American Business

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4-02-2010, 16:44

Wheel of retailing

The wheel of retailing is the theory or observation that new competitors come into established retail markets offering lower prices, greater selection of a limited line of products, or unique products challenging a portion of the market of established firms. The new competitors can do this (and still earn a profit) by minimizing costs through limiting services, smaller stores, or control of inventories. In effect, the new firm is attempting to establish a niche market, attracting a portion of the established firm’s customers.

Logically the new competitor is going to attempt to attract the segment of customers that is potentially the most profitable. The “wheel” analogy is used to suggest that this is an ongoing, circular process. The new firm becomes established by offering lower prices or added selection of a limited line of products. Once it has developed a customer base (assuming it is successful), the new firm will begin to offer additional products and services to its customers. This will require additional costs but should (it hopes) result in increased profits. Eventually the new firm becomes an established retailer, upon which new competitors will probably attempt to compete by taking away profitable segments.

One way of visualizing the wheel of retailing is the children’s story of the little fish eats the bigger fish, which eats the bigger fish, which becomes the biggest fish and then is nibbled on by the little fish. An example is today’s specialty clothing stores. In the early 20th century, Sears, J. C. Penney, Nordstrom, and others were individual stores that, over time, expanded to become national retailers. New competitors often choose to locate in the same shopping malls as these established companies, attracting a portion of the traditional stores’ consumers. The most successful of these specialty retailers become national chain stores, which will attract new competition.

Even in retail markets like fast-food restaurants, the wheel of retailing can be observed. In the 1960s, as Americans worked longer hours and two-income families became the norm, fast-food restaurants challenged local diners and at-home meals. By the 1990s fast-food companies had become established leaders. Then, led by Starbucks, new retailers challenged one part of the fast-food market—coffee—and, by turning a commodity into a gourmet food, created a niche market.

In 2002 a Wall Street Journal article reported another example of the wheel of retailing, gourmet sandwiches. New, small restaurant chains are challenging the fast-food industry by offering custom-made sandwiches using “artisanal” bread. In addition, the sandwiches and stores are given upscale-sounding names to help justify the higher prices. Unlike traditional fast-food restaurants, which target children and younger adults, gourmet sandwich stores are attempting to attract “baby boomers,” adults 45–64 years old.

Further reading

Leung, Shirley. “Fast-Food Chains Vie to Carve Out Empire in Pricey Sandwiches,” Wall Street Journal, 5 February 2002, p. A1.