Download Theoretical Studies on Retail Evolution and more Essays (university) Trade and Commerce in PDF only on Docsity!
Chapter 2: LITERATURE REVIEW
2.0 Introduction:
In this chapter, a detailed review of available literature on the subject is made. The chapter is structured into five sections. While the first section discusses the theoretical studies on retail evolution, the second section deals with empirical studies on retailing. This is then followed by the third section , wherein a review of case studies on the evolution and growth of retailing is made. The fourth section surveys the other studies on the evolution and growth of retailing. The fifth and final section gives the gap analysis.
2.1 Theoretical Studies on Retail Evolution
As mentioned in the introductory section of the study it is planned to study some of the significant theories of retailing, which have emerged in last fifty years. Many researchers have studied the evolution of organized retailing in developed economies like the United States of America and Europe. Researchers propounded various theories on retail evolution, which helped in studying retail evolution patterns in various economies. Out of the various theories, the author wishes to put a few of the theories, which are accepted as universal theories of retailing and are often found being quoted in further research studies. McNair (1958) propounded the Wheel of Retailing theory and Hollander (1966), the Retail Accordion Theory. Blake (1939) summarized the Dialectic Theory of Retail Evolution. Brown (1987) classified these theories based on their nature and grouped them as cyclic theories, environmental theories and conflict theories. Later, researchers carried out studies on these theories to establish if they carry any insights for the future growth of retailing, whether any patterns of retail evolution occur as proposed in these theories and whether such patterns maybe found common across firms in the future growth of retailing. As India is witnessing the growth of organized retailing, an attempt to ascertain the relevance of these theories in the Indian context will be made.
2.1.1 Wheel of Retailing Theory:
McNair (1958) propounded the theory of the Wheel of Retailing. This theory explains a cyclic retail evolution pattern, which he had observed with the European and U.S. organized retail organizations. The Wheel of Retailing is the most frequently cited theory of subsequent researchers. The Wheel of Retailing theory states that the evolution process comprises three stages: entry stage, trade-up stage, and vulnerable stage. This theory is diagramed as a large wheel with three spokes dividing the wheel into three segments or stages. The entry stage of the Wheel of Retailing starts with offering limited merchandise with low prices and retail organizations as a strategy have low margins in order to increase penetration of the market. As the store progresses in its growth, the organization enters the second stage, which is the trade- up stage where the organization offers full services and a range of merchandise in full prices, without any discounts. According to the study by Bennett & Cooper (1984), these firms have the highest profits and a strong cash flow. In the third stage, according to the Wheel of Retailing theory, the wheel turns as the store matures in its growth and faces more competition too. As a retailer reaches this stage he will reduce prices and scale down services too in order to reduce operating costs. In this phase of evolution, the strategy is to drop prices and McNair calls this, “a vulnerable phase as competition may make easy inroads.” According to Bennett & Cooper continuous innovations and sound management practices will help the retailer to sustain growth in this phase. The consecutive cycles as depicted by the Wheel of Retailing (Gist, 1968), support the evolution of department stores, discount stores, supermarkets, shopping centers and even non-store institutions like mail order companies. Mc Nair’s theory is based only on the premise of merchandise pricing in retail organizations in the various stages of their evolution. Currently retail companies follow well researched pricing in accordance with the marketing strategies of the organization. Retail organizations like Big Bazaar in India have positioned themselves as discount stores with the advertising by-line “Is se sastha aur achcha kahin nahin” meaning that one will not get such good products at low prices
evolving from its original discount format. He says that it did let its inventory growth get out of control in 2004-2006, negatively impacting profitability! This clearly shows that the theory is not applicable to a retail organization strategically positioned as a discount format.
2 .1.2 Retail Accordion Theory
Hollander (1966) propounded the Retail Accordion theory, which explained retail evolution as an expanding and constricting trend (like an accordion) in terms of the number of merchandise categories and product assortments. In this theory (which is also cyclical in nature), at the beginning of the retail operation, a retail organization carries a broad assortment of merchandise (i.e., various types of products or product classifications) but does not carry a deep assortment (i.e., various styles within one product classification). At this early stage, the retail organization is a general store. As time passes, the retail organization becomes specialized by carrying a limited line of merchandise with a deep assortment. At this point, the retail organization is a specialty store and at some point every retail organization returns to the inventory profile of the former operations with a broad assortment of many lines of merchandise. The number of lines (i.e., broad vs. narrow) and the depth of inventory (i.e., shallow vs. deep) expand and contract over time. Hollander used general stores, drug stores, supermarkets, department stores, and discount stores in the United States as samples of analysis for the theory (Kim, Sook-Hyun, 2003). He explained the historical changes of a merchandise assortment over time in these retail organization types, and noted that each evolved by following the steps of the Retail Accordion theory. Stern and El-Ansary (1977) proposed a graphic model of Retail Accordion theory with breadth of merchandise line assortment changing across time. In the model, general stores, department stores and shopping centers, were the examples of organization types with broad merchandise lines and they have alternated over time with specialty stores and boutiques, which represent organization types with narrow merchandise lines. Some researchers have attempted to explain retail organization
type evolutions using the accordion theory (Brown, 1987; Hollander, 1966 ). Hollander mentioned that the general store, the most common retail organization type in the 1800s, exemplified a retail organization that followed the Retail Accordion pattern. These retail organizations became merchandise specialists (i.e., department stores) in the early 1900s and as U.S. department stores became more successful, they expanded their product lines to hardware lines, such as automobile products and electronic home appliances. At the end of the 1900s, these stores, burdened with increased operating costs for extensive product lines, started removing non-profitable products, such as hardware lines from their merchandise assortments. Many of these stores eventually returned to a merchandise specialist offering only specific soft product lines such as household textiles and clothing. Davidson (1970) further supported this scenario of the Retail Accordion theory with the example of the retail trend in the 1970s, when broad and shallow (i.e., mass or general line of merchants) retail organizations became narrow and deep (i.e., specialty retailers) retail organizations, indicating the refining of the evolution of stores in the organized retail sector. Alexander and Akehurst (1999) say, “The theories that have emerged within retail management studies have developed without the historical analysis, which would allow for their validation or contradiction. As Hollander has noted from a marketing perspective in the context of Accordion theory of retail change, it is not possible to acknowledge the universality of the wide assortment to narrow assortment alternation, which appears to occur within the retail environment or to prove that such an alternation exists because ‘there are no valid historical statistics on merchandise assortments.’ These thoughts echo Hollander’s earlier comments on the ‘wheel of retailing’, where he observed that historical data on such as ‘retail expense rates is very scarce’ and hence undermine the theoretical framework of the wheel theory.” The accordion theory of retail change in its perspective of narrow to wide merchandise assortment alternation needs to be studied in the current context of category management where Stock Keeping Units (SKU) are managed at a micro
After examining retail evolution during this century, Oren (2006) reaches the conclusion that the dialectic process theory offers the most encompassing, simple, and logical framework for the understanding of recent retail metamorphoses. He contends that there are two established retail forms offered: traditional (store- based) and direct marketing (home-based) and both these forms have been converging in recent years. As this convergence has taken place, a new retailing form has started to emerge: electronic direct marketing. In this system, the marketer uses computers, telecommunication, and video display technologies to reach consumers and to build an interactive relationship with them. Oren emphatically draws a conclusion that this emerging form of retailing will come to have a significant and lasting effect on future retail institutions in the United States. Dixon (1982) studied retailing literature dating from the seventeenth century and he analyzed the areas of store location, store design, merchandise offering, promotion, and pricing. Dixon says that the basic principles of retailing have not changed very much. In his study of the history and development of retail thought over a period of three centuries he says that the right location, a good reputation, active turnover, and strong but honest selling have been recognized as the keys to success in retailing for over three hundred years. The dialectic theory has an organizational approach and not a situational approach. Relating to strategies of retail evolution, this theory revolves around the only aspect of competition. It may not be relevant to every context that as newer organizations will emerge the older ones will become traditional. The characteristics impacting retail evolution in a relevant context will be more appropriate and the theory needs validation in the context of retail growth in India.
2.1.4 Environmental Theories:
Institutions in the evolutionary life cycle emerge, develop, mature and decline as an effect of environmental circumstances. The retail institutions, which have the ability
to adapt to the changes in the environment may survive, while those not able to adapt to such changes will decline. Among studies based on the environmental view, a few focus on specific elements of the environmental mix. The environmental view has strong influences from the Darwinian ecological perspective with natural selection and survival of the fittest. As the environmental theories in general, the environmental view of retail change has a strong focus on the environmental conditions and in some way neglects the different retail institutions own opportunities to initiate change regardless of changes in the environment (Brown, 1987).
2.1.5 Conflict Theories:
The conflict theories hold that retail organizational evolution is derived from inter- institutional conflict. Innovations in the retailing system force the established retailers to respond or adapt to the innovation. Responses could be of two major types, by imitating some or all of the characteristics or by differentiating the threatened institution from the challengers. Brown (1987) opines, “The nature of existing retailing techniques may thus be altered as a result of inter-institutional strife; so much so in fact that completely new forms of retailing may emerge from the conflict.” Kim (2003) studied the evolution of organized retailing in South Korea and he has mentioned that research supports a combination of cyclic, environmental and conflict theories in the evolution of many forms of retail organizations in the USA. He however establishes that all these theories lack evidence of ‘generalizability’. Universality is a common limitation among retail evolution theories. The theories of retail evolutions have been discussed in the context of the economy, evolved consumer markets where the dynamics of evolution have followed similar patterns and the purchase power parity. They relate to the evolution of retail by changes largely in terms of merchandise pricing and range characteristics. Pioneer retailers thrive well throughout the early stages of existence and organized retailing in India is just a decade old. The engagement of these theories in the context of a retail
Brown (1992) applied Reilly's Law of Retail Gravitation in Economics to retailing relating the distance between retail locations to the size of the stores impacting the process of gravitating customers. Reilly’s law states that larger cities will have larger sphere of influences than smaller ones, meaning people travel further to reach a larger city. The law presumes the geography of the area is flat without any rivers, roads or mountains to alter a consumer's decision of where to travel to buy goods, it also assumes consumers are indifferent between the actual cities. The law was developed by William J Reilly in 1931. The Balance or Break Point ( BP ) is equal to the Distance ( d ) between two places, divided by the following: Unity or Total ( 1 ) plus the Square Root of, the size of Place One ( p 1 ) divided by the size of Place Two ( p 2 ). d is distance and p 1 and p 2 are the sizes of the places between which the distance exists; the answer will give the distance from p 2 - also called a break-point. What is the break-point? As an example: after leaving a store A, you remember something that you wanted to buy; it just so happens that you are headed towards an alternative store B. The break-point can be thought of as the point after which you would travel towards store B instead of store A because of its notional "gravity". This would happen sooner, for example, if store B is an equivalent store but with greater square footage, suggesting that you are more likely to go to store B for greater available utility. According to the study, this notional gravity can be influenced by a number of things, but square footage is simple and effective. Brown’s (1992) model in the retail evolution context says that the gravity model commenced as a simple conceptualization of consumer spatial behaviour and it became increasingly sophisticated through time, and thereby created conditions conducive to the reemergence of the basic interaction model. He opines that the wheel theory describes but does not explain the processes of change, and hence there is the need for a more comprehensive model of the evolution of retailing. Many empirical researches have been done studying various models on retail location. Lea and Simmons (1995) have studied location – allocation models for retail
site selection. Lord and Lynds (1981) have analyzed the use of regression models in store location research. The research of Brooks and Tsolacos (1999) models retail rents using vector autoregressive and time series models for predicting retail rents. The empirical studies are done in the context of developed retail environments and all these studies suggest commonly an interplay of four specific areas - the customer gravitation to the store, space / location attributes, stock / merchandise related factors and staff related parameters and the impact of all the four categories on the store performance. The empirical studies have followed the use of regression analysis, time and data series and indices largely, for research. Empirical studies are extended and done among formats and models developed for application in various retail functions. The majority of empirical research done in retailing significantly points to the understanding of trends based on the use of historical data. 2.3 Case Studies on Retail Evolution An attempt is then made to study few case studies covering how retailing revolution evolved in the world. This section helps in analyzing the evolving retailing environment in different countries and then analyzing the context on which the industry has evolved.
2 .3.1 Evolution of Organized Retail in the United States of America
A research study following the survey method was done by Kurt Salmon Associates in 2004 on the evolution of the organized retail market in the USA. The study highlights how formats evolved in the USA in the 20th century. The study establishes that that till the 1940s American retail was primarily centered around the city ‘high street’ or down town areas, with an array of independent stores such as department stores, drug stores and coffee shops. Post world war 11 the key demographic trend was migration away from the city centre towards the suburbs. This led to the emergence of the shopping centre. The 50s saw the emergence of the closed shopping mall, providing an end-to-end shopping and entertainment experience from food courts, theatres to shopping outlets, according to the study. The last major
food produce to cater to local tastes. Convenience stores have been another format that have done exceedingly well in larger cities (Sanwalka, et al, 2005). The retail boom in China and some of the South-East Asian economies throws up some startling similarities to the evolution of organized retailing in India. A decade ago, China was a different story - very little organised retail, virtually no malls and a not-too-significant middle-class, with the average Chinese not exposed to foreign brands. Today, China's retail industry is worth upwards of $580 billion with more than 14 global mega retailers setting up shop in the last ten years (Sanwalka et al, 2005). The organized retail evolution in India is passing through a phase where large formats are set up and malls too are surfacing. India too has diverse demographics and purchase behaviour of consumers; the consumers are price and value conscious and there is an urban versus rural divide. Much of the retail evolution before the opening of FDI in China is similar to what currently happens in India in terms of the entry of multinational brands through joint ventures.
2 .3.3 The Evolution of Various Organized Retailing Formats in India:
Furedy, Christine (1979) was a researcher who studied the early elite retail evolution in the colonial days of Kolkata (then known as Calcutta) between 1880 and 1920. Her research shows that retail businesses were established in India those days following the model of British shops, even though the early tradesmen were permitted to operate by the East India Company only under a bond system. However, according to her the peculiar conditions of society and economy in India soon called forth adaptations in the growing retail sectors so that colonial retail trading developed distinctive features. The large and stable retail firms which dominated the elite retailing in British India became a variant form of business organization although they shared many features of elite shops everywhere. Furedy studied the categorization of retail shops then. By the middle of the nineteenth century Calcutta's (Kolkata) commercial life was stratified into four main sectors: commercial firms, the European retail trade, Indian-owned, modern retail firms, and the bazaar sector of the city's markets and small-scale trade. Furedy in her research traces the sustenance
factors of modern elite retail stores during the colonial period to the British customers and she says, “Initially it was the British tradesmen's access to the manufactured luxury goods of Britain and Europe which enabled them to develop an elite trade independent of the bazaar. But even when Indian manufactured equivalents began to appear in some items, the prestige of imports was untarnished. Few persons believed Indian firms could produce goods of European standards. The elite firms imported most of their wares directly from suppliers, whether these were in Britain, America or Europe. This was necessitated by the fact that the import broker firms of Calcutta and other Indian ports were geared towards the wholesale distribution of bulk goods for the lesser shops and the bazaars and not towards the handling of individual, small or specialized items which comprised a great deal of the trade of the elite shops. It was only by direct importing that the tradesmen could ensure that the distinct reputations of their shops could be maintained. This retail importing was done over vast distances and under difficult conditions of communication. Furedy’s research evidences the factors of transportation and development of communication in the colonial times in India to impact the evolution of modern retailing then. “The retail evolutionary changes were dependent upon the development of transportation and communications in India. Of prime importance was the railway. In 1855 there were 169 miles of railway in India; by 1920, there were 35,199 miles. Every extra mile was important to the Calcutta shops, many of whom filled more mail orders than "in-person" ones. Whether lines were built to connect areas of commodity production and the ports, for military purposes or to link major towns, they reached into pockets of European residence hitherto barely accessible to the coast-based traders. Tradesmen constantly pressed for the extensions of lines and better organization of the railway systems. Although the first line in India was from Bombay city (1853), Calcutta rapidly moved ahead as the hub of multiple lines. By 1870, Calcutta was linked to all the main cities of the north, west and south. Lines also reached into the plantation districts of Assam. The East Indian Railway was soon the giant of the system, carrying more persons and goods than any other line. The railway gave Indian-based retailers a distinct advantage over shops selling directly from Britain through mail orders for, although
Mail order retailing in the USA emerged in the 1900s and became popular as consumers in the United States grew in their concern about time for shopping consequent on the increased number of working women and working parents. The growth of the railway system and expansion of the US post office supported the mail order delivery system (Kim, 2003). The growth of telecommunications, courier service, aviation and other infrastructure support services may have a direct relationship in impacting the evolution of many unconventional forms of retailing in India, which need to be researched. Focused on organized retailing in India, Furedy’s research is a study that has analyzed the evolution of retailing with its spatial limitation to Calcutta. Also, the relevance of Furedy’s research dates back to the pre-independence era, when the customers as the researcher has discussed are a mix of elite British and Indians. The current retail scenario in India since the year economic liberalization leaves a gap for research. While analyzing the deterrents to retail growth, Furedy’s research shows that the lack of government policies to govern elite retailing hampered its further growth in the pre-independence era. The impact of governance policies and regulations in the current context of organized retail evolution also has to be researched. The availability of refereed literature on the evolution of various formats of retailing post independence is scarce and hence one has to rely more on published articles in the recent period of evolution of organized formats. The study of the history of retailing business in the last twenty years in India throws up the fact that in most economies organised retailing passes through four distinct phases in its evolution cycle. In the first phase, new entrants create awareness of organized formats and raise consumer expectations. During the second phase, consumers demand organized formats as the market develops, leading to strong growth. As the market matures, intense competition forces retailers to invest in back-end operating efficiency. Supply chain management attains top priority in the third phase of evolution. In the final phase, retailers explore new markets as well as inorganic opportunities as growth tapers off (Kumar, 2005). Organized retailing in India is growing rapidly, although it
commands just 5% of the overall retail market share, compared with 85% in the USA. Even in Asian countries such as Malaysia, Thailand and China, organized retail formats command a much higher proportion of the total relative to India – at 55%, 40% and 20% respectively. Thus there is a significant scope for organized retail format market-share growth in India. The retailing industry in India, estimated at INR 9300 billion (2003-04), is expected to grow at 5% per year and organised retailing is well on its way to becoming an INR. 350 billion market by the turn of 2005 (India Retail Report, 2005). The future of the evolution of retail formats in India needs to be studied. 2.4 Other Studies on the Evolution and Growth of Retailing in India: It is planned to analyze specific studies that have a direct or indirect bearing on the evolution of retailing in India. The changes in various demographic measures and shifts in psychographics also have a direct impact on what consumers prefer and their retail choice behavior. These external factors build up context and provide links to explain the genesis of the retail growth in Indian economic system.
2.4.1 Studies on Growing Consumer Classes:
Rising incomes, changing demographics and consumer tastes are driving a growth of more than 30% for organized retail formats and the share of organized retail formats is expected to grow to more than 9% by 2010 in India (Singh, Princy et al, 2005). According to NCAER reports the number of ‘rich’ households, the target segment for organized retail stores is expected to more than double from 57m in 2002 to 107m by 2010 and that the proportion of India’s population that is less than 25 years of age stands at more than 50% currently, while more than 80% of the population is less than 45 years of age. The following figures are the age-wise population of India according to the India Election Statistics (2004 fig):
- 0 - 14 years: 31.7% (male 173,869,856; female 164,003,915)
- 15 - 64 years: 63.5% (male 349,785,804; female 326,289,402)
miss the India opportunity provided by such a promising nation. Between 2005 and 2006 domestic consumption increased by 8.7%. India has a total of 75 million households, called ‘consuming classes’ with an Annual Income Level between $1000-4800 in 2006 as compared to only 29 million such households in 1994- 95 (TATA Group Economic Survey). These studies show that as income rises, there is a marked increase in domestic consumption. As the demographic profile of India is very young, attitudes are positive towards spending and thereby increasing consumption that may impact resulting in augmented sales at the retail level and this will play a major role in retail evolution. The annual AT Kearney Global Retail Development Index (GRDI) ranks 30 emerging countries on a 100- point scale—the higher the ranking, the more urgency there is to enter a country. On the research parameters adopted for GRDI 2007, AT Kearney says that the countries were selected from a list of 185 based on the following three criteria:
- Country risk: more than 35 in Euromoney’s country-risk score
- Population size: more than two million
- Wealth: GDP per capita more than $3,000 (GDP per capita for countries with populations of more than 35 million is more flexible due to the market opportunity) India has been topping the Global Retail Development Index in 2006 and 2007 in succession as the most attractive retail destination from among the 30 emerging countries studied by AT Kearney. Goldman Sachs came up with the BRICs Report in the year 2004. The BRIC study assumes strong and stable macro-economic policies, stable political institutions, and high levels of education and openness as the fundamentals to the model used. The report on Brazil, Russia, India and China (BRIC) states that India will be the third largest economy, after the US and China by 2050. The Goldman Sachs global economics team released a follow-up report also to its initial BRIC study in 2004. The report states that in BRIC nations, the number of people with an annual income over a threshold of $3,000, will double in number within three years and reach 800 million people within a decade. This predicts a massive rise in the size of the middle
class in these nations. In 2025, it is calculated that the number of people in BRIC nations earning over $15,000 may reach over 200 million. This indicates that a huge pickup in demand will not be restricted to basic goods but impact higher-priced goods as well. According to the report, first China and then a decade later India will begin to dominate the world economy. These studies lead one to analyze the cause and effect relationships of demographic and psychographic consumer profiles and spending of consumers to the evolution of organized retailing in India.
2.4.2 Brand Proliferation and its Impact on Retail Evolution:
Brand proliferation along with consumerism has helped organized retailing grow in India. Most of the world's leading brands, including like L'Oreal, Espirit, Louis Vuitton, Marks & Spencer, Tommy Hilfiger, Louis Phillipe, Levis, Pepe, Lee, Arrow, Dockers, Red Tape, Clairns, Hugo Boss, Tiffany, Bulgari, Ecco, Chambor, Revlon, Philips, Corelle, Magppie, Nike, Reebok, Parker, Ray Ban, Swarovski, Daks, Lego and Mattel, are now present in India. Before nineties the food industry in India was struggling to establish only the traditional food brands and there was very little or no effort to introduce new foods. In post liberalisation era we have host of new MNCs with superior marketing skill and bigger resource to their command have extended their brands to a wide variety of retailers. A few years ago we had 'Tata-salt' as the only refined iodised salt selling in the market and today we have Captain Cook, Kissan Annapurna and Catch (with dispenser) and more brands to come in. The consumer durable market in India has seen a proliferation of brands and product categories in recent years. All the major international brands from Japan, Korea, US, Europe and China have launched their product range in India. Tipnis, Nitish (2004) has made an expert observation that the proliferation of brands is also seen in branded grocery products. In an investigation of the relationship between brand proliferation and growth of retailing in India Kumar, Ashok (2005) has studied the factors that will drive the retail boom in India in future and has concluded that brand proliferation will play a key role in India’s retail growth.
