The supermarket industry was approximately a $492 billion powerhouse as of the time of publication. It’s evolved from a format of pure competition, where hundreds of thousands of small independent stores essentially sold the same goods, each to a limited geographical area and customer base. This was the beginning stage of the industry life cycle. In the 21st century, the industry is dominated by a limited number of large, sophisticated chains serving multi-state regions in more of an oligarchical structure, the mature stage of the industry life cycle.
Wheel of Retailing Defined
This life cycle evolution from many small independent stores to a few large chains can best be explained by The Wheel of Retailing Theory. The theory postulates that a store will start out to serve a limited market with a small product mix, low prices and low margins. As the store grows, it will expand its product mix, upgrade its facilities, and add services. These all add to the cost of operations, so margins must be raised. As the store continues to grow, it follows the same approach of increasing product mix, and upgrading facilities and services. It may expand by opening additional stores and expanding their marketing area, all of which continues the need to increase margins and prices. If it is managed successfully, eventually the operation becomes the highly sophisticated chain serving a multi-state area.
Competitive Use of the Wheel of Retailing
Other entrepreneurs will try to take market share by opening a store serving a limited market with a small product mix, low prices, low margins and limited services in bare-bones facilities. As they grow, they follow the same format as their predecessors, and eventually become even more successful by learning from them and doing a better job, forcing them into the decline phase of the industry life cycle. Other entrepreneurs then see that success and open their limited stores, and the Wheel of Retailing starts all over again.
Examples of the Wheel of Retailing
An example of this life cycle is The Kroger Company, which, at the time of publication, was the second largest U.S. supermarket chain. Barney Kroger opened one small store in 1883 in Cincinnati, but that has grown to over 2,400 stores. Barney grew his operations by expanding his product mix, adding fresh meat and produce, manufacturing many of his own products, and opening new stores. Repeating this process over and over was his key to successful transition within the industry life cycle. The Great American Tea Company, which became A&P, opened its first store in 1859 in New York selling only tea and spices. Using the same Wheel of Retailing process, A&P grew to 15,000 stores by 1929, selling a very large product mix. Over time, other startups continued to take away A&P market share using the traditional approach of low prices, low margins and limited product mix. Because of its size, A&P could not compete and filed for bankruptcy in 2010. By 2012, they were down to 320 stores, in the decline stage of the industry life cycle.
Exceptions to the Wheel of Retailing
By 1988, Walmart was established as the largest consumer goods retailer in the world. Looking to grow even more, Walmart opened its first supermarket. As of the time of publication, it is the largest U.S. domestic supermarket chain, operating approximately 3,200 supermarkets. Walmart became the industry leader in just 25 years. It took The Kroger Company 130 years to become No. 2. Walmart did not follow the traditional Wheel of Retailing process. Instead, it used its immense financial and management resources, established distribution system, and retailing knowledge to enter at the mature stage of the supermarket industry life cycle.
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