Managing retail chain profitability based on local competitive conditions: preliminary analysis

Abstract

Purpose

The purpose of this study is to describe the determinants of profitability in terms of the strategic profitability model (the Du Pont model), depicting the “route” to high profitability in grocery retail stores located in market areas possessing dissimilar competitive conditions.

Design/methodology/approach

Different physical characteristics (e.g. store formats) have traditionally been used as control criteria, but it is argued in this paper that management principles in retail chains should be based on different clusters of stores, formed from local competitive conditions. The paper proposes a clustering method based on five indicators of local competition. The research results are derived from local competitive conditions and the performance of 168 supermarkets, located in Sweden, and controlled by one retail chain.

Findings

The paper identifies four clusters of local markets labeled monopoly, fleet market, venue, and duopoly, based on local competitive conditions. The findings show that the “route” to profitability significantly differs between the clusters. In monopoly the route to high profitability goes through high‐gross margin, while in fleet market the key figures are low cost, large number of shoppers per week, and high productivity. Venue and duopoly both gain from high‐average transactions per shopper.

Practical implications

Supermarkets under different competitive conditions have different critical success factors and would probably be better managed, supported and evaluated on a different basis, i.e. retail chains need to adjust their approach to their supermarkets depending on local competitive conditions.

Originality/value

Based on the findings the paper proposes unique management strategies for different clusters of local markets to further enhance current strength areas.

Citation

Hernant, M., Andersson, T. and Hilmola, O. (2007), "Managing retail chain profitability based on local competitive conditions: preliminary analysis", International Journal of Retail & Distribution Management, Vol. 35 No. 11, pp. 912-935. https://doi.org/10.1108/09590550710828236