CHAPTER 3:

RETAIL
INSTITUTIONS
BY OWNERSHIP

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 Inc. publishing as Prentice Hall 4-2
 Figure 4-1: A Classification Method for
Retail Institutions
I
Ownership

II
Store-Based
Retail Strategy Mix

III
Nonstore-Based
Retail Strategy Mix
©2013 Pearson Education Inc. publishing as Prentice Hall 4-3
 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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-5

 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 Inc. publishing as Prentice Hall 4-6

 Figure 4-2: Useful Online
Publications for Small Retailers

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 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
©2013 Pearson Education Inc. publishing as Prentice Hall 4-8
 Competitive State of Chains
Advantages Disadvantages
• Bargaining power • Limited flexibility
• Cost efficiencies
• Higher investment costs
• Efficiency maintained
• Complex managerial
by computerization,
warehouse sharing, control
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
©2013 Pearson Education Inc. publishing as Prentice Hall 4-9
 Figure 4-3: Louis Vuitton – A
Powerhouse of Upscale Retailing

©2013 Pearson Education Inc. publishing as Prentice Hall 4-10

 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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-11

 Franchise Formats
Product/ Trademark Business Format
• Franchisee acquires • Franchisee receives
the identity of a assistance: location,
franchisor by quality control,
agreeing to sell
products and/or accounting systems,
operate under the startup practices,
franchisor name management training
• Franchisee operates • Common for
autonomously restaurants, real-
• 2/3 of retail estate
franchising sales
©2013 Pearson Education Inc. publishing as Prentice Hall 4-12
 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 Inc. publishing as Prentice Hall 4-13

 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
©2013 Pearson Education Inc. publishing as Prentice Hall 4-14
 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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-15

 Franchise Disclosure
Document Contents (cont)
• Renewal, Termination, Repurchase, Modification
and Assignment of the Franchise Agreement
and Related Information
• Arrangements with Public Figures
• 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
©2013 Pearson Education Inc. publishing as Prentice Hall 4-16
 Dunkin’ Donuts Franchise
Disclosure Document

Click Here
to View

©2013 Pearson Education Inc. publishing as Prentice Hall 4-17

 Pros and Cons of
Dunkin’ Donuts Franchise
• Pros:
 No company owned stores
 Outside suppliers can be approved
 No markup on approved signs
 Of 4,543 franchises 16 terminated, none
reacquired by franchisor and 80 ceased
operations– A failure rate of 2.1 percent
 Average sales in Metro NY $914,992– 41.4
percent at or above average
 19 day initial training program
©2013 Pearson Education Inc. publishing as Prentice Hall 4-18
 Pros and Cons of
Dunkin’ Donuts Franchise
• Cons
• No exclusive territory, can license other retailers to
sell donuts, seek to convert other donut shops to
Dunkin’ Donuts, can sell donuts in supermarkets,
convenience stores, airports, universities
• Referral incentives to existing franchises, franchise
brokers
• Pages 12-34 litigation history. In one case DD
settled with payment of $780,000 to plaintiff; in
another repurchased franchise for $1.1 million
• Continuing franchise fees 5.9 percent of sales,
continuing advertising fee 5.0 percent of sales, loan
guarantee fee 1 percent of loan amount + net, net,
net lease
©2013 Pearson Education Inc. publishing as Prentice Hall 4-19
 Pros and Cons of
Dunkin’ Donuts Franchise
•Cons
 Board member sells eggs
 DD has right to approve advertising
 DD can appoint additional members to
Brand Advisory Council, can dissolve
council, council is only advisory

20
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 Figure 4-6: Structural Arrangements
in Retail Franchising

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 Wholesaler-Retailer
Structural Franchising Arrangements
• Voluntary: A wholesaler sets up a
franchise system and grants franchises to
individual retailers
• Cooperative: A group of retailers sets up
a franchise system and shares the
ownership and operations of a wholesaling
organization

©2013 Pearson Education Inc. publishing as Prentice Hall 4-22

 Figure 4-7: Franchise and Business
Opportunities

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 Competitive State of
Franchising
Advantages Disadvantages
• low capital required • over-saturation could
• acquisition of well- occur
known names • franchisors may
• operating/ overstate potential
management skills • contractual
taught confinement
• cooperative • agreements may be
marketing possible cancelled or voided
• exclusive rights • royalties are based
• less costly per unit on sales, not profits

©2013 Pearson Education Inc. publishing as Prentice Hall 4-24

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

franchisee/operation may affect

s are set and customer loyalty
• ineffective
enforced
franchised units
• money obtained at may damage resale
delivery value, profitability
• royalties represent • potential limits to
revenue stream franchisor rules
©2013 Pearson Education Inc. publishing as Prentice Hall 4-25
 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
©2013 Pearson Education Inc. publishing as Prentice Hall 4-26
 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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-27

 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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-28

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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-29

 Figure 4-8a: Vertical Marketing Systems
Independent Channel System

Functions:
Manufacturing
Wholesaling
Retailing

Ownership:
Independent Manufacturer
Independent Wholesaler
Independent Retailer
©2013 Pearson Education Inc. publishing as Prentice Hall 4-30
 Figure 4-8b: Vertical Marketing Systems

Partially Integrated Channel System

Functions:
Manufacturing
Wholesaling
Retailing

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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-31

 Figure 4-8: Vertical Marketing Systems

Fully Integrated Channel System

Functions:
Manufacturing
Wholesaling
Retailing

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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-32

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

©2013 Pearson Education Inc. publishing as Prentice Hall 4-33

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