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Retail revolutions

Updated Wednesday, 19th November 2008

Terry O'Sullivan explores the idea of 'The Big Middle', where low prices and innovation come together

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In spite of the growth of online shopping, the High Street is still a pretty dynamic place. In this blog post I want to talk about some of the ways in which marketing theory tries to explain the way in which retail outlets come and go.

Recent years have seen some very big names all but disappear. Others have had to re-invent themselves in tune with the times. And yet more have apparently popped up from nowhere to offer shoppers an experience they never realised they needed until they walked in off the pavement. Think of chains like Lush, whose perfumed presence hits the nostrils at a range of 100 metres. Bags of groceries Copyrighted  image Icon Copyright: Photos.com Groceries

Or Urban Outfitters with its quirky combination of houseware and boho fashion. Or the renaissance of destination stores like Harvey Nicks and Selfridges in Birmingham’s Bull Ring. You certainly won’t get that kind of shopping experience on the internet. All of these stores have prospered by producing something new that strikes a chord with shoppers. 

In another part of the market, the hard discounters Aldi, Lidl and Netto have come from unglamorous beginnings to a position where they are giving the big grocers a run for their money.

Marketing experts have puzzled for years about what, if anything, drives these changes in the retail landscape. One of the most famous theories, broached by the American scholar Stan Hollander as far back as 1960, is the Wheel of Retailing. This argues that successful new stores start off by piling high and selling cheap.

The ones that thrive expand rapidly – but on perilously thin profit margins. The inevitable next step is to move up-market and court wealthier customers with higher quality, but more expensive merchandise.

However, the operating costs this ushers in can leave established stores exposed to new competitors, keen to grab the customers they've left behind. According to this model of retail development, shops are on a predictable merry-go-round of discounting to win customers, then getting choosier about their clientele, and finally losing ground to upstarts keen to steal their early success.

This is a plausible theory in many respects. You can see how it might fit Aldi's recent launch of a premium range of products. But even Hollander, its originator, wasn't entirely happy with it and just a few years later he came up with another memorable image to explain retail comings and goings – the concertina model.

According to this, the main action on the High Street swings between specialist stores offering a limited range of goods in great depth, and general stores with a wide range of goods but less choice. In this image, the dominant mode of retailing expands and contracts, like an economic squeezebox.

If your products are right for the market, and people can't get them anywhere else, they will come

Just as in the Wheel of Retailing, no store can afford to stand still. So specialists yearn to expand into wider product ranges, and generalists decide to refocus on key lines to free the cash they have tied up in stock. Casualties occur either way, as shops which have grown big on a narrow path lose their way by injudicious expansion, and vice versa.

The latest big idea to explain changes in the retail landscape is called 'The Big Middle'. Dreamt up in 2005 by a group of American researchers working with a senior manager at Wal-Mart, this sounds like it might have something to do with spending too long at the deli counter. But it's another attractively simple concept.

Like the Wheel of Retailing it sees low prices as one route to success for new retailers. But at the other end of the scale it holds innovation to be an equally successful alternative, price notwithstanding. If your products are right for the market, and people can't get them anywhere else, they will come.

Think about some of the hot new apparel and technology retailers as examples of this. In common with the Wheel and the Concertina, the Big Middle holds that you can't stand still in retailing. Sooner or later both discounters and innovators have to move closer to the middle market just to keep growing and cover the rising fixed costs that expansion entails.

This means raising prices to boost profitability and broadening product range to appeal to more customers. So by a natural process they all become more or less the same kind of successful store..

So the likely future for the Aldis of this world is to become ever more like the established supermarkets. Ironically, the big chains, in turn, seem determined to parade their own discounting credentials ever more stridently before us.

Boring perhaps, but good news for the economically-challenged shopper – until the next big thing in retailing comes along.

Listen to this blog post on our Money & Management podcast.

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