Wheel of Retailing

Numerous theories have been brought out in order to attempt to explain the evolution of retail enterprises all over the world. The Wheel of Retailing most probably will be the one which is well known and describes the life cycle of evolution of retailing. This method is considered to be one of the oldest methods for explaining the patterns of competitive development and changes in retailing over the ages.

The Wheel of Retailing is the name Professor Malcolm P. McNair suggested for major hypothesis concerning the patterns of retail development

Definition

A process observed in retail marketing when what is originally a discount store improves its services and products in order to boost prices once it has become established. As it cycles through the wheel of retailing, a discount retail business might develop into a higher end department store, leaving its former niche to be filled by newer discount businesses

The Wheel of Retailing explains in simple terms retail marketing process whereby original low-price discounters upgrade their services and gradually increase prices. As they evolve into full-line department stores, a competitive opportunity develops for new low-price discounters to develop, and the process continues with the next generation.

According to this theory new retailers enter the market as, low margin, low price, low status institutions. The cycle begins with retailers attracting customers by offering low price and low service. Over a period of time these retailers want to expand their markets and begin to stock more merchandise, provide more services, and open more convenient locations. This trading up process increases the retailer’s costs and prices, creating opportunities for new low price retailers to enter the market.

Similarly the cycle continues for other new entrants.

Example

A restaurant started in a temporary location would be offering a limited number of items at low price. It looks to develop its client base but as soon as the construction is completed or final, it starts providing a lot more variety and introduces a number of new services (free home deliver y, boarding , and lodging )  it also starts increasing its prices on its earlier items. This is done to recover its fixed cost quickly and have an early breakeven so that it can start generating some profit since it is operating in a virgin market it will look to increase its market share.

However  with passage of time when a new restaurant comes up in its vicinity and starts offering the same items at a lower price in order to retain its customers it will  bring down its prices back to where its earlier ones.

Wheel

Many examples of conformity to this pattern can be found. Nevertheless, we may ask:

  1. Is this hypothesis valid for all retailing under all conditions?
  2. What factors cause wheel-pattern changes in retail institutions?

 

The evolution of the department store illustrates the “wheel of retailing” theory. In its entry phase, the department store was a low cost-low service venture. With time it moved up into the trading-up phase. It upgraded its facilities, stock selection, advertising and service. The same department store then moves into the vulnerability phase, because it becomes vulnerable to low cost/low service formats, such as full line discount stores and category specialists.

 

While the wheel hypothesis has a great deal of intuitive appeal and has been borne out in general by many studies of retail development, it only reflects a pattern. It is not a sure indicator of every change, nor was it ever intended to describe the development of every individual retailer.

 

 

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