Wheel of Retailing Theory McNair (1958) (pioneer in retail evolution theory) proposed the Wheel of Retailing theory to explain a retail evolution pattern, which he had observed in European and U.S. retail operations. It states that the evolution process consists of three phases: entry phase, trade-up phase, and vulnerable phase. Entry phase: The first or entry phase of the Wheel of Retailing starts with the opening of innovative retail institutions, which initially offer limited products with low prices and minimum services. Retail institutions at this phase strategically accept low margins due to lack of services and facilities offered and low market penetration, but these low margins can reduce product prices and help retailers to increase penetration of the market. When these retail institutions are successful, other rival retail institutions rapidly imitate and adapt those characteristics. At the end of the entry phase, the number of the same type of retail institutions has increased. Trade-up phase As time passes, the innovative retail institutions become traditional retail institutions that offer more services and better store characteristics at higher prices. For example, the maturing or more traditional retail institutions provide facilities, such as rest rooms, carts, wide aisles, food courts and resting areas, and promise services, such as more variety in products, advertisements, delivery, and provision of credit. These retail institutions are simultaneously increasing their margins and prices and appeal to more middle and upper income consumers rather than bargain hunting and lower income consumers. These upgrading practices continue to be practiced by the aging retail institution type into the tradeup or second phase; however, the forces that make retail institutions move to the trade-up phase were not clarified by McNair . Information from other theories resulting in combination theories is needed to analyze these changes. At the peak of the trade-up phase, retail institutions achieve increases in sales, volume, profitability, and market share due to improvement of their store retail mix. sound management of current operation practices. . A new innovative retailer in the next Wheel of Retailing cycle often initially coexists. At the entry phase into the Wheel. low margins and low price products. and profit margins tend to erode. According to Hollander (1960) and McNair and May (1978) in their conceptual articles. The evolution of or changes in department stores can be explained by the Wheel of Retailing theory. some mature retailers focus only on product quality and services rather than on prices. such as market segmentation. promotions. more luxury products were offered at department stores. vending machines.Vulnerable phase As time passes and the wheel turns. operation costs increase. advertisements. in the United States. As a result. These changing operational practices make the third phase retailers vulnerable to easy replacement by other retailers. Department stores integrated with wholesalers and purchased an assortment of products with volume discount. as retailers add higher levels of operational practices. With this change. Limitation Not all retail institutions start with low margins and low prices. with mature retail institutions. and convenience stores are operated with a high margin basis from the entry phase. which were financially possible through cost reductions from fixed prices and other operational strategies. which are at the highest popularity position in the previous wheel of retailing cycle. Accordingly. Bennett and Cooper (1984) suggested continuous selfdevelopment to create new innovations for the mature retailer and. department stores provided low priced products. pricing. In this vulnerable phase. Department stores became vulnerable to competitors. originally emerged as a small-scale retail institution. while many other variables could affect retail evolution. These firms are mature retail institutions that should have a strong cash flow and high profits. the expense for maintaining the downtown location for department stores increased. however. product prices rise. retail institutions lose market share and profitability. In the mid 1970s. therefore. department stores. As department stores matured and entered the second phase of the Wheel. High turnover also contributed to the cost reduction. department stores tried to remodel their buildings and renovate inside the store. Changes in all aspects of the retail mix will create initial increases in operation costs and decreases in profit margins. On the other hand. product positioning. the cost for these upgraded products and related operations significantly increased. All these conditions allow for the emergence of a new innovative retailer in the next cycle of the Wheel of Retailing. and to change from counter-service to self-service to compete with their innovative competitors. many department stores moved outside of downtown areas and located within shopping centers. and personal selling. retail institution types mature additionally and move into the third and final phase. such as environmental changes and competitors. For a mature institution to remain successful. Increased car ownership and improved transportation systems encouraged consumers to go to shopping centers located outside of downtown areas. Boutiques. From the late 1920s until the mid 1950s. the vulnerable phase. At the same time. they offered more elaborate facilities and higher services. which had less parking problems than downtown areas had. some mature retailers abandon high quality and high services in order to reduce operation costs and product prices to survive price competition. Theory only focused on margins and prices. at the same time. packaging. The mature retailer must gain improvement through non-product marketing strategies. The innovative retailer will enter the wheel with low costs. product prices were again increased. thesis1) is challenged by its competitor (i. a new retail institution (i. In an alternative explanation of the process. antithesis 2 alternate in a stair step pattern over time. o Department stores were mostly located in a center business district. However.e.e.. o Discount department stores were located both inside and outside of the center business district. characteristics of department stores).. Not all retail institutions have evolved with the same pattern in all countries..e. high margin was necessary. educated sales people. offering better characteristics than the existing retailer and its competitor. personal credit.g.. As time passes. discount stores have reduced prices and limited services (i... Discount store is a synthesis of department stores and wholesale stores. thesis2) in the next evolution.e. Limitation . antithesis1 and synthesis 1/thesis 2 vs. A new retail institution will become a traditional retail institution (i.. synthesis1) is created.. in time. implementation of solutions. in Turkey. characteristics of wholesalers). thesis1). delivery). a traditional retail institution’s first reaction was to resist change and to fight against the new competition. a retail institution realized a need for change and started imitating or differentiating from the competitors’ characteristics.. self-service policy) to remove unnecessary operating costs to achieve the lowest prices. o Discount stores offer a variety of products in one place by dividing the store into many departments and selling directly to the final consumer (i. which offered many services (e.e. and emergence of a new retail institution type. o Discount stores were mostly located outside of a center business district with limited services (e.g.. while two retail institutions are in conflict. the department store and the discount store began to compete for the same customer. o When department stores were relocated to the suburbs and when discount stores started to improve services. Discount department stores as a synthesis of department stores and discount stores.e.e.e. As a retail institution type moves along a step into the next step. supermarkets were imported and positioned as a retailer providing high price and high margin products at the entry phase. synthesis1). For instance. The phases of thesis1 vs. o At the same time. When a competitor or a new retail institution appeared. the institution type passes through the stages of problem recognition. To cover the high operating costs for these services and location. antithesis1) because it has competitive advantages over the existing retail institution (i. Conflict Theory An existing retail institution (i. the first retail institution imitates the characteristics of competitor to upgrade its existing characteristics and finally creates a new retail institution (i. The level of services and margins were between department and discount stores. discount stores emerged as a strong competitor. therefore. Brown (1987). Original retail institution types (i. mostly specialized and small customized craft stores were the main retail institution. economy. retail institutions need to evolve by adapting or adjusting to the environmental changes. cultural. department stores matured and had high market saturation. growth of automobile and refrigerator ownerships. invention of the elevator. technology. Having an environment favorable to a retail institution highly enhanced the retail institution’s ability to adapt to the environment. especially those of technology and economy. Environmental theory to explain an evolution of a specific retail institution type. and competitors and social. such as a sluggish economic condition and strong competitors. Environmental influences. were advanced mass transportation systems. Some retail institution types do not react to a new retail institution type and keep serving their customers. The retail environment was comprised of consumers.. most of all. and to survive change and competition. a retail institution could eventually survive. thesis) may not change. and legal conditions. and. .e. What retail operations and how these operations interact between two retail institutions and how a new operation is finally created are difficult to explain in a discrete step-by-step process. consumers’ willingness to accept fixed prices. the retail institution would become extinct. which contributed to the emergence of the department store. it does not explain patterns of change or changes over extended time. The unhealthy economic condition resulted in reduced consumer spending. The blending process is not distinguishable. Original idea of the Environmental theory came from Darwin’s Natural Selection theory. Through change in reaction to the environment. Department stores started to provide various and standardized-quality products to satisfy the growing demand of the middle class. Environmental Theory Retail environment is the key influence to retail changes. New environmental conditions started affecting operations of department stores. The Environmental theory explains how variables in the environment affect retail evolution. and this ability would significantly affect the success of the institution types’ retail evolution. o Before department stores. and Stevens (1975) mentioned that a retailer’s ability for adaptation to the environment was highly dependent on environmental conditions. Oren (1989). o As time passed. Gist (1968) predicted that retail evolution could occur only when environmental variables positively affected retail institutions. If a retail institution cannot react quickly to environmental changes. however. advanced packaging technology. o o Consumers. Post Office supported the mail order. This is what is commonly termed as the retail life cycle. Accelerated Growth: . the growth of the railway system and expansion of the U. direct retailing was highly accepted by these consumers.Consumers in the United States grew in their concern about time for shopping because of the increased number of working women and working parents. even when their environments change. ‘Retail Life Cycle’ is a theory about the change through time of the retailing outlets. it improves the convenience or creates other advantages to the final customers that differ sharply from those offered by other retailers. Also. Some environmental influences. where the organization has a few competitors. the rate of growth is fairly rapid and the management fine tunes its strategy through experimentation. This is because retail organizations pass through identifiable stages of innovation. maturity and decline. Researchers cannot confirm that all retail evolutions followed the pattern that the Environmental theory proposed. which significantly influenced on some retail evolutions. o Since it is a new concept. development. With the increased number of working women.S. Retail institutions are not legally required to be evolved. Consumers saved time and effort in mallshopping. especially those that had moved to the suburbs. Retail Life Cycle The concept of product life cycle is also applicable to retail organizations. Limitations Environmental changes are not synonymous with required retail evolution. could be a non-significant influence to other retail evolutions. and shopping malls became another strong competitor to downtown department stores. who were concerned about more leisure time than shopping time. Mail order retailing . o Levels of profitability are moderate and this stage can last up to five years depending on the organization. o This is the stage of innovation. It is claimed that the retail institutions show an s-shaped development through their economic life. The s-shaped development curve has been classified into four main phases: Innovation: o A new organization is born. which was located outside of the downtown area and provided a number of shops under one roof. delivery system. demonstrated that they preferred shopping at a shopping mall. the rate of growth slows down and profits also start declining. It now not only stocks apparel. music retail chain and a small coffee shop. It is necessary to keep in mind that a retailer need not always move from maturity to decline. Premsons. jewelry. a retailer may succeed in moving back to the growth phase after reaching a stage of maturity with a certain format and a certain mix of products. a few competitors emerge. the investment level is also high. o This is the time when the retail organization needs to rethink its strategy and reposition itself in the market. the growth rate tends to decrease. The rate of growth is negative. o Since growth is imperative. Mumbai had stores like Akbarally’s. Then Shopper’s Stop opened its first outlet in Mumbai in 1991. become more competitive and direct competition increases. towards the end of this phase. Investment is largely in systems and processes. the company embarked upon a major exercise in terms of repositioning of the store. the company has been forced to rethink its product offering. o A change may occur not only in the format but also in the merchandise mix offered. Cross words counters have been added to many of the existing stores. Eastside. In May 2008.. As the organization moves to stage two of growth. with the change in customer expectations and increased competition in the form of other department stores like Globus. which is the stage of development. o Since the company has been in the market for a while. cosmetics etc that it earlier stocked but has also acquired the book store chain – Crosswords. However. In the private sector. Amarsons and Benzer. as is the profitability. most cities in India had a few independent retailers. The store in Andheri (Mumbai) also houses Planet M. profitability declines further and overheads are high. cost pressures tend to appear. till a few years ago. Maturity: o The organization still grows but competitive pressures are felt acutely from newer forms of retailing that tend to arise. By reworking the marketing strategy or by changing the product or service offering. Lifestyle. For example. Thus. o Gradually as markets. it is now in a position to pre-empt the market by establishing a position of leadership. The store enjoyed an enviable position for a while. which many stores at that time did not offer. However. imitation jewelry cosmetics and perfumes and home fashions. o o . Decline: o The retail organization loses its competitive edge and there is a decline. a change in the logo. o In this stage. o This stage can last from five to eight years. The retail organization faces rapid increases in sales.The store initially offered apparel. which involved among other things. the organization needs to decide if it is still going to continue in the market. It also had a customer loyalty program in place. etc and the rise of specialty stores.