There are several different ways to classify retail businesses and create retail categories. These methods of categorizing and classifying retailers can help to make the complex landscape of retailing more manageable and understandable. Some common ways that retail businesses are classified include by the number of outlets, margin vs. turnover, location, and size.
Number of Outlets
The U.S. Census Bureau classifies retailers by the number of outlets they operate. The number of outlets refers to the total number of retail locations that a company operates. The Census Bureau classifies retailers into three categories based on the number of outlets they operate:
- One outlet: These businesses only have one physical location. An example of a one-outlet retailer is a mom-and-pop shop.
- Two to ten outlets: These businesses have two to ten physical locations. An example of a two-to-ten-outlet retailer is a small chain store.
- Eleven-plus outlets: These businesses have eleven or more physical locations. An example of an eleven-plus outlet retailer is a large department store or supermarket chain.
Businesses that fall into the two-to-ten-outlet and eleven-plus-outlet categories tend to have a larger geographic footprint and a stronger presence in the marketplace than one-outlet retailers. These businesses that have two or more locations are often referred to as chains. This can include larger retailers such as Walmart and Target, which operate thousands of stores across the United States, and smaller retailers that may have only a few stores in a specific region or city.
Margin vs. Turnover
Another method that is used to classify retail businesses is based on a company's inventory turnover and gross margin percentage. This is often referred to as margin versus turnover. Gross margin is the difference between a company's sales and the cost of goods sold. The term inventory turnover refers to the measure of how often a company is selling and replacing its inventory.
There are four main categories typically used in the margin versus turnover classification.
- Low margin/low turnover: These businesses have a low gross margin percentage and a low inventory turnover. These businesses may be struggling to turn a profit due to the low margin on their products and the slow turnover of their inventory.
- Low margin/high turnover: These businesses have a low gross margin percentage but a high inventory turnover. These businesses may be able to offset their low margins with a high volume of sales. For example, Amazon and Home Depot are both low margin/high turnover businesses.
- High margin/low turnover: These businesses have a high gross margin percentage but a low inventory turnover. These businesses may be selling products that are expensive or have a relatively low demand. Examples of high margin/low turnover businesses include jewelers and furniture stores.
- High margin/high turnover: These businesses have a high gross margin percentage and a high inventory turnover. These businesses are typically able to command high prices for their products and have a strong demand from consumers. For example, Apple is a high margin/high turnover business.
Location
Location is an incredibly important factor in the success of many retail businesses. Retailers must carefully choose their locations to ensure that they are able to attract customers and drive sales. Whether that means being located in a high-traffic area or in a location that is convenient for a target customer segment, retailers need to be strategic about where they open their stores. Location can also be separated into four general categories: Business districts, Shopping centers, Free-standing units, and Non-traditional locations.
- Business districts: These are areas that are zoned for commercial and business use. Business districts typically have a mix of office buildings, restaurants, and retail stores. Many business districts are located in densely populated urban areas that are close to areas with abundant access to public transportation.
- Shopping centers: These are commercial areas that are anchored by one or more large retail stores. Shopping centers also have a mix of smaller stores, restaurants, and service businesses. Many shopping centers are located in suburban areas and are accessible by car or public transportation.
- Free-standing units: These are retail stores that are single-unit structures that are not located in a shopping center. These stores are often located in high-traffic areas such as along busy roads. A common example would be a fast-food restaurant along a busy highway.
- Non-traditional locations: These are locations that do not fit into any of the other categories. Non-traditional locations can include college campuses, hospitals, airports, and military bases. These locations often have captive audiences that are willing to pay for convenience.
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Some retailers may have a mix of locations, while others may focus on just one or two types of locations. For example, Starbucks has a mix of locations including business districts, shopping centers, and free-standing units. In contrast, Walmart focuses primarily on free-standing units in suburban areas.
Size
The last classification worth noting is size. Retailers can be classified by their total volume of sales or the number of employees they have. They are often classified this way because size is often seen as a proxy for economies of scale as well as a direct insight into how a company conducts its business. Large businesses typically conduct their business activities differently than small businesses. For example, many large businesses have complex supply chains that require a significant amount of coordination. In contrast, small businesses often have simpler supply chains and can be more nimble in their operations. By separating businesses based on size, researchers and analysts are able to compare companies with their peers to get a better understanding of how they operate.
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A final segmentation method worth noting is the categorization of types of retail stores by their general format or type. The four primary types of retailer formats are department stores, supermarkets, specialty stores, and online retailers.
- Department stores: These are large stores that sell a wide variety of merchandise. Department stores typically have several departments, each selling a different type of product. For example, a typical department store would have departments for clothing, cosmetics, home goods, and electronics. Some department stores also have restaurants, cafes, and other service businesses.
- Supermarkets: These are stores that sell a wide variety of food and household items. Supermarkets typically have a large produce section as well as sections for meat, dairy, frozen foods, and dry goods. Supermarkets may also have a wide variety of non-food items such as health and beauty products, cleaning supplies, and clothing.
- Specialty stores: These are stores that sell a specific type of product or cater to a specific customer demographic. Specialty stores can be small or large depending on the type of merchandise they sell. For example, a small specialty store might sell only women's clothing, while a large specialty store might sell electronics.
- Online retailers: These are retailers that conduct all of their business activities online. Online retailers typically sell a wide variety of merchandise and may be either small or large. Online retailers typically have lower overhead costs than brick-and-mortar retailers and can offer lower prices to consumers.
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It is useful to work through a few examples of retailers to get a better understanding of how they are classified. The first scenario will explore a specialty store example while the second will explore a much larger retailer.
Example 1
Jack's Pizza is a small, family-owned pizzeria that operates 8 locations in a small Midwestern city. Jack's Pizza is classified as a specialty store because they sell only one type of product: pizza. Jack's Pizza is also classified as a small business because they have fewer than 50 employees. The restaurants are usually quite busy and the profit margins are small. Thus they can be considered a high-volume/low-margin business. They have a variety of locations including in the downtown business district and in suburban shopping centers. The most recent location opened is on the local university campus which would be considered a non-traditional location.
Example 2
XYZ Corporation is a large, publicly-traded company that operates 3,000 retail locations across the United States. XYZ Corporation is classified as a department store because they sell a wide variety of merchandise including clothing, cosmetics, home goods, and electronics. XYZ Corporation is also classified as a large business because they have more than 25,000 employees. The company operates in a variety of locations including urban, suburban, and rural areas. They also have a significant online presence. XYZ Corporation may be considered a more traditional retailer because they operate physical locations where consumers can come to purchase merchandise.
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A retailer is a business that sells products or services directly to consumers. There are numerous ways to classify retailers based on various factors such as size, location, margin vs. turnover, and the number of outlets. The U.S. Census Bureau has three general classifications for the number of outlets: single, two to ten, and eleven plus. A business with two or more outlets may be referred to as a chain. Size typically refers to the number of employees, though it can also refer to the gross sales volume. Retailers are often classified by size to accurately compare same-size retailers to one another. There are four general categories for locations known as business districts, shopping centers, free-standing units, and non-traditional locations. Each of these locations has its own unique set of characteristics.
For example, a pizza shop located on a university campus would be considered a non-traditional location. This location would likely have different operating hours than a pizza shop in a shopping center and cater to an extremely specific customer base. Margin vs. turnover is another method of classifying retailers. This is a measure of how many times and how quickly a retailer sells its goods. A high-volume/low-margin retailer sells its products quickly but with lower profit margins while a low-volume/high-margin retailer sells its products slowly but with higher profit margins. A final categorization method worth noting is segmenting businesses into their general types or formats such as supermarkets, department stores, specialty stores, and online retailers.
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Additional Info
Classified
If you're a retail manager, you may be familiar with your business' NAICS code. This is a method of classification under the North American Industry Classification System that helps to categorize and explain the economic activity of businesses in the United States, Canada and Mexico.
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What you may not know is that there are other, informal types of classification that help to explain North America's numerous retailers. Let's take a look at four ways retailers are categorized outside of the official NAICS system.
Retail Categories
There are four common ways that retailers can be classified: number of outlets, margin versus turnover, location and size. Now, let's break down each one.
Number of Outlets
The number of outlets designation refers to how many stores a retailer has, and is broken down into three categories by the U.S. Census Bureau: a single store, two to 10 stores or 11-plus outlets. A retailer that is designated as a single would be similar to a locally-owned grocery store in your town. A business with more than one store is loosely referred to as a chain, even if it only has one additional location. Single outlets sometimes struggle to compete against companies with numerous locations. In the case of the locally-owned grocery store, its owners must contend with chain retailers like Walmart, Target and Kroger. Yet, they may make up for a strong competitive market by having more independence over their pricing or selecting products that they know are strong sellers because they live in, and understand, the market where they are located.
Stores that fall into the two to 10 and 11-plus categories have a stronger presence in a market, simply because they have more locations. This could include big retailers like those mentioned above, such as Walmart, Target, McDonald's and Starbucks, or even locally-owned stores with more than one location. These types of retailers make up roughly 40 percent of all retail sales.
Margin vs. Turnover
Another frequently used retail classification is based on a business' gross margin percentage and inventory turnover, appropriately called margin versus turnover. A gross margin percentage tells us how much a retailer is making on its goods being sold, while inventory turnover shows us how many times annually a retailer sells its goods. For example, if a retailer has inventory turnover 12 times per year, that retailer is experiencing monthly turnover.
There are typically four categories used in the margin versus turnover classification:
- Low margin/low turnover: This category of retailer would struggle, since they are making a low margin of profit and not actively selling goods.
- Low margin/high turnover: This category deals with low gross margins, but turns over inventory quickly. Amazon is an example of this classification.
- High margin/low turnover: This category has a high gross margin, but is slow in turning over inventory. Think about jewelry stores or funeral homes when you consider this category.
- High margin/high turnover: This category has a high gross margin as well as a high turnover of goods, which makes retailers in this group very profitable enterprises. If you've ever purchased a T-shirt at a concert or sporting event, you've supported this type of business.
Location
Real estate agents know that ''location, location, location'' is important, and it's no different for retailers. Whether it's a Starbucks coffee shop placed inside a Target or a freestanding Pizza Hut opened near a college campus, retailers know the significance of being in the right location for the right audience.
Typically, location is separated into four types:
- Business districts: Stores in the central shopping district are positioned in areas of high-traffic or with access to public transportation. This shopping area is frequently in the center of the city or along a town's ''Main Street.'' Other shopping districts may pop up in neighborhoods to be more convenient for shoppers. You may find a mix of popular retailers and local shops in this zone.
- Shopping center: Perhaps more frequently referred to as a mall, shopping centers have been a mainstay in American shopping for years, with tenants ranging from large anchor stores like Belk or Sears to smaller specialty stores selling shoes, cosmetics, clothing and toys, as well as restaurants.
- Free-standing units: Free-standing units are single locations that exist in areas of high traffic. You may have stopped at a fast-food restaurant while traveling on an interstate highway; that is an example of a free-standing unit.
- Non-traditional locations: Increasingly, retailers are seeing the need to evolve in non-traditional ways to appeal to consumers. These locations may be spotted on college campuses, in airports or in the form of a doctor's office inside a popular pharmacy chain. The purpose of these types of units is to be more convenient to customers.
Size
The final area of retail classification is size, whether in terms of volume of sales or the number of employees. Retailers are often segmented in this way because small and large businesses differ in the way they do business. A small, locally-owned store may have relatively low sales volume, while a large retailer like Walmart will do higher sales volume. Retailers with larger employee numbers will be larger in size and volume than retailers with three or four employees. This allows researchers to accurately compare small to small retailers and larger ones with ones their own size.
Lesson Summary
Apart from the more traditional NAICS classifications, there are more informal ways that retailers are categorized. The first is by number of outlets, whether single, two to 10, or 11-plus. This differentiates a single, locally-owned store from a chain of outlets. The second is margin versus turnover, a classification that describes whether a company has low or high margins, or what a company makes, and whether it has low or high turnover of inventory. Location is an important category, with businesses falling into one of several categories: business districts, free-standing units, non-traditional locations and shopping centers. The last category is size, and it relies on either volume of sales of number of employees for segmenting purposes.
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