Chain Stores | Characteristics | Classification | Advantages | Disadvantages
What are Chain Stores?
Chain stores originated in America. It is known as multiple shops in Europe and other Western countries. It is a network of a number of branches situated at different localities in the city or in different parts of the country. Chain Store is a group of retail stores which are of similar kind. They are centrally owned. Some degree of centralized control of operations is exercised over chain stores.
Definitions of Chain Stores
Chain stores are defined as follows:
A chain store system consists of a number of retail stores, which sell similar products, are centrally owned and operated under one management.
— Clark and Clark
A chain store is one of the retail units in the chain store system.
— Holli claw
Number of retail stores operating under a common ownership and management constitutes a chain.
The chain store is a retail organization composed of two or more retail stores owned by and operated under one management.
— Nystrom P.H.
A group of stores handling similar lines of merchandise with single ownership and centralized location.
— Fri J. L
An organization owning a controlling interest in two or more establishments which sell substantially similar merchandise at retail prices.
— Federal Trade Commission
Characteristics of chain stores
1. A group of stores (units) constitutes a chain.
2. Chain stores are centrally owned.
3. They enjoy some degree of centralized control of operations.
4. Individual units have very little autonomy.
5. They sell similar merchandise at retail prices.
6. Centralized purchases are made for all chain stores operating under the single management.
7. Chain stores are horizontally integrated. With addition of each new store, the system extends its operations to another group of customers.
8. Promotional services are undertaken in common to all stores. The cost of promotional services is spread over all units.
9. Sometimes, chain stores are vertically integrated. They maintain distribution centres. They buy from producers, have their own warehousing and then distribute them to their own stores.
Classification of chain stores
Chain stores are classified as follows:
1. On the basis of location, chain stores are classified as local, sectional and national chains. Chain stores which operate in the city itself or near about the city are known as local chains. When chain stores are located at different places within a distinct geographical unit, they are known as sectional stores. National chains operate throughout the country.
2. Chain stores are classified on the basis of type of goods handled. Accordingly, chain stores are drug, tobacco, variety goods, apparel, dry goods, general merchandise, furniture, musical instruments and hardware.
3. Mail order stores do catalogue business.
4. When outside parties stock goods and manage the whole or part of the store, it is known as leased department stores.
5. When public utility companies operate chain stores for the sale of household appliances, they are called utility operated chains.
6. Chain stores which are owned and operated by a manufacturer are known as manufacturer controlled chains. Inefficient services rendered by existing channels of distribution may be the reason for formation of manufacturer controlled chain stores. Shoes, hats, office furniture, sewing machines, bakery goods and confectionery are some items of goods which are sold through manufacturer controlled stores.
Advantages of chain stores
Chain stores offer some important advantages. These may be discussed under two heads namely, advantages to manufacturers and advantages to consumers.
Advantages to of Chain Stores to manufacturers
1. Operational expenses are comparatively lower: Centralized management, common advertisement, high rate of turnover, elimination of middlemen, cash and carry operations etc., lead to lower overhead expenses.
2, Economies of large scale buying: Since centralized buying is undertaken for all the chains owned and operated under one management, economies of large scale buying are available.
3. Uniform price is maintained: Chain stores are a group of retail units operated by a single management. All stores charge the same price. So, a uniform price can be maintained. Uniformity of price gives customers confidence and avoids scope for unnecessary bargaining.
4. Standardized methods of operations are followed in all chain stores: Laying out, window display, advertising, selection and training of sales persons, selling policies, customer services and channel music are carried out in standardized patterns. Adoption of standardized procedures in chain stores ensures economical operations.
5. There is an effective inventory management: The chain stores deal in limited varieties of goods. There is quick turnover of goods. So, this reduces inventory cost.
6. Opening of a new store and closing an unprofitable store are possible: Chain stores are characterized by centralized buying and decentralized selling. So, if a particular store is unprofitable in its operations, it can be closed without affecting other stores. Likewise, addition of a store is also easy.
7. Chains stores deal in a particular line of merchandise. So, expert opinion can be had for all stores simultaneously.
8. Chains stores operate at different residential areas of the same city. So, huge investment is not required in real estate.
9. Risks of bad debts are less: Chain stores sell on cash basis. So, there is no risk of bad debts.
10. Advertisement expenses are less: All branches are uniform in display, design etc. Common advertisements are undertaken for all branches. So, advertisement expenses are less.
11. There is facility of transfer of goods among stores. When one chain store experiences shortage of goods, it can have goods from other branches operating under the same management.
12. The loss incurred by one store can be compensated by the profits earned by other stores.
Advantages of chain stores to consumers
1. Customers enjoy ample shopping convenience. Chain stores are operated in many areas. So, they are easily accessible to customers.
2. There is no involvement of middleman in the operations of chain stores. Manufacturers sell directly to consumers. Profits of middlemen are avoided. So, customers get goods at cheaper prices.
3. Customers are assured of good quality goods. Services of expert buyers are used in centralized buying.
4. Consumers are assured of regular supply of goods.
5. There is direct contact between the seller and consumers.
Disadvantages of Chain Stores
Chain stores suffer from the following demerits.
1. As a number of stores operate under a single management, the overall management and supervision of stores may be difficult.
2. As standardized systems and procedures are followed, the chain stores have little freedom to act according to local situations.
3. An effective remuneration scheme may not be operated for store employees. So, there may be difficulty in securing cooperation from them.
4. Customers do not get services like credit sales, free door delivery, etc. It may have a negative impact on the stores.
5. Chain stores may emerge as monopolistic institutions over a long period.
6. Chain stores simply appeal to a particular class of trade. So, they cannot meet fully the public need.
7. They do not cater to individual tastes.
8. They control retail prices. They create an impression that all their prices are low and that money can be saved by trading with them.
Reason for success of Chain Stores
Despite the above disadvantages, chain stores manage to succeed in the present competitive world.
There are so many reasons for their success:
1. Many of the stores have integrated wholesaling and retailing. Thus, they reduce the selling costs.
2. They reduce cost by buying in large quantities, standardizing their activities, making use of salvage materials, specializing labour and by reducing advertisement cost per store.
3. Chain stores are normally satisfied with a lower percentage of net profit. They depend upon huge sales volume to maximize their profit.