Unpacking Retail – The 4 retail models and how to win in each

The retail landscape is changing due to the emergence of pure play digital alternatives, the dominance of cross-category sellers such as Walmart, and the expansion of consumer information availability.

This article examines the big 4 types of retail model, and the key drivers for success in each of these areas. To keep thinks positive, I’ve avoided listing potential pitfalls for each of these models, but it should be clear from the definitions and opportunities, where the corresponding threats lie.

Model1_final

These brands exist as an extension of their manufacturing arm (whether internalized or outsourced), and live and die on their perceived product quality, brand equity, and marketing prowess.

As they sell very few third party products (nor receive associated co-operative marketing funding) to assist their function, they must focus on their internal marketing and branding approach. Notably, many retailers that fall into this space operate at the highest margins, as they are effectively internalizing the manufacturing portion of the chain and cutting a section of margin erosion from acting in a re-seller capacity. They live and die by brand equity, and the perceived value and quality that customers place on their products.

Examples of this Retailer type include:
– Many Fragrance Stores (Lush, The Body Shop (UK), Bath & Body Works)
– Many Apparel Stores (Nike, Lululemon, Adidas, etc.)
– Intimate Apparel Stores (Victoria’s Secret)

Key Expansion Opportunities:

  • Leveraging their brand power and influence – Pop-Up presence in larger retail can extend reach.
  • Gift Cards, Subscription model and associated gifted services if applicable.
  • Cross-Branding partnerships with influencers and limited co-brand line engagements.
  • Loyalty/CRM strengthening plays through loyalty programs.
  • Third party reselling of limited lines through Mixed Offer (Model #2) retail.

model2_final

A broad spectrum of retailers fall under this umbrella, and even many ‘Pure Play’ brands will include a sub-portion of 3rd party products. For grouping purposes, I’ve grouped retailers where there is a close to 50/50 mix of own brand vs. 3rd Party offerings.

These retailers will often attempt to position their own brand as a viable alternative to the premium branded alternative, and undercut the cost in doing so. Many department stores and grocery chains follow this model.  If successful in driving own brand alternatives, this can be used to offset the higher overheads that operating in large square footage/high service environment (such as department stores).

Examples of this Retailer type include:
– Bulk Buy (Costco, Best Buy)
– Supermarket Chains. (HEB, Kroger, Etc)
– Certain Department Stores (ex: Kohls, Dillards)

Key Expansion Opportunities:

  • Providing competitive landscape and offers for own brand (often through pseudonyms). If successful, this increases margin dollars, and can create independent traffic drivers to the store.
  • Partnership based brand equity building. Utilizing Co-operative marketing funds to drive campaigns & leverage 3rd party brands as a draw.
  • 3rd Party brand exclusive lines where possible from manufacturers (applies most significantly to big box + department chains).
  • Generating influencer tie-ins to own brand offer (or leveraging influencer brand to launch independent lines with exclusive coverage).

Model3_Final

The specialty reseller is seeing the most apparent threat from online alternatives. This is generally because of omni-channel ubiquity of like product, and the slow erosion this creates of the legacy value proposition that these retailers hold.

There are smart strategies to adopt to mitigate this threat, but this environment is becoming increasingly difficult to operate within. Margins are low, as the reseller markup must apply after manufacturer mark-up, Minimum Allowable Pricing (MAP) constraints neuter the reseller’s ability to offer deep discounts and loss leaders to drive traffic, and both ‘Big Box’ and online Pure Play alternatives are compelling options against the incumbent specialty retailer.

Examples of this Retailer type include:
– Specialty Category Retail (GameStop, Guitar Center, Toys R Us)

– Specialty Market Retailers (Buy Buy Baby)
– Pharmacy / Drug Stores (CVS/Walgreens)
– Specialty Sporting Goods (ex: REI, Foot Locker)

Key Expansion Opportunities:

  • Loyalty is a key play for these retailers, though they’re in a tough position and generally they are squeezed more tightly on margin than other models. Retaining and enhancing customer engagement through strong loyalty programs should be seen as a high priority.
  • Driving store traffic through value add services and draws (ex: Event days, supplementary services (ex: GameStop Trade-In), Loyalty driven exclusive offers.
  • Creation & expansion of private label alternatives where opportunities exist.
  • Stronger reliance upon category expertise to drive in-store purchasing decision.
  • Returns policy. A superior returns policy to online and cross-category alternatives can drive positive customer experience and retention.

Model4-finished

The discount reseller often has a sporadic offering that is typically sourced down from excess stock of Model #1 retailers or direct excess from the manufacturer base.

The discount Reseller may have some private label products on offer, but will generally sell a wider assortment per square footage than comparable department stores (which should rightfully be seen as their primary competition).

Examples of this Retailer type include:
– Discount Clothing (ROSS, Marshalls, TK Maxx)
– Discount Cross-Category (Big Lots)
– Deep Discount Stores (Dollar General, Dollar Tree, etc)

Key Expansion Opportunities:

  • Cataloging and digitizing the product offer that is available through these resellers presents a significant untapped opportunity. This can be used to build a supplementary digital sales channel and expand operations.
  • Store Brand Credit Card + Layaway options.
  • Cross-brand loyalty opportunity. I specifically call this out for TK Maxx, HomeGoods and Marshalls as they are all owned by the same company. A central loyalty play would be a great opportunity to build cross brand equity and drive mutual traffic.
  • Category expansion testing. For example, Big Lots sells a very wide variety of products. Other discount resellers should be reviewing their category by category performance to determine areas of expansion opportunity and threats of overstock.

Summary

Bricks and Mortar retail will continue to hold a key place in the future of our shopping activities, but it is critical for brands to assess and recognize their offer and their position within the market and ensure that the offer they’re presenting resonates with the value proposition of their brand, and the key drivers of their customers.

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