Millennium Marketing Research®

Tom Schori DBA Millennium Marketing Research®, 808 Ironwood, Normal IL 61761, 309-532-8466

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The possible adverse effects of the 'Wheel of Retailing.'

By Thomas R. Schori, Ph.D., and Michael L. Garee, Principals,  Millennium Marketing Research, 808 E. Ironwood, Normal, IL 61761-5239. 

Most marketers are probably vaguely familiar with the "Wheel of Retailing" concept. Unfortunately, though, many fail to grasp how it may affect their own businesses. As a refresher, here’s how the Wheel of Retailing works:

• An innovative, more cost-effective form of retailing emerges;

• Products (or services) are priced lower than was the case with the earlier form of retailing;

• This lower pricing is made possible by cost efficiencies that are achieved by factors such as: Fewer items offered; smaller staff; Spartan facilities; low rent locations.

As the new form of retailing eventually replaces the older, less cost-effective form, guess what happens? Once success and affluence are attained, ego takes over and. . .

• Products are added to their current "meager" portfolio;

• Staff is added

• Facilities are "upgraded" (linoleum will no longer do as a floor covering¾carpeting is now a must! Music is piped in. Narrow aisles are replaced by much wider ones; And numerous other "symbols of affluence and success" are added.)

• Low rent locations become de rigueur will no longer do. Out goes the $10/square foot rental space; in comes the more "appropriate" $100/square foot rental space.

The result of all these "upgrades" is predictable and inevitable: increased prices. And, at some point, the ever-increasing prices encourage someone to create yet another innovative, cost-effective, new form of retailing which will gradually replace its predecessor.

Interesting concept, you might say. But does it really happen? It sure does. Let’s look at a couple of prime examples.

McDonald’s

Fast food restaurants were introduced as low-cost alternatives to traditional restaurants. McDonald’s, more than any other fast-food player, must be given much of the credit for creating the fast-food category. Initially, they opened tiny stores in low-cost areas. Typically, there would be, maybe, eight parking spaces. After getting out of one’s car, it was only a few steps to the window where an order was placed. A menu was really not necessary. The only things to order were hamburgers (and cheese burgers), French fries, shakes, Cokes and milkshakes. When your order was ready, you carried it back to your car, ate it, and drove off. Truly fast food. The cost? A hamburger for 15 cents. French fries for a dime, Cokes for a nickel and milkshakes for 15 cents. Adjusted for inflation, that would be about 60 cents in today’s money just for a hamburger. Predictably, success was swift in coming for McDonald’s.

But a funny thing happened on the way to the bank. In stepped ego. Thinking the little stores were too Spartan and the menu too limited, McDonald’s made bigger stores, with eating space inside, and introduced a much more extensive menu. Flexing their muscles of affluence, the individual franchisees also made "improvements," often adding that which they considered "objets d’art," local memorabilia, and even sports memorabilia, complete with autographs. The predictable result: higher prices, much higher prices, even considering the impact of inflation. That was ultimately good news for "Ma & Pa" restaurants, since they’re now generally no more expensive than McDonald’s. But McDonald’s isn’t done yet. Just the other day, there was an article in the media about McDonald’s new CEO who has come in on his white steed to restore McDonald’s to its glory days of the past. The secret, he believes, is to add even more items to the menu plus the installation of a new cooking system. Sadly for McDonald’s, their new CEO is paving the way for an innovative, more cost-effective, entrant to wreak further havoc to the fast-food industry. A classic example of the Wheel of Retailing phenomenon!

Sears, K-Mart & Wal-Mart

Strange as it may now seem, department stores were the innovative, more cost-effective, new retailing form in the early part of this century. And they’re still around, barely, and still doing those dumb things which the Wheel of Retailing so well describes. In the ‘70s, for instance, the CEO of Sears reputedly added expensive furniture and clothing because he wouldn’t have Sears furniture in his home and wouldn’t wear Sears suits. (Guess he didn’t realize that few of Sears’s customers have incomes in the seven digit range.) Is it any wonder that that was the time frame in which discount stores made their dramatic entrance?

More than any other discounter, K-Mart deserves credit for having created the category that has challenged traditional department stores. Wal-Mart took it to new heights. Of course, with the added frills, more items, and bigger stores they’re now creating, it is clear that Wal-Mart is even now setting itself up for the entrance of an entirely new form of retailing: an innovative, more cost-effective, new entrant. Another classic example of the Wheel of Retailing in operation!.