The Wheel of Retailing is a theoretical retail marketing process that illustrates how original low-price discounters evolve over time. This theory suggests that these retailers gradually upgrade their services, increase prices, and eventually transform into full-line department stores. This evolution creates market space for new low-price discounters to emerge, thus perpetuating a cyclical process in the retail industry.
Origin and Evolution of the Wheel of Retailing
The concept of the Wheel of Retailing was first introduced by the marketing professor Malcolm P. McNair in the 1950s. McNair observed that successful retailers often started as low-price operators but, over time, enhanced their offerings and raised prices to appeal to a broader customer base.
Phases of the Wheel of Retailing
Entry Phase
In the entry phase, new retailers enter the market with a focus on low prices and minimal services. Their primary goal is to attract price-sensitive customers by offering essential products at lower costs.
Trading Up Phase
During the trading up phase, retailers start to enhance their service offerings and improve their store environments. This phase involves investments in better facilities, increased product variety, and improved customer service. Consequently, prices begin to rise to cover these additional costs.
Vulnerability Phase
In the vulnerability phase, retailers have fully transformed into more traditional department stores with extensive services and higher prices. At this stage, they become less competitive on price, creating an opportunity for new low-price discounters to enter the market and start the cycle anew.
Applicability and Examples
The Wheel of Retailing theory has been observed in various retail sectors including grocery stores, electronics, apparel, and more. A classic example is the transition of Walmart from a low-price discounter to a retail giant providing a wide range of products and services, thus opening space for new discounters like Dollar Tree and Five Below.
Case Study: Walmart
Entry Phase: Walmart began as a discount retail store, focusing on offering the lowest prices with minimal frills. Trading Up Phase: Over time, Walmart expanded its product lines, improved store interiors, and added services like pharmacies and financial services. Vulnerability Phase: As Walmart evolved into a full-service retailer, new discount stores emerged to fill the low-price niche.
Economic Impact
The Wheel of Retailing is essential in shaping competitive dynamics within the retail industry. It ensures that there is a constant challenge for established retailers to innovate and maintain their market position while providing an entry path for new competitors.
FAQs
Why do retailers following the Wheel of Retailing raise prices?
How does the Wheel of Retailing create opportunities for new retailers?
Can the Wheel of Retailing be disrupted?
Related Terms
- Discount Store: A retail establishment offering products at reduced prices compared to traditional retail outlets.
- Department Store: A large retail establishment offering a wide variety of products and services under one roof.
- Market Saturation: A situation in which a market can no longer accommodate new entrants due to high levels of competition.
References
- McNair, M. P. (1958). “Significant Trends and Developments in the Postwar Period.” In Competitive Distribution in a Free, High-Level Economy and Its Implications for the University, edited by A. Bruce Clark, 1-25. University of Pittsburgh Press.
- Kotler, P., Armstrong, G. (2017). Principles of Marketing. Pearson Education.
Summary
The Wheel of Retailing elucidates a recurring pattern in the retail industry where low-cost retailers evolve into comprehensive service providers, opening new opportunities for emerging discounters. Understanding this cycle is essential for recognizing competitive dynamics and strategic market entry in retail marketing.
