Forms of Retail Business Ownership

18/07/2020 0 By indiafreenotes

The term ‘retail sales by ownership’ refers to the basic system or basic format of doing business. In India, around 12 million retail outlets are covered under this format. Under this format, proprietor is responsible for the success and failure of the store. It is a type of format, which legally has no separate existence from its owner. Opportunities in retail ownership are in plenty. From market positioning and operating perspectives, each ownership format serves a particular market and has its own advantages and disadvantages.

Over Ninety percent retail firms / outlets in India are independent and hence unorganized. With the globalization and borderless economies, this percentage is coming down but still unorganized stores (mom and pop stores) are in plenty. This number may be because of ease of entry. Ownership pattern has its own competitive advantages and disadvantages. Among independent competitive advantages, main are flexibility, low investments, less interference, quick decisions, direct strategic control, image, consistency, personal attention and entrepreneurial spirit.

Among disadvantages, common are limited finance, less bargaining power, labor intensity, reduced media access, few economies of scale, less expertise, over-dependence on the owner, excess workload and limited planning and supervision due to individual’s limitations.

The retail sale by ownership is classified as under:

  • Independent Retailer
  • Chain stores
  • Franchising
  • Leased department stores
  • Vertical Marketing system
  • Consumer co-operatives
  1. Independent Retailer

An Independent Retailer usually is a small retailer (always not true) and is found in all lines of trade and in all communities. He may be a young man, fresh graduate just starting his own business or he may be a man of advanced years with many of them spent in the field of retailing. In India, many of the independent stores tend to be passed on from one generation to another. In either case he has a business of his own. He is independent in-fact as well as in name. The high numbers of independent retailers is associated with the ‘ease of entry’ into the market place. The entry and growth of independent retailers in India is a big reason in the high rate of new retail outlets failure.

Merits of Independent Retailer

  • The independent retailer has no restrictions on who, how or where the business to be set up. He is free to do what he wants and to select a convenient location.
  • The independent retailer takes all decisions related to the store functioning. It drastically saves the time that usually exist between decision-making and the implementation process. Therefore, an independent retailer can respond quickly to the environmental changes and adopt proper strategies.
  • The independent retailer can concentrate on a local area to achieve its business goals.
  • To serve the local demand, a retailer can decide the trading hours, merchandise to be sold / removed and prices as and when desired.
  • It avoids duplication of work, ambiguity of role and excess stock due to clarity of role, thus resulting in increased productivity and time utilization.
  • To start an independent store is comparatively an easy task as it requires low investment, modest fixtures and merchandise.
  • The independent store by providing limited but deep merchandise can act as a specialized store to serve a particular consumer segment.

Demerits of Independent Retailer

  • Due to limited exposure and small investments, in most of the cases, they don’t stand in competition with the emergence of giant retailers and international store outlets.
  • As independent stores are dependent on labor intensive techniques, they find themselves difficult to improve store-productivity when it comes to stock-keeping, ordering, merchandising, displays, accounting and dispatching.
  • Undoubtedly, the bargaining power of independent retailers is comparatively less as they offer limited merchandise. On the other hand, big retailers (like supermarkets, hypermarkets and chain stores) due to bulk buying, negotiate vendors effectively and offer less prices, better quality goods and great service at short notice or in small lots create problem for independent stores.
  • Due to limited operations, less working capital, improper logistic arrangements, retailers are not able to have benefits of economies of scale.
  • Independent retailers due to limited funds cannot go for mass sales promotion programs resulting in limited target market and geographical coverage.
  1. Chain Store/Chain Retailer

A chain retailer or a chain store is a group of two or more outlets carrying the same sort of merchandise assortment, owned and controlled jointly and usually supplied from one or more central warehouses. The main advantage of such a retail format is to make retailer enable to bargain well with the suppliers. Another advantage is cost effectiveness in advertising and sales promotions. Thus, a very small number of stores constitute a chain-store system.

Merits of Chain stores

  • Good bargaining power with suppliers
  • Cost effectiveness due to centralized operations
  • Ease of managing store operations
  • Use of advanced technology increases their working efficiency

Demerits of Chain stores

  • The establishment cost to set up such chain of outlets requires huge money and expertise.
  • Difficulty in managerial control due to geographically dispersed branches/outlets
  • Due to centralized decision-making, some outlets may have difficulty in adapting to local needs.
  • Due to huge network of outlets, it is difficult for management to monitor their day to day activities resulting in communication gap, inefficiencies, and delay in decision making.
  • Expense on safety stock remains high.
  1. Franchising

A Franchise is a contractual agreement between the franchiser and the franchisee that allows the franchisee the right to supply its brand (goods and services) exclusively within a defined area, as per a particular format for a specified period of time. In return, franchisee pays a fixed fee in advance and a monthly percentage of gross sales made by him under franchiser name and fame in the form of royalty. In India, franchising business is becoming very popular and growing rapidly.

The small businesses find it convenient by being a part of large, multinational firm because franchiser provides great assistance to franchisee for locating and constructing the retail store (including interiors, and exteriors), developing the goods and services for selling, hiring employees, training, advertising and administering the store effectively.

Types of Franchising

In commerce, franchising structure can vary according to the goods and services provided. In most of the agreements, the franchisee is prohibited from selling goods and/ or services of other brands from the same retail outlet in any circumstances.

The franchising may be of three categories:

(i) Product or a trademark franchising

In this sort of franchising, a franchisee with mutual consent acquires the name and identity of the franchiser by agreeing to sell the franchiser’s goods and services exclusively made and supplied by him under his name. In actual, under such an arrangement, franchisee use the franchiser’s business methods, selling techniques, standardized product lines and advertising on co-operative basis.

Although, franchisee adheres to certain operating rules and regulations, but still is independent in their day-to-day operations. In consultation with the franchiser, franchisee can decide the store hours according to the locality needs. Archie’s Gallery, Hallmark stores, which are spread all over India, is the best suitable examples of a product/ trademark franchisee.

(ii) Business Format Franchising

In business format franchising, there is a more synergetic relationship between a franchiser and the franchisee. The franchisee receives assistance on the issue of site location, building the store, quality control, accounting practices, training to store employees, and the problems faced in conducting the store.

Besides these services, a franchisee enjoys the benefits of prototype stores, standardized product lines, selling and presenting skills and co-operative advertising. McDonald’s outlets, Domino’s, Pizza Hut are the best suited examples of business format franchising. In India, since 2000, most growth has been observed under this type of franchising format.

(iii) Area Development Franchising System

In an area development franchisee system, the franchiser grants development rights of a particular area to the franchisee in turn for a front-end development fee. The franchisee on his part is responsible for developing a certain number of units within a given period of time. Excel InfoTech EIIT has adopted this unique mode of franchising.

  1. Leased Department Stores

A leased department which is also known as shop-in-shops or store-in-store, is a section of a department in a retail store in the form of specialty/discount store given to any outside party on monthly rental basis. The person who provides the store space to outside party is known as lessor, and the person who takes the shop/store space is known as lessee.

The payment made by lessee to lessor for the use of store space is decided in a contract in the form of monthly rent. The lessee (the proprietor) is usually responsible for all aspects of business such as managing fixtures and furniture. In order to maintain the overall consistency and co-ordination, the store has some operating and administrative restrictions for each lessee in a uniform manner. For a lessee (retailer), the main reason to have rented premises is the property price that usually is so high that buying the premises is beyond the reach of the retailer.

Leased Departments in India:

In India, leased departments are an emerging trend in the field of retail business. Most of the renowned retail chain stores set up their outlets or extension counters in commercial complexes of residential areas, malls, PVR multiplexes, public places like bus terminals, railway stations, metro stations, airports and on national highways. The reason behind their popularity is the business and marketing philosophy of the retail chains that insures the availability of their brands to the consumers near their place of work or home.

Advantages of leased departments

  • Following are the advantages of having leased departments from stores’ point of view:
  • It provides one-stop shopping experience.
  • Leased stores pay for property, personnel and other expenses resulting in fewer burdens on lessor.
  • Lessor gets regular monthly income in the form of rent.
  • Employees’ management, merchandise displays and arrangement, reordering of items, complaint handling and so on are handled by individual lessees.

Disadvantages of leased departments

  • Operating hours may vary from store to store on the basis of goods and /or services sold.
  • Items sold /business lines are restricted.
  • If lessees are performing well, the store owner may increase the rent or lessees themselves can create problems by changing /not obeying agreements’ rules and regulations.
  • The bad image of one lessee can spoil the image of entire store.
  1. Vertical Marketing System

A Vertical Marketing System (VMS) is a system in which almost all the members of distribution channel such as manufacturers, wholesalers and retailers work together to satisfy human needs and wants by facilitating the smooth flow of goods and services from manufacturer to ultimate consumer.

In traditional marketing system, manufacturers, wholesalers and retailers are separate entities that try to maximize their own profits. The philosophy behind developing vertical marketing system is that when one member of distribution channel tries to maximize its profits on the expense of rest of the members, it will create conflicts resulting in decline in profits for the whole channel of distribution. To avoid these conflicts, now retail firms have started forming vertical marketing systems. Three types of VMS are in existence through which goods and services are usually distributed to customers.

These are:

  • Independent firm VMS
  • Partially integrated VMS
  • Fully integrated VMS
  1. Consumer Cooperatives

Consumer Cooperatives are retail outlets owned and managed by its customer members. A group of interested customers (members) start retail operations by investing money, receive stock certificates, elect members to run day to day activities and share the profits on the basis of investment made or certificates held.

The reason to setup consumer cooperative is that local retailers are not able to satisfy consumers’ needs (whatever the reason may be). Therefore, consumers are left with no option but to open their own store. Examples of cooperatives in India are the ‘Kendriya Bhandaars’, owned and managed by government, ‘Apna Bazaar’ shops in Mumbai and ‘Super Bazaar’ stores in Delhi. In some cases, these stores are run by the local residents of society/colony/apartment residents.