Revisiting the Wheel of RetailingThe Case of a Turkish Discount

Retailer?

Muge CEVIK, Neva YALMAN

Yeditepe University, Istanbul, TURKEY

Objective of the Study To summarize the existing literature- developing

country perspective

To examine the evolution of discount retailing in Turkey

To identify the applicability of the wheel of retailing theory

For a discount retailer In a developing country

The need The Wheel of Retaling Theory is still in debate

Generalizability; universal and format based applicability Forces that cause trading-up process

Lack of attempt in the literature to explain the applicability of the theory in developing countries

Lack of studies on discount retailing in Turkey.

Re-assessment of the current state of the theory under such rapidly changing economic climate.

Background More than 70 years has passed since Malcolm P. McNair

(1931) first outlined his hypothesis on the ‘wheel of retailing’ theory.

A debate topic among scholars since it has been first introduced.

Though heavily criticized by many marketing scholars; This concept ‘should be nurtured and developed rather than

abandoned for borrowed concepts from economics, psychology, or sociology.’ (Sheth, Gardner and Garrett, 1988)

‘…the wheel does not need to be changed, nor does it require retreading, rebalancing, realignment. In my opinion, it needs to be road-tested more often’ (Brown, 1990).

Need for testing retail institutional change model ‘in a variety of spatial settings, particularly in the developing world’ (Brown, 1991).

Wheel of Retailing

Innovative Retailer• Low status• Low price• Minimal service• Poor facilities • Limited product offering

Traditional Retailer• Elobarate facilities• Expected,essential, exotic services• Higher rent locations• Fashion orientations• Higher prices• Extended product offerings

Mature Retailer• Top heaviness• Conservatism• Declining ROI

ENTRY

TRADING-UP

VULNERABILITY

Background- Debate Hollander (1960) provides non-confirmatory examples

(developed and developing countries) evolution of some retailing formats cannot be explained by the wheel

pattern. different forces causes trading-up process (other than stated by

McNair).

Many institutional forms- department stores, mail order houses, supermarkets, discount houses and shopping centers began by low prices and evolved into high costs modes of distribution (Hollander,1960a).

Goldman (1975), in fact argued that not every department store, supermarket or discounter emerge as cut-price.

‘Boutiques, convenience stores, planned shopping centers, automatic vending machines and super-specialists’ enter the market on high cost basis (Hollander, 1960b)

Background- Debate The wheel pattern seems to hold mostly in developed

economies. Some studies in developing countries show that

innovations are introduced at high- cost scales ( Brown, 1998;Guerin,1965; Kaynak,1979; Goldman,1982; Bernett, 1966; Alawi,1986).

Introduction of a new retail system that is crucial for wheel to revolve is limited by the socio-economic environment it exists.

Different countries with different economic, political, societal and business conditions have distinct retail systems ( Kaynak,1979).

Background- Turkey Retailing activities exist with direct interaction with the

environment- mainly social, economic, cultural, political and technological systems- of a developing country (Kaynak, 1976).

Economic growth and liberal policies of 1980s became the major accelerator of retail change in Turkey.

When compared with countries of the European Union, the grocery retail sector in Turkey is relatively underdeveloped.

small and independent traditional retailers still dominate the retail market (64%)

Retailing Sector- Turkey

The size of the Turkish retailing sector is approximately $ 47.9 billion

53% belongs to food retailers.

The share of organized retailing sector, including hypermarkets, supermarkets and local chain stores, among food retailing is yet $16 billion.

Europe have on the average 15 hypermarkets and 150 supermarkets per one million people, Turkey has only 3 hypermarkets and 17 supermarkets.

Background- Discount Retailing Results of the 2009 Global Powers of Retail report

(Deloitte Touche Tohmatsu) showed that discount retailers have strong performance emerging market retailers are on the way of becoming world players

The discount store is defined as a ‘retailing establishment selling a range of rapid-turnover, cut-price goods and with virtually no floor-service at all’ (Eurostat, 1993).

The appearance of discount stores in Turkey occurred in 1995, just after the economic crisis of 1994.

Share of discount stores is 6.8% (2006). Share of consumers buying private label products increased from 39% in

1999 to 55% in 2004

The Study As suggested by Savitt (1984) and Brown (1991) this study

concentrates on the evolution of an individual retail firm rather than ‘institutions’.

Through the case study approach, a Turkish discounter is analyzed- considering the stages that a retailer assumed to gone through by the wheel of retailing theory.

Although the discount format is transferred from Europe to Turkey, all discount chains including the chosen company for analysis, has started with consideration in low pricing as the main point of differentiation (fitting the entry phase).

At the recent times of harsh competition, fitting to trading-up process is in question?

a pattern indicated by the wheel or retailing theory or completely innovate its existence at the end or in contrast, adopt a dynamic strategy while keeping price as the core strategy

Methodology A semi-structured interview with an executive manager

has been conducted. In order to have an understanding of the institutions’

current stage of evolution, relevant data was gathered from the company’s official web site and financial reports as well as private sector reports.

A specific measure that considers the shareholder value creation has also been used to analyze the economic profitability of the retailer.

Brown (1991) suggests the use of, market-to-book ratio (Kerin and Varaiya, 1985), when analyzing the retail institutional change.

Accordingly, the market-to-book ratios of the discount retailer has been calculated and analyzed as an indicator of the company’s current value and growth potential.

Findings The position of the discount retailer on the wheel

is examined using following criteria:1. Price Strategy

2. Assortment Size and Structure

3. Store Interior

4. Location

5. Customer Services

6. Communication

Findings Pricing Strategy As the main proposition of any discounter is low prices,

the Company also started operating in Turkish market with an aggressive pricing strategy. It is stated that the general price level is 8-10% below similar

retailers. To enhance low price perception, weekly special offers are

provided to customers on items with varying range of products; from toy trucks and strollers to laptops.

The main reasons that enable control over prices the strong purchasing power held by the company due to increasing number

of stores the increasing share of revenue of this retailer in the market the concentration of private label items among the assortments ( As of 2008,

the share of private label products has reached to 50-55% and the aim is to have a 75-80% ratio in the near future ).

FindingsAssortment Size and Structure Despite the promotional items the Company achieved to

keep the assortment size with 600 SKUs. In general the Company sells four groups of products:

Private labels: This group has the highest volume share within the assortments. From branding to formula creation the company has the overall control.

Branded goods: 37% share within the total portfolio. Weekly promotions: 7% share within the total portfolio. These products are

promoted weekly in order to increase customer visits. Exclusive products: 7-10% share within the total portfolio.

Although not existent in the begining perishables and imported goods are added to assortments.

Private label products and promotional products- lowered the risks of vulnerability that has been expected for such a retailer along the wheel.

FindingsStore Interior The average store sizes vary from 200 to 600 square

meters. In line with simplicity principle, all the goods are

presented inside the parcel packages on the shelf. On the other hand, it is mentioned that the recent

improvement in parcels used for display has some effect on the costs. When the steady increase in store numbers are considered such

increases in fixed costs would become one of the trading up indicators.

FindingsLocation Being one of the largest retail chains, the Company has stores all

over Turkey (from 21 stores in 1995 to 2628 in 2009). When it has started its operations, target customer segment was

consisted of C and D socio-economic class stores were located at lower income districts of the main cities.

Due to economic recession increase in conscious shopping widening target customer segment new stores started to open at places with higher income levels.

As the Company continues to open stores in higher income districts An increase in the fixed costs are experienced due to higher rental costs of new

store locations.  

Incremental costs in terms of transportation is to be expected.  Recently, the Company started to transfer this retail concept into

international level more complicated management and increasing operational costs.

FindingsCustomer Services Minimum required level of services are provided to

customers when compared to other food retailers. On the other hand, due to new locations, the company

has experienced a trading-up with the addition of new services: the credit card started to be accepted. contour machines of GSM operators started to operate at the

cashiers. battery collecting stations are put inside the stores. All these additional services bring additional load to in-store

operations.

FindingsCommunication In the beginning- very limited advertisement budget that

is spent mainly to in-store communication.

Currently it heavily relies on mass media. In terms of press advertisements, the company has the largest spending

among other retailers (Nielsen Media Research, 2010). In recent years, TV advertising also started to be used.

Utilization of mass media can be considered as a diverging strategy from the original one which may actually lead the company to trade up to the next level in the wheel.

FindingsMarket to Book Ratio Kerin and Varaiya (1985) points out ‘market-to-book ratio’ as

an alternative indicator for profitable growth of a company. 48% increase in net profit margin ( 2.7%) in 2008 to (4.0%) in

2009 can be proposed as a supporting indicator that the Company is currently experiencing a trading up in terms of profit-margins.

FindingsOperational Costs Considerable rise in operational costs by 178% through

the years

Conclusions According to the secondary data available and the semi-

structured interview conducted with the company's executive, there have been some significant changes since the establishment of the company in question.

Findings confirm that this retailer is in the trading up process as suggested by the wheel of retailing concept. When phases of the wheel are considered Increasing operational costs Degradation in terms of flexibility

Although, the development pattern of the discount retailer appears to fit the wheel theory proposed by McNair (1958), it is also possible that through the implementation of dynamic strategies, such formats can pursue their existence in the long run.

Conclusions The retail institutional change in developing countries

has been a neglected area for a long time in the existing body of literature.

This study aimed at drawing attention back to this research area through the case study approach so that results could be used for improvement in future studies.

An alternative indicator for profitable growth of a company- market to book ratio- is used in this study to understand company’s wealth creation capability (as suggested by literature).

ConclusionsLimitations

The analysis of wheel pattern should be spread out in a long period of time.

The emerging of the discount retail concept in Turkey is quite new, precise conclusions cannot be drawn.

As this study was focusing on an individual retailer; The company examined has very strict rules of sharing limited

information with outside parties, even for academic purposes. The limited data gathered from the interview and the publicly

available information were the only data sources for this study.

Further Research

In order to have a complete conclusion on the compatibility pattern, longitudinal studies are crucial and is suggested for future studies.

In line with Brown's (1991) proposal, an originally developed retail pattern should be analyzed for determining the applicability of the wheel pattern.

In Turkey’s case ‘bakkals’, a version of a convenience store, small-scale, capital-weak, independent, single location and family-owned outlets would be an appropriate format

Same study can be applied in an other developing country to compare findings.

For more precise conclusions findings of this study could be re-tested through future quantitative studies.

Thank you...