7.5.1 Introduction to Retailing¶
Retail is a significant part of distribution, and India is often referred to as a "country of retailers" or "shopkeepers," where shopkeeper is colloquially used to describe the retail business. Let's take a closer look at the key factors in the retail business, as it plays a crucial role in the distribution chain.
1. Definition and Origin of Retail¶
The term "retail" is derived from the French word "Retailier", which means "to cut a piece off" or "to break the bulk." Essentially, retail refers to the process of selling goods in small quantities, typically to the final consumer.
Key Points:¶
- Retail Business: The business activities involved in selling goods and services directly to consumers for their personal or household use. It does not involve reselling products or processing goods for further sale (i.e., B2B is not part of retail).
- Not for Resale: Retail is specifically focused on final consumption by individuals or households, not intermediate businesses.
2. Retail Revenue Model¶
A typical retail revenue model involves the retailer obtaining merchandise from manufacturers or suppliers and then selling it directly to consumers. The revenue flow in retail can be simplified as follows:
- Manufacturer/Supplier ➔ Retailer ➔ Consumer
- Consumer pays the retailer for goods.
- The Retailer then pays the Manufacturer/Supplier for the goods they sell.
The retailer earns money by marking up the price they pay to the supplier, allowing them to generate profit from the difference between the wholesale and retail price.
Important Considerations for Retailers:¶
- Supplier Relationship: Retailers need to maintain strong relationships with suppliers to ensure a smooth supply chain and avoid disruptions in stock.
- Customer Understanding: Retailers must understand consumer behavior to stock products that align with customer preferences. Knowing how and what customers purchase is crucial for successful retail operations.
- Segmentation, Targeting, and Positioning (STP): Understanding the target market segments, positioning products to meet customer needs, and tailoring marketing efforts are essential for retailers.
3. Retailer’s Role in the Supply Chain¶
Retailers sit between the manufacturer/supplier and the consumer in the distribution channel. Their role is critical in ensuring that the products are available in a format and quantity that aligns with consumer demand.
Key Roles of Retailers:¶
- Stocking Products: Retailers select products based on customer preferences and demand.
- Quality Control: They ensure the products they sell meet the required quality standards, especially when they deal with suppliers who do not have widely known or branded names.
- Branding: Retailers may create private labels, which are unbranded products that are produced by suppliers but sold under the retailer’s own brand name. This allows retailers to offer goods at lower prices, while still maintaining control over the branding and quality.
4. Private Labels in Retail¶
Many large format retailers are successful because they sell a significant portion of their products under their own private labels. Private labels are products that are not branded by the manufacturer but are instead marketed with the retailer’s brand.
Benefits of Private Labels:¶
- Higher Margins: Retailers earn a higher profit margin by offering products under their own brand since they control pricing and quality.
- Increased Control: Retailers can maintain strict quality control and customize products to better meet the needs of their customers.
- Differentiation: Private labels help retailers differentiate their products from competitors who may sell similar branded items.
Example:¶
Retailers like Walmart, Target, and Reliance are successful largely because they offer a wide range of private label products, allowing them to control pricing, quality, and margins more effectively.
5. Revenue Flow in Retail Business¶
The revenue flow in retail can be visualized in a simple model: 1. Manufacturer/Supplier: Supplies products to the retailer. 2. Retailer: Marks up the price and sells products to the consumer. 3. Consumer: Purchases products for personal or household use.
Retailers may sometimes manufacture their own products (e.g., through private labels), but generally, they rely on external suppliers to provide the goods that are sold in their stores or online platforms.
Conclusion¶
The retail business plays a pivotal role in the distribution process, acting as the intermediary between manufacturers/suppliers and consumers. Retailers need to: - Build strong supplier relationships. - Understand consumer behavior and preferences. - Manage inventory and stock products that align with customer demand. - Leverage private labels to increase profitability and gain a competitive advantage.
While many large retailers have shifted towards private labeling to maximize margins, the core principle of retail remains the same: selling products to consumers for personal or household use.
This understanding of retail is crucial, especially given the significance of retail in India’s economy, which is often referred to as a “country of retailers.”
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