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January 26, 2005

Being the Biggest, Not the Best

While reading Category Killers I started thinking how these retailers are not designed to become the best, they are; however, designed to become the biggest. The accumulation of market share is what these retailers are after and low prices is how they try to get it. Category Killers forgo trying to be the best retailer at customer intimacy or true product leadership for the discipline of being operationally efficient in order to bring low prices to the marketplace.

Spector outlines the many tools category killers attempt to maintain profits by being operationally efficient given dwindling margins in the hyper-competitive big box retailing game. The tools these retailers use include price optimization software (to better understand consumer buying patterns), self service checkout lanes (to improve a retailer’s labor efficiency and reduce shoplifting), and radio-frequency identification technology (to maximize ‘just-in-time’ inventory controls).

Spector also highlights how category killers are turning to producing private label goods to drive sales, maximize profits, and offer consumers even lower prices. On page 71 he writes,

Category killers are constantly searching for a brand-name product that can be sold at the lowest price. If they can’t find it, they will work with a manufacturer to make a product under their own in-house [private label] brand.

Furthermore, Spector lists three reasons why Category Killers are making significant investments in creating their own private label product lines.

First, these goods produce a greater profit margin because the retailers don’t have to pay the built-in costs for the supplier’s shipping, marketing, and advertising. With in-house brands, stores typically have no middleman vendor to pay, and they have more control over prices. By generating better profit margins, the retailer can afford to stock national brands, which produce a thin profit margin.

Second, a retailer can use private label as a distinctive reason for shoppers to visit one of its stores.

Third, the best retailers can market and merchandise their own private labels so well that the consumer believes them to be national brands.

Spector mentions that Best Buy is maximizing the private label opportunity with its vpr Matrix line of personal computers. (The ‘vpr’ in vpr Matrix stands for value, performance, and reliability.)

And, that Barnes & Noble has ramped up its production and merchandising of self-published titles and reprints with an eye towards its B&N branded books garnering 10% to 12% of total company revenues by 2008. (Currently, B&N titles comprise 4% of total sales.)

He also references the private label initiatives Toys "R" Us has implemented in an attempt to arrest Wal-Mart’s market share gain in the toy category.

While my marketing mindset doesn’t sync with the ‘bigger is better’ and ‘lowest price is best’ mentality of Category Killers, Robert Spector adds a touch a retail reality by writing ...

Category killers are not ensured of another tomorrow. To the extent that they adapt or tweak or fine-tool or reorganize they will continue to be vital and important to the consuming public, who are the final arbiters of retail survival. Otherwise, like the retail dinosaurs that once ruled the American retail landscape—Montgomery Ward, Kmart, and others—they will slowly fade from the scene, replaced by newcomers who best capture the contemporary needs of the consumer culture.

Will the drive to be the biggest and not the best retailer ultimately serve as the root cause for the inevitable downfall of Category Killers? After all, competing on a low price strategy is an unstable platform because someone … somewhere … will always find a way to offer the same product at a lower price. Thoughts? Bueller? Bueller? Anyone? Anyone?


Category_killers_4In Category Killers, Robert Spector explores how big box retailers have come to overpower department stores, regional chains, and mom-and-pop stores. He also discusses the societal and economic impact category killers have had on reshaping the retail industry.


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