure
Document Contents (cont)

• Financing Arrangements
• Obligations of the Franchisor; Other
Supervision, Assistance or Services
• Exclusive/Designated Area of Territory
• Trademarks, Service Marks, Trade Names,
Logotypes and Commercial Symbols
• Patents and Copyrights
• Obligations of the Franchisee to Participate in
the Actual Operation of the Franchise Business
• Restrictions on Goods and Services
Offered by Franchisee
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 Franchise Disclosure
Document Contents (cont)

• Renewal, Termination, Repurchase,

Modification and Assignment of the Franchise
Agreement and Related Information
• Actual, Average, Projected or Forecasted
Franchise Sales, Profits or Earnings
• Information Regarding Franchises of the
Franchisor
• Financial Statements
• Contracts
• Acknowledgment of Receipt by Respective
Franchisee
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 Manufacturer-Retailer
Structural Franchising Arrangements

• A manufacturer gives independent

franchisees the right to sell goods and
related services through a licensing
agreement
• (E.g.
• Auto/truck dealers (General motors)
• Petroleum product dealers (BP, Total, ExxonMobil )

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 Wholesaler-Retailer
Structural Franchising Arrangements
• Voluntary: A wholesaler sets up a
franchise system and grants franchises to
individual retailers (e.g. Auto accessories stores
(Champion Auto), Consumer electronic stores (Radio Shack)
• Cooperative: A group of retailers sets up
a franchise system and shares the
ownership and operations of a wholesaling
organization (Food stores, Hardware stores)

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 Service Sponsor-Retailer
Structural Franchising Arrangements

• A service firm licenses individual

retailers so they can offer specific
packages to consumers
• (e.g.
• Auto rental firms (Hertz),
• Fast-food restaurants (McDonald’s, KFC,
Starbucks)
• Hotels (Hilton, Days Inn)

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 Figure 4-6: Structural Arrangements
in Retail Franchising

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 Competitive State of
Franchising
Advantages Disadvantages
• acquisition of well- • over-saturation could

known names occur

• franchisors may
• operating/
overstate potential
management skills
• contractual confinement
taught
• agreements may be
• cooperative
cancelled or voided
marketing possible • royalties are based on
• exclusive rights
sales, not profits
• less costly per unit

©2013 Pearson Education 4-22

 From the Franchisor’s Perspective
Benefits Potential Problems
• national or global • potential for harm to
presence possible reputation
• qualifications for • lack of uniformity may

franchisee/operations affect customer loyalty

• ineffective franchised
are set and enforced
• money obtained at
units may damage
resale value, profitability
delivery • potential limits to
• royalties represent
franchisor rules
revenue stream

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 Potential Conflicts Between
Franchisor and Franchisee
• High power of franchisor relative to
franchisee. Franchisee needs franchisor
approval to sell business, and to extend
franchise. Lease is generally in name of
franchisor
• Franchisor obtains profit based on gross
sales, not on franchisee’s profitability
• Franchisor requires goods and services to
be purchased from itself or approved vendor
• Franchisor can break up territory of existing
franchisee, reducing its sales and profitability
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 Leased Departments
• A leased department is a department in a
retail store that is rented to an outside
party
• The proprietor is responsible for all aspects of
its business and pays a percentage of sales
as rent
• The department store sets operating
restrictions to ensure consistency and
coordination

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 Competitive State of Leased
Departments
Benefits Potential Pitfalls
• provides one-stop • lessees may negate

shopping to store image

customers • procedures may
• lessees handle conflict with
management department store
• reduces store costs • problems may be

• provides a stream blamed on department

of revenue store rather than
lessee

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 Common Leased Departments
for Department Stores
• Cosmetics/Fragrances
• Beauty Salon/Spa
• Fine Jewelry
• Furs
• Photography studio (CPI)
• Optical

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 Example of Department Store

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 Independent Channel System

Functions:
Manufacturing
Wholesaling
Retailing

Ownership:
Independent Manufacturer
Independent Wholesaler
Independent Retailer
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 Partially Integrated Channel System

Functions:
Manufacturing
Wholesaling
Retailing

Ownership:
Two channel members own all
facilities and perform all functions.

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 Fully Integrated Channel System

Functions:
Manufacturing
Wholesaling
Retailing

Ownership:
All production and distribution functions
are performed by one channel member.

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 Figure 4-9: Sherwin-Williams’ Dual
Vertical Marketing System

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 Question for Discussion

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