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Retail Institutions

Objectives of the Chapter


Theories of Institutional Change

Wheel of Retailing Dialectic Process Retail Accordion Natural Selection

Classification of Retailers

Store-Based Retailer Non Store Retailer


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Introduction
Varied Retail store formats

Reasons for the diversity in store formats


Retail format influences the entire retail business

model Retail format plays a key role in the retail strategies being formulated New retail formats are getting framed around different pricing and service strategies. This chapter covers the various theories explaining the reasons for institutional change and also examines the classification of retailers.
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Theories of Institutional Change


Wheel of Retailing Dialectic process Retail accordion Natural selection

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Wheel of Retailing
Proposed by Malcolm. P. McNair

This theory states that in a retail institution

changes take place in a cyclical manner.

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Wheel of Retailing

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Wheel of Retailing
Entry Phase Positioning of Store Trading Up phase Vulnerability Phase Low status Low Higher status Higher Declining ROI price format price format Small High Demand Bigger Customer convenience not necessarily high demand

Size of Store Type of products provided

Service to customers
Shopping Atmosphere Store Location

Minimal
Modest Low rental area

Maximum
Posh High cost, accessible customers Differentiated Traditional retailer Conservatism
7

more to

Product Mix Type of retailer

Minimal Innovative retailer

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Dialectic Process
Melting pot theory

Two institutional forms with different advantages

modify their formats till they develop a format that combines the advantages of both formats. Thomas. J. Maronick and Bruce J. Walker in "The Dialectic Evolution of Retailing." Implies that retailers mutually adapt in the face of competition from "opposites." Thus, when challenged by a competitor with a differential advantage, an established institution will adopt strategies and tactics in the direction of that advantage.
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The Dialectic Process


High margin Low turnover High price Full service Downtown location Plush facilities

Average margin Average turnover Modest price Suburban Location Model facilities

Low margin High turnover Low price Self service Low Rent location Spartan facilities
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Retail Accordion
The theory of 'retail institutional change' states that

institutions evolve over time from outlets offering a wide variety of merchandise to stores offering specialized products, and then eventually these stores begin to offer a wide variety of merchandise. The merchandise mix strategies of retailers change, while the retail prices and margins remain the same. Strategies ranging from stores that offer multiple merchandise categories with a shallow assortment of goods and service to others that offer limited merchandise with a deep assortment of goods and services.
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The Retail Accordion Theory

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Natural Selection
Based on Darwin's theory of evolution.

According to this theory, a firm or retail

institution should be flexible enough to adapt to the changing environment and should adapt its behavior. Success depends on the degree of flexibility enjoyed by the firm.

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Classification of Retailers
Store based retailers

Ownership Strategy Mix Service Vs Goods retail mix

Non Store based retailer

Traditional Non traditional

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Types of Retailers

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Based on Ownership
Independent Stores

Chain Stores
Franchise Stores Leased Department Stores Vertical Marketing System Consumer Cooperatives

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Independent Store
A store, which is owned by a single retailer.

This retailer does not own any other store. The entry barriers are low Licensing procedures are simple Low initial investment.

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Independent Store - Advantages


Freedom to select a convenient location and suitable store

format. Can concentrate on a small target market to achieve its business objectives. Decide on the timing, product assortment and price based on target market. The cost of setting up an independent store is low. Employ a few people, have modest fixtures and do not carry much merchandise. No excess stock or duplication of store functions. Reduced time lag in Decision making. Specialization is possible as focus is on a particular consumer segment.
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Independent Store Disadvantages


Bargaining power is less. Reduced ability of retailers to negotiate with

suppliers Productivity is low Lack exposure to modern tools and techniques for managing various retail functions Increased operational costs Cannot promote their product aggressively in the media.
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Chain Stores
Chain stores have two or more retail outlets

that are commonly owned and controlled. Have a centralized buying and merchandising system and sell similar lines of merchandise.
Eg: Musicworld, Titan, Tanishq, etc

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Chain Stores Advantages


Low costs because of bulk purchases

High Bargaining power


Efficiency is more because of centralized

decision making system and use of latest technology Can afford aggressive and expensive promotion Full time experts employed for long term planning
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Chain Stores - Disadvantages


Cannot

customize

strategies

for

every

location High cost of establishment Requires multiple stores with additional fixtures, product assortments and a large number of store personnel. Difficult to control Centralized management is difficult No personal interest in management of stores
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Franchise Store
A store based on a contractual arrangement

between a franchiser (manufacturer) and a franchisee, which allows the franchisee to conduct a given form of business under an established name and according to a given pattern of business. Eg: McDonalds
Franchising is of two types Product / Trademark franchising Business format franchising
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Franchising Models
Master Franchising System Area Development Franchising System Exclusive Showrooms

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Product / Trademark Franchising


Franchised dealers acquire the identities of

their suppliers by agreeing to sell the latter's products and/or operate under the suppliers name.
In this format, franchisees are relatively

independent from their suppliers.

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Business format Franchising


The franchiser, gives the right to sell goods

and services, and also helps franchisees in various aspects of store management.
Under this type of ownership pattern, the

franchiser and its franchisees work together like a chain store.

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Franchising - Advantages
Franchiser

Can own and operate retail businesses with relatively small capital investment Get well- known brands and goods / service lines Exposure to standard operating procedures Benefit from the nation-wide promotional activities Enjoy exclusive rights to sell the franchiser's products Better bargain per unit purchase

Franchisees

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Franchising Disadvantages
Over saturation Franchisers projects higher returns on investment Restrictions on purchase of raw materials or goods

only from their franchiser Termination of the franchisee license Royalty payable is linked to gross sales Have to renew their franchisee rights when the contract expires.
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Leased Department
A department in a retail store that is rented to an outside party is

called a leased department. The volume of sale depends on the existing store's customer base and store's reliability. The lessee is accountable for all the activities of the leased department. The lessee pays a part of the sales turnover to the store as rent. should ensure that the merchandise of the leased department does not cannibalize the sales of the store. Operations of the leased department should be in line with the image and overall strategy. Objective is to add variety to the merchandise offered. Leased departments offer products/services that complement the primary product/service offering of the store.
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Leased Department - Advantages


Advantage to Lessor

Reduce their cost by leasing departments. Shortcomings in handling certain goods and specialized services can be overcome. Regular monthly income in the form of rent. Advantages to Lessee Increase in customer traffic be of the established name of lessor. The initial cost of establishing an outlet is reduced as a result of leasing is less

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Leased Department - Disadvantages


Disadvantages to Lessor

Disputes may badly affect the image of the established store. Customer will blame the store for any disputes/deficiencies. Leased department may not attract additional customers. Has to function within working hours and operating pattern of the store. Restriction on the goods and service lines offered by the leased departments. The store may increase the rent if the leased department is successful. The in-store location of the leased department may negatively affect its sales.

Disadvantages to Lessee

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Vertical Marketing System


A vertical marketing system is a distribution

system in which the producers, wholesalers, and retailers act in a unified manner to facilitate the smooth flow of goods and services from producer to end-user. One channel member owns the others or has contracts with them, or has the power to control them.

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Types of Vertical Marketing System


Independent Vertical Marketing System:

Consists of independent businesses like manufacturers, wholesalers and retailers. Required when customers are scattered, Manufacturers and retailers are small, Product sales are high, and Products require extensive distribution. used by stationery stores, gift shops, hardware stores, food stores, drug stores etc.
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Types of VMS
Partially

integrated

vertical

marketing

system:

Only two independent business units in a distribution channel work together. These units take care of all the production and distribution functions, A manufacturer and a retailer alone manage the shipping, warehousing and distribution functions without the help of a wholesaler. Generally used in furniture stores, appliance stores, restaurants, computer retailers etc.
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Types of VMS
Fully integrated vertical marketing system:

Only one player manages all the activities In this system, several channel members at different levels in the channel are owned by the same company. The company/store exercises full control over channel operations like production, wholesaling and retailing. The initial cost of setting up a fully integrated marketing system is very high. The company owning the entire marketing system may have difficulty handling some specialized channel activities.
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Consumer Cooperatives
Consumer cooperatives are retail operations

owned and managed by its customer members. In many cases, consumer cooperatives are started by the residents of an area. These residents believe that the existing retailers in that area are not serving them well (either charging too much or providing poorquality goods/services).
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Retailers based on Strategic Mix -- 1


Food Oriented Retailers
Convenience

Stores Conventional Supermarket Food-based supermarket Combination Store Box (limited-line) store Warehouse stores
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Convenience Store
Relatively small stores located near residential areas. Open long hours, seven days a week and carry a

variety of products with limited assortment of merchandise. They generally carry high-turnover convenience products. charge relatively high prices and operate in a 3000 to 8000 square foot area. Cater to customers who prefer 'convenience of buying or shopping'. May not carry all the items that are available in supermarkets, but they are very conveniently located for customers. Customers can get their products billed faster
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Conventional Supermarket
Focus on food and household maintenance

products. Earn very limited revenues from the sale of non-food or general merchandise goods. Self-service operation.

Self-service enhances impulse buying.

Every day low price (EDLP) policy may be

followed.

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Food based supermarket


Larger

and more diversified than a conventional supermarket, but smaller and less diversified than a combination store. The size of the store ranges from 25,000 to 50,000 square feet and the store earns 20 to 25 percent of its revenue from general merchandise goods It provides the full range of grocery items.

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Combination Store
A blend of a super market and a general

merchandise store, Maintains the identity of both a food store and drug store. Size of a combination store ranges from 30,000 to 100,000 square feet. Designed to allow customers to have a onestop shopping experience. Prices are less than those in a general merchandise store.
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Box (limited-line) Store


A food-based discount store that concentrates on a

small selection of goods. Has limited shopping hours, limited services, and limited stocks. Offers a limited number of national brands. Prices are displayed on the shelf or on overhead signs. Customers have to serve themselves and are not allowed to examine products. Sells private label brands, priced 20 to 30 percent below market prices.
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Warehouse Stores
Warehouse stores are discount food retailers

with an average size of 100,000 square feet. They cater to customers who look for low price deals. Merchandise is often displayed in cut boxes or shipping pallets and services are limited. Availability of the goods assured as the warehouse retailer's buy only deep price or quantity discount is offered.
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Types of Warehouse Stores


Depending on their functioning style
Warehouse

showroom Catalog showroom Hypermarket Warehouse club

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Warehouse Showroom
Owned by a single-line hard-good retailer. Usually sell well-known brands of furniture

and appliances As soon as a customer makes the selection and places an order, the goods are shipped from the nearest warehouse. offers different services like credit, delivery and installation for extra charge. located in freestanding sites that are adjacent to busy roads.
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Catalog Showrooms
Discount operations that offer merchandise through

a catalog or a showroom. Catalog showrooms generally offer hard goods like house ware, jewelry, consumer electronics etc. Customer orders by mentioning the corresponding number of product in the showroom or catalog. Delivery a few days after the order is placed. Retailers compete on price. Concentrate on high margin merchandise

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Hyper Market
A large retail store that offers products at a

low price. A combination of a discount store and a food based supermarket. Spread over 300,000 square feet and offers over 50,000 different items for sale.

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Warehouse Club
A general merchandise retailer who offers a

limited merchandise assortment with limited service at low prices to consumers as well as small businesses. Store is located in remote locations in an area of 100,000 sft. Interiors are simple and services are limited. Warehouse clubs operating on a membership basis are known as membership clubs.
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Retailers based on Strategic Mix -- 2


General Merchandise Retailers

Classified based on location, merchandise, price, store atmosphere, service and promotion mix:

Specialty Stores Variety Stores Department stores Off price retailer Membership Club Flea Market
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Specialty Stores
A type of general merchandise store Sells limited lines of closely related products or

services to a select group of customers. Types - Single line specialty stores and Limited line specialty stores. Major variable in a specialty store's strategy is the merchandise assortment. Both high margin and low margin operators can be found in the specialty store category. The size of the specialty store varies based on the nature of merchandise and mode of operation. Specialty stores are located in high traffic areas like shopping centers, downtown malls etc.
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Specialty Store -- 2
The promotional activities emphasize the

uniqueness of the store and the deep assortment they provide to customers.
Category killer: It offers enormous selection

in a product category at relatively low prices. A category killer offers not only low price but also variety within a narrow product line.

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Variety Stores
Variety stores offer a deep assortment of

inexpensive and popular goods like stationery, gift items, women's accessories, house wares etc.
Also called 5 and 10-cent stores

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Department Stores
Department stores are large retail units that

offer wide variety and a deep assortment of goods and services.


Organized into separate departments
Provide a one-stop shopping experience to

customers.

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Criterion for classification as Department Store


i.

A department store should employ a minimum of fifty people.

ii.
iii.

The store should generate at least 20 percent of its total revenue from the sale of apparel and soft goods.
The store should have the following product lines: furniture and home furnishings; appliances, radio and TV sets; a general line of apparel for the family; household products and dry goods. The annual sales of the department store should be under $10 million, where no single product line should contribute more than 80 percent of the total sales. -- U S Bureau of Census

iv.

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Types of Department Stores


A

traditional department store offers merchandise of average quality priced above average, with minimum customer service.

A full-line discount department store offers a

broad merchandise assortment at less than prevailing prices. Full-line discount department stores are popular because they offer well-known brands at competitive prices.
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Features of a Full Line Department Store


High volume, low cost, fast turnover outlet

with a wide merchandise assortment. Centralized checkout service Self-service store A low cost model Offers private brands for non-durables and well-known brands for durables.

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Off-price Retailer
Offer an inconsistent assortment of branded fashion

oriented soft goods at low prices. Purchases from manufacturers who have excess inventory Off-price retailers get special prices from manufactures by agreeing to order goods in the offseason. Off price retailers sell unsuccessful samples and products. Off-price chains do not carry out many promotional activities.
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Classification of Off-price retailers


Outlet stores Close outlet stores Single-price retailers

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Membership Club
Cater to price conscious customers.

Customers pay an annual fee to become members


Very large and located in isolated areas. Characterized by little or no advertising, plain fixtures,

wide aisles, concrete floors, limited or no delivery services, little or no credit, and very low prices.
Get merchandise directly from manufacturers.

Also known as wholesale clubs, warehouse clubs

and wholesale centers.


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Flea Market
The term "flea market" is a literal translation

of the French marche aux puces, an outdoor bazaar in Paris, France. A flea market is an outdoor or indoor facility that rents out space to vendors Entrepreneurs can start business with low investment. Consists of many retail vendors offering a variety of products at discount prices.
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Service Vs Goods retail mix


As

competition increased, service organizations started providing services at a convenient time and location.

Service retailing consists of the sale or rental

of an intangible activity, which usually cannot be stored or transported, but satisfies the need of the user/ customer.

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Types of Services
Two types:

Services along with goods,


Rental Goods Service Owned Goods Service Non goods Service

Services without any goods (pure service).

Services that are provided without any physical product or good are called pure services.

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Non Store Retailer


Differ in the retailing methods from store retailers.

Reach customers and market merchandise using

various methods like "infomercials," directresponse advertising, paper and electronic catalogs, door-to-door selling, in-home demonstrations, portable stalls (street vendors), and vending machines. Non store retailing takes place in two ways:

Traditional Non traditional


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Traditional non store retailers


Direct Marketing

Direct Selling
Vending Machines Catalog marketing Telemarketing TV Home shopping

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Direct Marketing
"Interactive marketing system that uses one or more

advertising media to yield a measurable response and/or transaction at any location". -- Direct Marketing Association (DMA) Customer is informed about the product through non personal media and the customer places an order through the mail or phone. In direct marketing, responses can be measured. Company can concentrate its promotional activities on potential customers.
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Direct Marketing - Advantages


The initial cost or investment for direct

marketers is comparatively less A wide geographic area is covered by the direct marketer's promotional activities. This form of shopping allows the customer to make purchases without having to look for a parking place or waiting in line at the cash register.

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Direct Marketing - Disadvantages


Customers do not have the opportunity

to see and feel the goods before purchasing them.


Cost of developing, printing and mailing

these catalogs can be very high.

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Direct Selling
"Marketing and retailing consumer goods

directly to the consumer that relies neither on direct mail, product advertising nor fixed retail outlets". -- Direct Selling Association
Encourages convenience shopping as well as

personal touch or feel of a product. Can also be called door- to- door selling
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Types of Direct Selling


Person to Person

Multilevel (network) marketing


Party plan Direct selling benefits both consumers and

sellers.

From the consumers' point of view goods are available at their convenience. Direct selling is advantageous for retailers as it is an effective, low cost channel.
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Vending Machines
Involves coin or card-operated dispensing of

products. Eliminates the use of sales personnel and facilitates round-the- clock sales. Vending machines help customers avoid the inconvenience of shopping in a store. High Installation costs Also called Automatic Merchandising.

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Catalog Marketing
Catalog marketing refers to sales made

through catalogs mailed to a select list of customers or made available in a store.


Basic product and pricing information is given

along with instructions for placing an order.


The kind of delivery (mail, express service,

parcel post) that the customer wants can be mentioned in the order
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Telemarketing
Provide

more convenience satisfaction to customers,

and

service

Useful for customers who want to avoid traffic

congestion and parking problems.


Allows

retailers to provide customers information on new merchandise and upcoming sales events.
merchandise to the customers' residence or hold it till it is picked up by the customer at a later date.
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Deliver

TV Home Shopping
TV home shopping works in the following

manner: The merchandise items are displayed, described and demonstrated on television. Using the toll-free number provided, customers can place orders. Payments are done through credit cards. The goods are delivered by courier service along with a guarantee.
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Non-traditional non store based retailers World Wide Web


Retailers' websites allow customers to order

with a click of the mouse. To attract potential customers, retailers also send details of new products through email to customers. Use of Internet as a medium for promoting their goods and services all over the globe at minimum cost. Can conduct research also on customers Internet reduces the costs of retailers
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Non-traditional non store based retailers Video Kiosk


The term kiosk is derived from a Turkish word

which means pavilion. shopping malls.

open

summer

house

or

Kiosks are often placed near the entrances of A video kiosk is a freestanding interactive

computer terminal that displays product and related information on a video screen
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Non-traditional non store based retailers Video Catalog


A video catalog is a retail catalog on a CD-

ROM disk to be viewed on a computer monitor.


After viewing the catalog, the consumer can

call up the retailer to order the goods.


The disk allows the customer to quickly

gather information products.

about

the

retailer's

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Summary
Theories of Institutional Change

Wheel of Retailing Dialectic Process Retail Accordion Natural Selection

Classification of Retailers

Store-Based Retailer Non Store Retailer


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