Retailing in the 21st Century

The global retail landscape is changing in some dramatic ways. Retail sales are currently improving. At the same time, competitiveness of both the U.S. retail and global marketplace is escalating. Whereas category dominant retailers were once the store of choice for a variety of products, chains like Wal-Mart, Carrefour, METRO Group, Tesco and Target have taken over in most categories ranging from toys to jewelry. As the world’s leading retailer, Wal-Mart has a formidable history of providing greater value to consumers than its competitors, in part due to its innovative supply chain management. French-based Carrefour, the world’s second largest retailer, operates five different formats in 30 countries (but not in the United States).1 Based in Germany, METRO Group is ranked fourth in global sales after Wal-Mart, Carrefour, and Tesco, and it operates four different types of retail formats in 32 countries (Table 1).

Costco is the sixth largest retailer in the U.S. and the ninth largest in the world.2 It has developed a unique retailing strategy that has allowed it to outperform other warehouse club stores such as Sam’s Club. A critical component of their strategy is value-based pricing. They generally do not markup merchandise more than 14 %, compared to most supermarkets and department stores who markup products 25 and 50 %, respectively. They also create a lot of excitement by offering limited assortments of prestigious merchandise, such as Waterford Crystal, Polo/Ralph Lauren apparel, and fine diamonds. Their total assortment is about 4,000 stock keeping units (SKU), compared to about 150,000 SKU in a typical Wal-Mart store. This highly edited assortment creates a sense of urgency for their customers – buy it now or it will be gone tomorrow. While a typical grocery store might carry ten brands of ketchup in three different sizes, Costco will carry only one SKU. It has also taken a very proactive orientation towards its employees, and compensates them generously. Although Costco’s innovative approach has proved to be successful, they continue to look for new ways to offer exciting products, prices, and retailing experiences.

At the end of 2007, Germany’s METRO Group had over 280,000 employees and an annual turnover of 66 billion Euro making it the fourth largest retailer in the world behind Wal-Mart (a turnover of 271 billion Euro), Carrefour (82 billion Euro) and Tesco (68 billion Euro). Further, nearly 60% of METRO Group’s revenues came from outside Germany. The story of the growth and transformation of METRO Group from its humble beginnings in the Ruhr valley of Germany just 45 years ago to its present size and scope as a global retailing group is an interesting and important case study, particularly from the viewpoint of providing insights into successful international retailing and global expansion. In this chapter, we describe and review METRO Group’s history and strategies within and outside of Germany, drawing lessons and implications for retailers interested in international growth.

The METRO Group today, whose management holding group is METRO AG in Germany, is comprised of four major sales divisions: The “Cash & Carry” (C&C) stores of the affiliated Metro and Makro companies which make this Group the worldwide leader in self-service wholesaling, the Real chain of food hypermarkets, the nonfood specialty stores chains Media Markt and Saturn which are the leading consumer electronics stores in Europe and the Galeria Kaufhof department store chain. Altogether, METRO Group now has a presence in 32 countries and its four sales divisions together have almost 2,200 locations distributed as follows: 655 Metro and Makro Cash & Carry outlets in 29 countries; 439 Real outlets in five countries; 768 Media Markt and Saturn outlets in 16 countries; 141 Kaufhof outlets in two countries.

Retailing is a challenging industry to enter and be successful in. How do great retail businesses get started and grow? What are the hallmarks of a successful retail entrepreneur? Most students of retailing know the story of Sam Walton and how he founded and built up Wal-Mart to a point from which it could surge ahead to eventually become the number one retailer in the world. Many are also familiar with the stories of his predecessors, among them great American retail entrepreneurs such as Richard Sears and Alvah Roebuck, Frank Winfield Woolworth, and James Cash Penney. However, the experiences of successful contemporary retailers outside of the United States, e.g., those in Europe and Asia, are not so well known on an international scale. These retail leaders’ stories and insights are worth recounting, as they offer valuable guidance to budding retail entrepreneurs and managers setting up shops around the world.

Since the early 1990s there has been a substantial re-structuring of retailing in Europe. Further, even greater, re-structuring is likely over the next 5 years. The implications extend beyond Europe but they have had primary impact within European markets. The restructuring involves not only changes in horizontal competitive relationships amongst retailers but also involves new forms of relationship with suppliers and an extension of the activities of West European retailers into Central Europe. The restructuring has occurred alongside substantive changes in strategies, relationships and operations. These changes have encouraged the emergence of an alternative perspective of the role of retailing that places retailing as the initiator of added value activities in the economy rather than in its traditionally more passive role of building on the value being added in manufacturing. The new role places retailing in a global framework of international store operations, international sourcing of products, international flows of management and managerial know-how, and international retailer brands. The aim of this chapter is threefold to place the re-structuring in context, to consider its nature, and, to explore how the new global framework could affect Europe over the next decade. The chapter comprises five parts. First, the new role of retailing is explored. Secondly, there is consideration of what is changing in the retail sector of Europe. Thirdly, some implications of the changes are explored. The fourth part considers why the changes are taking place. Finally, there is consideration of the underpinning nature of innovation in the changes and exploration of how future patterns may develop.

U.S. retailing is a highly competitive, dynamic industry. Consumers have a large number of retailers that they can choose to patronize conveniently. Due to the availability of information on the Internet, consumers are becoming more sophisticated shoppers – more knowledgeable about retailers and the merchandise they offer. Diversity in consumer needs is increasing across the population and specific shopping situations and, given the number of alternatives, consumers are selectively patronizing retailers that satisfy their specific needs.

In this environment, retailers are employing the classic competitive strategies of low cost or differentiation. Retailers are either developing innovative approaches for lowering their costs and providing lower prices or tailoring their offering to better satisfy the needs of specific market segments.

In this chapter, we first outline the general trends in the U.S. retail industry and then explore specific trends in the various retail sectors – food, general merchandise and non-store retailing. The chapter concludes with a view into the future.

East Asia is a region currently undergoing rapid retail development. There is little mystery in this. It is by far the most densely populated region of the world, and, with some important exceptions, remains largely undeveloped in terms of modern retailing. This latter fact is changing as the world’s leading grocery retailers, notably Carrefour, METRO Group, Tesco, and Wal-Mart, expand in the region, emphasizing East Asian markets as a major pillar of their global strategies. In addition, and although almost unrecognized in the Western press and academic literature, equally large retailers from Japan are also aggressively building market share in all of the key markets in the region.

Such factors make East Asia one of the most interesting regions in the world in terms of how retailing will develop over the next few years. At the same time, East Asia is not a homogenous entity. It does not have a common language, culture, religion or even a single race. There are wide disparities between countries in terms of economic development and standards of living. The geography of the region ranges from desert to jungle and from snowbound winters in northern Japan to constant 30 degree temperatures in Singapore and Indonesia. It is by no means a single market. In contrast, Europe, which is also a large and diverse market, is still more uniform.

Retailing in India is receiving global recognition and attention. It is not just such global players as Wal-Mart, Carrefour, Tesco, and the METRO Group that have plans to expand in this market; even domestic corporate behemoths such as Reliance, TATA, KK Modi, the Aditya Birla group, and the Bharti group are now forging ahead in the development of retail businesses. On 27 June 2007, Reliance announced that it would invest US $ 5.6 billion in retail ventures to become India’s largest modern retailer. The industry is buoyant in terms of growth, and the early entrants are opening new stores at a rapid pace. Considering both the organized and unorganized sectors, retailing in India is currently estimated to be a US $ 350 billion industry, with organized retailing making up only about 3 % of it. By 2010, organized retail is projected to reach US $ 23 billion (KSA Technopak 2005 report) and make up 20-25 % of retailing sector sales (KPMG, 2005). The KPMG report also predicts that retailing will grow faster than GDP in the next 5 years. However, it should be noted that while there is excitement in the organized sector, the traditional format that includes small independent, largely mom-and-pop stores is also expanding rapidly, with almost 1.0 million stores being added every year.

Indian consumer tastes and preferences are changing rapidly, leading to radical alterations in lifestyles and spending patterns, which in turn are giving rise to new business opportunities. Shopping malls are becoming increasingly common in large cities, and at least 150 new shopping malls are expected by the end of 2008. The number of department stores is growing at a healthy rate of 24 % per annum. Supermarkets have come in to garner an increasing share of the general food and grocery trade. Such changes are being witnessed even in rural areas. Many corporations, such as ITC, DCM, TATA, and Godrej, are experimenting with new store formats.

Around 2002, as a participant of MIT’s Auto-ID center, the METRO Group saw the need to test, prove, observe and experience the acceptance of RFID and other new technologies in a real-life environment. The objective was to find solutions entailing real advantages for both the retail industry and the consumers. In the short run, the focus was on technologies that can increase the effectiveness of logistic processes and make shopping easier and more convenient. Longer run objectives include setting standards for retailing that can scale on an international basis.

On April 28, 2003, METRO Group opened its first “Future” Store in Rheinberg near Duisburg/Germany. The remodeled convenience store of METRO Group’s Extra sales division was a novelty and a breakthrough for the development of innovative technologies in retailing. What made the Future Store so special was that it was not a sterile laboratory, but a future “workshop” where everyday customers were able to experience the shopping of tomorrow. Many innovative technologies are not only present in the future store, but also in use. The first customer of the Future Store was Rheinberg born Claudia Schiffer who said, “I am happy to fire the starting shot for a real novelty. Shopping will become really exciting!”

During the last 25 years, marketing research in retail settings has been transformed by technological change. The first wave of change occurred when retailers adopted point-of-sale (POS) systems with UPC barcode scanning. This provided companies with real-time data on purchase transactions and accurate estimates of product sales and market share. Retailers used this information in combination with shelf space allocation and product inventory information to measure the productivity of their stores. By modeling these data as a function of causal variables, such as product price, display activities, and feature advertising, marketers were able to assess the performance and profitability of their marketing investments (e.g., Blattberg and Neslin 1990). UPC scanning served as the foundation for syndicated research services such as A.C. Nielsen and Information Resources, and led to the development of brand and category management. Scanner data are in widespread use today and support many critical business decisions.

The second wave of change occurred when retailers started to track and analyze the purchases of individual shoppers. Some retailers, especially in the grocery industry, launched frequent shopper and customer loyalty programs to collect these data (see, e.g., chapter by Reinartz in this book). Shoppers who participate in such programs typically identify themselves with loyalty cards at the point of sale in exchange for price discounts or other incentives. Companies can also identify repeat customers by requesting their telephone numbers, capturing information from credit and debit cards, reading “cookies” stored on their computer disk drives, etc. This information is often combined with geodemographic and behavioral data from other public and private sources to create a profile and purchase history for each customer or household. These data can be used to estimate customer value and loyalty, measure individual-level response to direct mail and other targeted promotions, and conduct shopping basket analyses to identify product complementarities among other applications (Berson, Smith, Thearling 2000; Ravi, Raman, Mantrala this book). Once again, innovation led to the emergence of new industries (data mining, data warehousing) and new practices (customer relationship management, or CRM).

Over the last two decades, various “intelligent technologies” for database analyses have significantly impacted on the design and development of new decision support systems and expert systems in diverse disciplines such as engineering, science, medicine, economics, social sciences and management. So far, however, barring a few noteworthy retailing applications reported in the academic literature, the use of intelligent technologies in retailing management practice is still quite limited. This chapter’s objective is to acquaint the reader with the potential of these technologies to provide novel, effective solutions to a number of complex retail management decision problems, as well as stimulating more research and development of such solutions in practice.

The great opportunity and scope for productive use of intelligent technologies in the retailing industry today derives from the tremendous expansion in computing power and in data captured for decision-making in various domains of retailing, including inventory and supply chain management, category management, dynamic pricing, customer segmentation, market basket analysis, and retail sales forecasting. The universal adoption of barcode technologies over the last two decades has generated much of the data concerned (e.g., see chapter by Burke in this book). For example, as early as 1990, typical supermarket database sizes ranged from 1 million records for a store audit to 10 billion records for store-level scanner data (McCann and Gallagher 1990). Now, in the first decade of the 21st century, data availability is poised to explode further with the advent and adoption of RFID (radio frequency identification) technology in retailing management.

Customers are becoming more and more familiar with self-service systems. They are used to checking in without assistance at the airport and to using automated teller machines at the bank. Self-service is a trend that is extending to more and more aspects of daily life. The triumphal procession of self-service systems seems to be extending to the supermarkets. New automated self-checkout systems enable shoppers to scan, bag, and pay for their purchases without or with very limited help from store personnel. Although this technology has existed for more than a decade, it is still in the early stages of its diffusion process. Retailers expect to reduce their costs and to gain more flexibility by introducing self-checkout systems. One cashier can now serve multiple customers simultaneously, so that staff time is used efficiently. Displaced labor could be used to improve the service in areas where they really help the customers. But are customers really willing to use the new automated self-checkout systems? The vendors of these systems assert that customers benefit from it too. Shorter checkout queues, a faster checkout process, more privacy, and greater control for the customers are the key arguments being used to convince the retailers to introduce the new self-checkout systems. But past introductions of new products and systems have shown that customer’s acceptance is crucial for their success.

All of us patronize shopping malls and retail outlets, buying goods and services for our own consumption and for gift-giving. By engaging in these activities we are in a good position to reflect on our personal experiences, but what in general is known about retail customers and what changes are becoming apparent? Corporate and academic analysts are grappling with this question, and it is the focus of this chapter. In the first section a retrospective assessment is presented, with particular attention paid to the way retail consumer choice has been conceptualized and analyzed. The report card shows that considerable advances have been made, although there are areas where more work is required. The next section is forward –looking and examines the buyer-centric revolution that is sweeping through contemporary retailing. In particular, we consider how consumer lifestyles are changing and the impact of these changes on our understanding of consumer choices in the retail context. This section is more speculative and raises as many questions as it provides answers.

Commercial retailers find themselves in an increasingly complex environment. On one hand, this complexity is shaped by establishment of new channels and store formats, while there is also moderation of the earlier “store-specific offered goods” targeted at the consumer. On the other hand, consumers also demonstrate multi-optional behaviour and needs structure.

This chapter will outline the status quo currently prevailing in the retail world. In the first part, we intend to show the characteristics of consumer needs and behavioural patterns set against the background of immensely diverse channels and store formats. The second part will deal with the question of how retailers are able to react within the existing framework of multi-channel strategies, and provide some basic guidelines.

Forty years ago, a consumer who wanted to buy prescription medicine in the US or many other western countries would have visited a local independent drugstore. Today, a US customer can fill prescriptions at any number of drugstore chains (e.g., Walgreens or CVS), supermarkets (e.g., Kroger or Albertson’s), mass merchandisers, or supercenters (e.g., Wal-Mart or Target) in town, not to mention mail-order providers (e.g., AmeriCan Meds 1-800-469-0955) and online pharmacies (e.g., www.Drugstores-Online.com). The increased number of options for purchasing pharmaceuticals illustrates the high intensity of retail competition in today’s consumer goods marketplace, driven by discerning consumers with heightened expectations and varying tastes, along with technological advances that facilitate efficient distribution of products and provision of retail services.

As the above example shows, most product categories can now be purchased in several different retail formats. A retail format is comprised of stores that offer the same, or a very nearly the same, variety of product categories.1 Formats that have emerged in recent years, mass merchandisers, supercenters (supercenters include both a mass merchandise store and supermarket under one roof), warehouse clubs, and dollar stores, are collectively known as nontraditional formats. Formats with a longer history, such as grocery, drug, and department stores, are more traditional formats (see also chapters by Ahlert, Blut, Evanschitzky; Weitz, Whitfield; Dawson in this book).

Such terms as globalization, process management, and value-based management dominate the current discussion of management in retail companies. There has been an increasing realization that people are one of a company’s key assets. Retail means working and serving customers in a direct, personal way. This calls for special actions from retail companies to fulfill the demands of an increasing number of well-informed and sophisticated consumers. In view of all the changes in both national and international contexts, it is absolutely essential to get the right people if a business is to be successful and sustainable.

Retailing is a major labor-intensive industry sector. Therefore, companies are continually challenged to re-organize and adapt their structures to become more efficient. The necessity for part-time workers, because of long store opening hours and peaks in the trading day/week, requires a flexible framework to optimize labor processes. Emotionally, the workforce needs orientation and vision in changing times. Human resource management (HRM) has to provide a “coach,” not only to organize, but also to support employees and management mentally and professionally in fulfilling their tasks in terms of future company goals. People are the driving force behind all transactions that occur in retailing outlets. In the future world of retailing, there will be an increasing need to adapt and change towards a more formative and proactive style of HRM.

Product assortment strategy is a central yet complex issue for retailers. Retail product assortments have undergone drastic changes in the past decade from unparalleled large assortments in the early 1990s to the current emphasis on streamlined, efficient assortments. The purpose of this chapter is to provide guidance to retailers making these important assortment strategy decisions.

Consumer assortment perceptions have been shown to be one of the top three criteria, along with location and price, in determining retail patronage. In the 1980s and early 1990s, retailers assumed that larger product assortments better met consumer needs. Broad assortments should increase the probability that consumers will find their ideal product and offer flexibility for variety seekers. Thus, in an effort to serve the customer, the number of products offered in supermarkets escalated from 6000 stockkeeping units (SKUs) in the 1980s to over 30,000 SKUs in the early 1990s. However, the Food Marketing Institute issued two imperative reports that called this increasing assortment into question. First, these broad assortments resulted in higher inventory costs and more out-of-stocks for retailers (see Verhoef & Sloot chapter in this book for further information on out-ofstocks). Second, these higher costs made it difficult for conventional supermarkets to compete against the growing retail formats of discount stores, warehouse clubs, and supercenters.

In today’s competitive environment, service-oriented retailers are faced with one important question: How can we deliver good service levels to our customers, while becoming more cost efficient at the same time? Superior levels of service to customers are necessary to differentiate these retailers from the strongly priceoriented chains, such as Aldi, Lidl, ASDA, Wal-Mart, and Colruyt. One key differentiator of service retailers is their assortment. In general, service retailers offer more national brands than discounters, and also a wider variety of products. However, offering more variety in products and brands has two important consequences. First, retailers are confronted with more costs in the supply chain, due to higher inventory, procurement, handling, and warehouse costs. Second, more variety also increases the probability that out-of-stocks (OOS) may occur, which may lead to customer dissatisfaction and (temporary) store disloyalty. As service retailers strive to compete with discounters on service, OOS can severely jeopardize their competitive position in the consumers’ mind.

It is therefore important for retail managers to manage their assortments in a professional manner (see, e.g., Broniarczyk, Hoyer in this book). In managing the assortment they must strive for an optimal assortment, which at the same time creates customer satisfaction by offering the customers’ required products, reduces supply chain costs, and minimizes OOS levels. The minimization of OOS levels is not an easy task for retailers. However, it is very important, as gross margin losses due to OOS are estimated at between $7 and $ 12 billion in the United States (Andersen Consulting 1996). Moreover, the aforementioned dissatisfaction that can result may decrease retailers’ overall satisfaction scores, which are now regarded as important indicators for future retailer profitability.

Profitability in retailer pricing has become a paramount concern. Retailers, especially, grocery retailers, are operating on razor-thin margins. On average, a supermarket’s margin is about one percent of net sales. A typical supermarket today is bigger than ever before, with several thousands of items – and, due to mergers and acquisitions, it is part of an even larger retail chain. Prices are set weekly on these items, so supermarkets are challenged to develop a coherent and profitable pricing strategy. Moreover, retailers receive trade allowances from manufacturers for promotional pricing. Pressured by competition and by consumers who have come to expect frequent price discounts, retailers have fallen into a price-promotion trap. Although only about 20 % of retail sales come from promotions, supermarkets devote about 80 % of their week managing them. The same retail pricing battle is being waged across department stores, convenience stores, and stores in other traditional retailing categories.

The current focus on profitable pricing strategies is also due to a changing retail landscape. Cross-channel consumer shopping is becoming increasingly common and is altering the pricing practices of many retailers. Competition across retail channels and formats such as grocery (e.g., Kroger), drug (e.g., Walgreens), mass merchandise (e.g., Wal-Mart), convenience and gas (e.g., 7 Eleven), club (e.g., Costco), and dollar (e.g., Dollar General) appears to be much more intense than ever before. Ongoing expansion by Wal-Mart's Supercenters, plus recent growth in club and dollar stores, has lowered the price floor in many markets and categories. Concurrently, the growth of dollar stores is challenging the dominance of the giant low-cost mass merchandiser, Wal-Mart. This phenomenon parallels the rise of low-cost competitors in other industries. For example, competition in the airline industry has intensified with point-to-point airlines, such as Southwest Airlines and Jet Blue, stealing market share from the long standing hub-and-spoke airlines, such as United Airlines and Delta Airlines.

The average profit margin of European retailers is a mere 0.7 %. Most companies blame the difficult economic environment for this low profitability. Yet the disastrous situation is largely self-inflicted, as is indicated by two facts.

First, for years growth has been slower in the retailing industry than in private consumption, indicating a structural problem within the industry. In Germany, for instance, while private consumption grew by some 3.2 % p.a. from 1994 to 2003, revenue growth in the retailing industry stagnated during the same period and even decreased, by 2.8 % in 2002 and 1.0 % in 2003 (see Figure 1). Traditional retailers were hit particularly hard, and their profits were depleted by massive price wars induced by competition for customers and market shares. Secondly, some companies have been able to grow despite the trend. Hypermarkets and discounters such as METRO Group, Carrefour and Aldi, and also focused retailers such as IKEA, Zara, and Hennes & Mauritz have grown. These retailers have continued to increase their revenues and profits year after year. They prove that a difficult economic environment is not necessarily an obstacle to growth.

Present-day consumers are faced with an ever-growing variety of retail formats to satisfy their needs and want. The emergence of new retail formats can be explained in at least three ways: First, it can be argued that the changing demand patterns of consumers may lead to different formats. For example, there are valueoriented shoppers, price-oriented shoppers and convenience shoppers. Each type of consumer may cause the retail industry to consider new retail formats. Secondly, retailers themselves may decide to develop a certain format that best fits their internal strength. By so doing, they hope to obtain a competitive advantage. A third explanation for the emergence of new retail formats may be the changing role of the manufacturing industry. Excess product supply can force prices down, which in turn may lead retailers to purchase opportunistically.

Whatever the reason for the emergence of new retail formats, it is certain that new formats offer opportunities for both traditional and new retailers to increase their market share and their profitability. On the other hand, it may also cause erosion in the retail landscape. Those players who are unable to take the chances that come with a change in the market may lose market share or even disappear (see chapter by Fox, Sethuraman in this book for more insights into betweenformat versus within-format retail competition).

One way for retailers to evaluate the chances for certain retail formats is to take an international perspective. While most developed countries share the same basic retail formats, their importance and dissemination vary substantially across different countries.

Perspectives on electronic retailing have changed dramatically over the past seven years. In 1998, most analysts predicted that a new breed of high-tech, web-savvy entrepreneurs would dominate the retail industry. Everyone would shop over the Internet, stores would close owing to lack of traffic, and paper catalogs would become obsolete. The prospects for electronic retailing were so bright that companies invested, and lost, billions of dollars in Internet retail entrepreneurial ventures such as Webvan, eToys, and Garden.com – companies that are no longer on the retail landscape.

Even though online retail sales continue to grow much faster than retail sales through stores and catalogs, we now realize the Internet is not a revolutionary new format replacing stores and catalogs. Although the Internet continues to provide opportunities for entrepreneurs, in the retail industry it is primarily used by traditional retailers as a tool, complementing their store and catalog offerings, for growing revenues and providing greater value for their customers. For the majority of retailing activity, the Internet is a facilitating rather than a transformational technology (Weitz 2001).

Supply chain management deals with the effective and efficient coordination of flows of inventory, information and cash to lower the total cost of ownership. The supply chain view always starts with the point of purchase or consumption, e.g., at the retail level and follows orders upstream and product flow downstream from wholesalers, distributors, manufacturers and suppliers.

Since 1993, the fast moving consumer goods (FMCG) and the retail industry have formed an alliance to drive out waste out of their supply chains. The initial goal was to reduce the overall supply chain inventory by at least 5 %. This was triggered by the early successes at Procter & Gamble and Wal-Mart in the U.S. in using category management and supply chain collaboration approaches (including information sharing). At the same time, discounters emerged in Germany, i.e., Aldi and Lidl, and challenged big and small stores alike. By 2004, discounters accounted for 37.4 percent of the overall market. Currently, due to a lasting recession, grocery sales are declining and promotion intensity and frequency are steadily increasing across all store formats, including discounters. Retailers that refuse to collaborate with their suppliers but frequently adopt high-low pricing to attract customers to their stores (and lure them away from the every-day-low-pricing (EDLP) stores) are typically suffering from high inventory costs in their supply chains and large forecast error mostly for promotion items (see also chapter by Bolton, Shankar and Montoya in this book).

Sales promotions are a marketing tool for manufacturers as well as for retailers. Manufacturers use them to increase sales to retailers (trade promotions) and consumers (consumer promotions). Our focus will be on retailer promotions, which are used by retailers to increase sales to consumers. Typical examples of retailer promotions are temporary price reductions (TPRs), features, and displays.

Sales promotions have an important role in the marketing programs of retailers. A large percentage of retailer sales is made on promotion, as illustrated by the numbers in Figure 1. Also, retailer promotions address consumers at the point of sale. Thus, while advertising in classic media is becoming less effective, communication through promotions reaches the consumer at the place and time where most purchase decisions are made. The Point of Purchase Advertising Institute (POPAI) finds in a study from 1999 that the in-store decision rate of consumers in Germany, for example, is 55 %, meaning that more than half of all purchase decisions are made in stores, as opposed to before the shopping trip.

In retailing, loyalty programs (LPs) have been the subject of exploding levels of attention since the late 1990s. Building mainly on the premise that it is less expensive to market to existing customers than to acquire new ones, firms across a multitude of industries have raced to implement one loyalty scheme or another. For example, Internet service provider AOL and American Airlines recently created the world’s biggest loyalty program with, respectively, 1.5 million and 38 million members and more than 2000 partners. In Europe, an estimated 350 million loyalty cards were distributed in 1999 for the retailing sector alone.

An LP can be defined as a marketing process that generates rewards for customers on the basis of their repeat purchases. The term “loyalty program” is used here to encompass the many different forms of frequency reward programs. There is not one single definition of an LP because of its considerable overlap with promotional tools. The key characteristics of the term, as it is used herein, are the notions that it pertains to longer-term activity and focuses on supporting or generating repeated customer interactions with a product, store, or brand. Consumers who enter an LP are expected to transact more with the focal company, and in that sense, they voluntarily give up the free choice they would possess otherwise. In exchange for concentrating their purchases with the focal firm, they accumulate assets (e.g., points) that they can exchange for products and services, typically but not necessarily those associated with the focal firm. Therefore, LPs have become an important customer relationship management (CRM) tool used by marketers to identify, reward, and retain their customers

A computer scientist, Mark Weiser, envisioned over a decade ago that future environments would be saturated with computing and communication capability, but yet gracefully integrated with human users (Weiser 1991). His vision manifests itself in smart environments, where useful technologies disappear and “weave themselves into the fabric of everyday life until they are indistinguishable from it.” Retailing environments are poised to become such smart environments with modern technologies such as RFID (Radio Frequency Identification), wireless sensors, the ubiquitous Internet, and mobile computing. Communication is the central part of this smart retailing environment that proactively anticipates the consumer’s needs and makes recommendations to assist consumers’ decision-making process. The key challenge for retailers is to build strong brands by orchestrating in-store communications (e.g., Personal Shopping Assistant) with the usual out-of-store branding communications (e.g., print advertisement). To achieve this orchestration, retailers will find the concept of Integrated Marketing Communications (IMC) relevant for designing profitable marketing strategies.