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Retail Business Model In A Nutshell
A retail business model follows a direct-to-consumer approach, also called B2C , where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based; it carries higher margins but also higher costs and distribution risks.
Introducing the Retail Business Model
As a classic example of a retail business model , think of the local coffee shop or restaurant.
The coffee shop owner buys a set of products in bulk from wholesalers (coffee beans, foods, drinks, etc.), thus paying for these products at a low price and selling them back in its store with a high markup.
For instance, as a trivial example, the coffee shop might buy a coffee bag at $100 and, with that, make 100 coffees, which it will sell at $3 each, thus turning the $100 into $300.
That all seem simple, yet there are a few things to take into account when it comes to retail business models .
In fact, while the retail business model runs with higher margins than wholesale, there are a few critical differences. And a few things to take into account:
Local and direct access to customers
The retailer distribution is mostly local.
Therefore, just like in the case of the coffee shop, the retailer can build a strong tie with the local community to enjoy repeat customers who help the local shop’s bottom line.
The local shop enjoys higher margins, given the fact it can sell directly to customers.
Therefore, transform a simple product (perhaps a bag of coffee) into a product served to customers and, therefore, with an incredible markup.
While the local shop might enjoy high gross margins, in reality, its net margins might be pretty tight (that’s because the local shop needs to pay for expenses like a rental in a central area, personnel costs, and so on) which makes it hard for it to survive in the long run.
Therefore, the retailer does take on its shoulders the distribution risks, associated with the costs of running the overall business and making sure that a continuous stream of customers and repeat customers feed the business.
In some cases, local competition can also be very strong.
Take the case of the ice cream shop, which is a retailer that enjoys very tight margins, as you might find in the same neighborhood many others selling the same product, thus leading to saturation of the local market and a price competition that erodes the bottom line.
The same applies to local shops like gas stations, where margins on the main product (the oil) are extremely low.
And instead, the real money will be made by selling ancillary products at much higher margins (like candies, drinks, snacks, and so on).
Wholesale prices fluctuations
Since the retailer usually does not control the supply chain it might also be exposed to price fluctuations that it can’t control.
Take the case of the increased price of coffee beans for coffee shops, which can’t be easily translated into the final product (the cup of coffee) as this would disappoint local customers, thus threatening the survival of the business.
To have more control over prices and on the overall supply chain, retailers might expand upward.
Take the case of a coffee shop that buys coffee plants and the machinery to make that coffee.
While much more expensive to control the supply chain, this might give more stability to the retail business in the long term.
While direct-to-consumer wasn’t common decades ago.
With the rise of the Internet and the access of millions of consumers, many companies in various industries have converted to this model .
One example is Tesla which, by opening local showrooms across large cities (similar to the Apple store), can sell directly its cars to consumers.
Therefore, enjoying higher margins (as it doesn’t have to pay middlemen and car dealers) and access to customer feedback.
How can retail business models survive and thrive long-term?
As we saw, the retail business model has the advantage of having direct access to local consumers.
Therefore, it can build a strong tie with the local community to build a profitable business.
Yet, we also saw that the local retailer also carries distribution risks and that local competition can also be fierce.
In addition, since the retailer does not control the supply chain, it might be subject to price swings for the raw products, which it can’t pass to local consumers so easily as this would lead to a loss of its customer base.
How do you deal with these?
Strong local community
A retailer should focus on understanding the local community as a primary focus.
In fact, by building ties with the neighborhood, it can develop a product offering tied to that.
This is a long-lasting advantage.
Hard to copy products and experience
While many retail shops sell products that can be easily copied. It can also offer an experience around the product, which is hard to copy.
As an example, the same coffee shop can become the second home for many of the neighborhoods, which goes there to work, hang out and organize local events.
Go upstream and innovate the product
The retailer can also, over time, try to control more steps of the supply chain upward so as to have more control over price swings.
Perhaps thinking of an ice cream shop, instead of selling the same ice cream, it can open its lab to make its own ice cream and experiment with new tastes.
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The Elements of a Retail Business Model
July 28, 2010 By Patricio Ramos , Rob Souza , and Pedro Esquivias
Some retailers assume that a little tinkering with the value proposition is all it takes to adapt to changes in the marketplace. Although it is almost always necessary to keep the value proposition aligned with shifts in the market, the most successful retailers make significant improvements in their operating model as well, because the value proposition and operating model together are responsible for the entire business model’s success. (See the exhibit.)
The value proposition is the differentiating offer the company makes to its customers. It includes the following elements:
- The product or service, including the depth and breadth of assortment, private-label options, and product quality
- The customer’s shopping experience, including the physical layout of the store and the arrangement of merchandise
- The pricing and revenue model, including the pricing strategy (such as high-low or everyday low prices) and value-added services, such as free delivery
The operating model supports the value proposition by enabling the retailer to fulfill its pledge to its customers. It includes the cost model (sourcing and store operations), the value chain structure (degree of integration with suppliers and logistics, for example), and the organizational processes. Most managers’ time and resources tend to be focused on changes to only one or two elements of the business model. Few companies think about changing it entirely.
We recommend that a retailer begin optimizing its business model by using deep “customer discovery” techniques to identify what its target customers like and dislike in the product and shopping experience, as well as their shopping patterns. It can then develop a value proposition that serves those target customers and an operating model that enables the company to effectively deliver it.
A business model developed in this way evolves with changes in the environment, and the value proposition continues to be aligned with the needs of consumers. The retailer should also leverage opportunities that the operating model provides to create differentiating features in its value proposition.
Consider Grand Frais, a growing French retailer specializing in ultrafresh fruits, vegetables, fish, cheese, and meat. It leveraged the abilities and know-how of its owners—most of which are wholesalers specializing in specific categories, such as fish (Zeus Faber) and fruits and vegetables (Prosol Gestion)—to create a competitive offering in each category combining optimized product assortment and very attractive prices. The result was a new business model that has succeeded in capturing a growing share of the highly competitive French market.
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What is retail.
Retail is the sale of goods and services in small quantities to the consumers for use or consumption.
A retailer is a person or business who buys goods from manufacturers or wholesalers in large quantities, and sells them in small quantities to the end consumer at a higher unit price.
Types of Retail Businesses
The North American Industry Classification System ( NAICS ) categorizes retail businesses into two types:
- Store retailers : these are the normal brick & mortar retail stores .
- Non-store retailers : these include ecommerce businesses, mail-order houses, vending machine operators and direct selling establishments.
Types of Retail Stores
1. Clothing & accessories stores 2. Furniture & home furnishings stores 3. Building materials & garden equipment and supplies dealers 4. Electronic & appliance stores 5. Food & beverage stores: grocery stores, supermarkets, convenience stores , specialty food stores.. 6. Health & personal care stores: Pharmacies, beauty supplies, cosmetics, optical goods.. 7. Sporting goods, hobby, book and music stores 8. General merchandise stores: Department stores, warehouse clubs and superstores.. 9. Gasoline Stations 10. Motor vehicle & parts dealers 11. Miscellaneous store retailers: Florists, office supplies, gifts, used merchandise 12. Non-store retailers: Electronic shopping , mail orders , vending machine businesses , direct selling..
How Retail Business Works?
The business model of retailing involves buying merchandise in large quantities from wholesalers (or manufacturers) at low price and selling it in small quantities to the general public at higher price. The difference in price is called gross profit .
Retailers operate the business through different functions to deliver this final service of making merchandise available to the end consumer to buy through a convenient channel at a profitable margin for the business.
For the big picture, read our article Retail Business Model
Importance of The Retail Industry
Economists always keep an eye on the retail industry and its quarterly sales reports, because it is one of the most vital sectors of the economy.
Not only do these retail sales measure consumption and demand, but this sector is actually the largest private-sector employer in the U.S, supporting 1 in 4 U.S jobs. There are currently 52 million jobs supported by retail .
From a customer’s point of view the importance of this industry also lies in the convenience it provides for customers to fulfill their daily shopping needs through the different retailing channels.
Frequently Asked Questions
Yes, it is. Ecommerce falls under the non-store retailers sub-sector. This sub-sector also includes selling through infomercials, selling through catalogues, door-to-door selling, in-home demonstration and selling through vending machines.
A retail or ecommerce business will typically have the below functions: Buying : Involves choosing the product assortments and dealing with suppliers Merchandising : Ensures products are allocated to stores in right quantities at the right time Visual Merchandising : Organizes how products are displayed in the stores to drive sales of merchandise Operations : Ensures stores are operating on a daily basis according to company’s standards & procedures Sales : The sales team on the floor that serves the final customers Warehousing & Logistics : Deals with receiving goods, storage of goods and delivering goods to the stores or final customers (ecommerce) Marketing : Promotes the company’s products through different channels and drives traffic to the stores Retail Audit : Ensures stores are following the company’s guidelines to prevent stock loss or financial loss. Finance & Accounting : Dealing with all the financial aspects of the business from budgeting to final reporting.
To start a retail or ecommerce business you first need to decide about which type of retail business you want to be in. After that you will start deciding about the products you want to carry in your store and where & how to source these products from and at what margin can you sell them. Then you will start looking at different locations and choose the best location for your retail business, that also complies with your budget. Based on all the information that you have gathered in the previous steps, you will then draft down your financial projections for your business. This is to know whether buying and selling these products at these margins, and paying the costs related to the business will result in profit at the end. It will also show you how much cash you will have available, to make sure you can meet your expenses, pay your suppliers and also pay yourself on time. You will finally need to determine how much capital you will need to start and how you will arrange for this capital.
Learn About Retail
If you are still new to the retail industry, we recommend reading all the free materials here on Retail Dogma first and get to know more about retail math , financials and the different functions of retail, and then proceed to the preparation stage to open your retail or ecommerce business.
The Professional Retail Academy (PRA)™ also offers a unique curriculum of online retail management courses , that teaches everything you need to start and run a retail business.
RETAIL MANAGEMENT 101
- Foundations of Retail Management
- Key Retail Functions
- Keys to Success
- Starting a Retail Business
- How to Make Money Through Ecommerce
- How Do Retail Stores Make Money?
- How Much Inventory Do You Need?
- Retail Budgeting Process
- P&L Management
CONNECT THE DOTS
Learn how to manage a retail business end-to-end.
We’ve put together a curriculum, specifically designed for retail owners or retail professionals who want to advance into senior management roles.
Learn how to connect the dots of the business and take the basic knowledge to the next level of application .
- Asset Management
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- HRMS & Payroll
- Manufacturing Processes
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- Procure to Pay
- Plan to Perform (Projects)
- Tax & Compliance
- Treasury Management
- Warehouse Management
- Aerospace Industry
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- BFSI Industry
- Consumer/ FMCG Industry
- Chemicals Industry
- Engineering & Construction
- Energy Industry
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Retail Industry: Revenue Model
Understand the traditional retail revenue model and, what are the variations in different revenue models adopted by key players in the retail industry. Analyze the pros and cons of various models. The most common and most profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a mark-up from the actual cost.
Revenue Models – Retail:
Successful retail operations depend largely on two main dimensions: margin and turnover. How far a retail enterprise can reach in margin and turnover depends essentially on the type of business (product lines) and the style and scale of the operations. In addition, the turnover also depends upon the professional competence of the enterprise. Margin is defined as the percentage mark tip at which the inventory in the store is sold and turnover is the number of times the average inventory is sold in a year.
In a given business two retail companies may choose two different margin levels, and yet both may be successful, provided the strategy and style of management are appropriate.
Given below are some revenue models adopted by the players of the retail industry:
1. Low Complexity, Low Margin, High Turnover Potential
The most common and most profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services directly to buyers at a mark-up from the actual cost. In the first model, the retailer assumes that low price is the most significant determinant of customer patronage. Low-cost retailers generally sell to the mass market with a strong emphasis on price over quality or other premium product/service attributes.
The stores in this category price their products below the market level. Marketing communication focuses mainly on price. Low-cost retailers typically offer a high number of SKUs at the best possible price. By emphasizing price, the low-cost retailer operates on very low margins and must have the market power to negotiate deep discounts from its suppliers, coupled with significant operational efficiencies. They provide very few services; if any, and they normally entail an extra charge whenever they do. The merchandise in these stores is generally pre-sold or self-sold. This means that the customers buy the product, rather than the store selling them.
Amazon and Wal-Mart serve as the best examples of low-cost retailers. Wal-Mart benefits from its vast size in the physical retail space, leveraging its volume operations in the digital space. Amazon has created its own efficiencies using digital technology. Pantaloon Chain and Flipkart are the Indian examples of such stores.
2. High Margin Low Turnover
This operation is based on the premise that distinctive merchandise, service, and sales approach are the most important factors for attracting customers. Premium retailers target highly segmented markets with an emphasis on prestige, quality, and performance much more than price. Stores in this category price their products higher than those in the market, but not necessarily higher than those in similar outlets. Many premium retailers find that higher prices positively correlate to the prestige of the brand. In many cases, the premium retailer sells its own branded products instead of reselling other brands. The focus in marketing communication is on product quality and uniqueness.
Merchandise is primarily sold in store and not pre-sold. These stores provide a large number of services and sell select, categories of products. They do not stock national brands that are nationally advertised. These retailers manufacture their own or work with contract manufacturers to develop name brand products for sale at premium prices. Typically, a store in this category is located in a downtown area or a major shopping center. Sales depend largely on salesmanship and image of the outlet.
Williams-Sonoma and Victoria's Secret are examples of premium retailers who have developed their own mainstream premium product category by selling quality, private-label products. Gilt Groupe is an example of a digital premium retailer that has created an outlet to sell other premium brands to a targeted group of customers.
3. High Margin High Turnover Stores
These stores generally stock a narrow line of products with a turnover of reasonably high frequency. Cost-plus retailers generally sell to a segmented mass market, trying to maintain comfortable margins instead of focusing on price, and justifying those margins through quality, service, and selection.
They could be situated in a noncommercial area but not too far from a major thoroughfare. Their locational advantage allows them to charge a higher price. High overhead costs and, low volumes also necessitate a higher price. Most cost plus retailers choose specific product segments, such as computers and electronics or office supplies, and develop a level of expertise that mass-market retailers cannot match. Others may offer a broad product offering but emphasize shopping experience or a higher level of customer service.
Staples and Best Buy represent the best examples of cost-plus retailers that focus on specific product categories, while Target is a good example of a cost-plus retailer that offers a broad array of products.
4. Low Margin-Low Turnover Stores
Retail enterprises in this category are pushed to maintain low margins because of price wars. Compounding this problem is the low volume of sales, which is probably a result of poor management, unsuitable location etc. such businesses, normally get wiped out over a period of time. These retailers spend most of their time fighting for sales volume and trying to build customer loyalty.
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Retail Industry – Drivers & Dynamics
To succeed in the retail sector, retailers must offer compelling value propositions and be responsive to market dynamics. The continued rise of e-commerce has altered the dynamics of the retail industry in such a way that has forced retailers to drastically reallocate their resources to multi-channel strategies. This article focuses on retail industry drivers and dynamics that provide the reader with a basic understanding of the factors that influence this trade. Understand the business drivers and dynamics of retail industry
Retail Industry: Value Chain
The retail value chain defines a series of actions that enable businesses to sell their products to customers. Value Chain for any industry describes how an industry is structured and its methods for maximizing revenues. Learn the value chain of the industry. Learn about the key partners, key activities, cost structures, and revenue streams of the retail sector. The value/supply chain analysis reveals the business activities which comprise the movement of retail goods.
Competitive Landscape of Retail Industry
In an increasingly competitive landscape, retail industry players must compete in a number of ways. In this article, we will learn about the competitive landscape of the retail industry. Learn the key players in the retail industry and their business profile. Learn more about the top 5 industry players. Competition is rough, especially for the small business. Knowing how business stacks up to the competition is important to your business strategy.
Overview of Retail Industry
Retailing is the combination of activities involved in selling or renting consumer goods and services directly to ultimate consumers for their personal or household use. In addition to selling, retailing includes such diverse activities as, buying, advertising, data processing, and maintaining inventory. This article explains the meaning of retail and its etymology. Understand the meaning and constituents of the retail industry and the role it plays in the economy of any nation.
Retail Industry - Business Model
A retail business model articulates how a retailer creates value for its customers and appropriates value from the markets. In retail, a business model would dictate the product and/or services offered by the retailer, the pricing policy that he adopts. Many different types of retail establishments exist, and, the overall industry has seen a significant blurring of the boundaries that separated the wide range of retail businesses. Understand the key business models adopted by the retail industry. Understand the distinctive ways that retail industry players use to reach to the end consumer.
Importance of Retail Industry
Consumers benefit from retailing as retailers perform marketing functions that make it possible for customers to have access to a broad variety of products and services. Retailing also helps to create a place, time, and possession utilities. A retailer's service also helps to enhance a product's image. Retailing has a tremendous impact on the economy. It involves high annual sales and employment. Learn the importance of the retail industry in this article.
Retail Industry: Key Performance Metrics
You cannot manage what you do not measure and cannot measure what you do not define. Learn the key performance metrics for the retail industry like Sales per square foot, Gross margins return on investment, Average transaction value, Customer retention, Conversion rate, Foot traffic, and digital traffic and Inventory turnover, etc. These metrics are used across the globe by key industry players to track and improve their performance.
Types of Consumer Goods
From an economic standpoint, there are three main types of consumer goods: durable goods, nondurable goods, and services. For marketing purposes, consumer goods can be grouped into different categories based on consumer behavior, how consumers shop for them, and how frequently consumers shop for them. One of the largest consumer goods groups is called fast-moving consumer goods. This segment includes nondurable goods like food and drinks that move rapidly through the chain from producers to distributors and retailers than on to consumers.
Challenges in Consumer Goods Industry
There are tens of thousands of general consumer products manufacturers in the United States. They compete to develop the best products at the most affordable price for the greatest number of consumers. Challenges for these organizations include meeting the changing demands of customers, maneuvering through a consolidating market, and executing strategies to grow profitably.
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A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a
The Elements of a Retail Business Model · The product or service, including the depth and breadth of assortment, private-label options, and
Changes in strategy require changes in underlying business models. How are retailers planning to generate sales reve- nue, and which operational factors enable.
The business model of retailing involves buying merchandise in large quantities from wholesalers (or manufacturers) at low price and selling it in small
The most common and most profitable revenue model is that of the traditional retailer. The traditional retailer profits by selling products and services
A customer's comfort with the retailer selling the goods and services can drive energy efficiency market sales. Retailers possess a unique ability to leverage
Four Essential Elements for a Strong Retail Business Model · Build a Strong Foundation with Data · Bring Products Closer to the Customer with Home Integration.
Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit.
Business Models in Retail Industry · 1) Online Model –. In this, a retailer operates its shop completely online i.e. website and apps without
Retail Outlet Selling to End Users ... A retail outlet purchases product from a distributor or wholesaler, and then sells those products to the general public or