The Advantages and Disadvantages of Large-Scale Retail Business

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The business of a retailer is to buy items in large quantities to take advantage of lower costs and then sell the items in smaller quantities with a profit mark-up. Retailers act as middlemen between the manufacturer or the wholesaler, and the customer wh

Advantages of operating a large-scale retail business

  • Economies of scale

Economies of scale occur when the output of the business increases at a faster pace than costs. Businesses enjoy benefits due to their size. As costs can be divided into fixed and variable costs, where fixed costs are incurred regardless of the level of production, and variable costs are incurred in direct proportion to levels of output, the fixed element of costs can be spread over a larger output in larger firms. For example, a retailer incurs costs relating to carriage inwards of products to his store, over and above the variable costs to buy the products. As the large retailer orders more items, the cost of carriage inwards can be divided by a larger amount of products. Large retailers enjoy the benefits of bulk buying and lower relative cost of labour.

  • Specialization

While a small retailer must decide about all the aspects of the business, the larger retailer can afford to employ specialized persons to deal with sales, purchasing, financing and marketing, amongst others. With persons dedicated full time to their specialized role, efficiency would be affected positively, leading to higher profits and bigger expansion.

  • Offering home deliveries to customers

Dedicated deliverymen can be employed to deliver large orders to clients, and such cost would be covered by the higher profit generated on the large order and the lower relative cost of delivery when the number of clients living close to each other are grouped to minimise travel distance. This facility will attract more customers, open up the business to new concepts such as telesales or internet selling, and enhance the reputation of the business.

  • Special offers and other promotions

Retailers engage in special offers and price cuts in order to attract higher demand and more sales. Large retailers are more likely to afford engaging in such activity than the smaller retailers would be.

  • Investment in new technology

Technology facilitates business, but at a relatively large initial investment. Large retailers have more capital to be able to afford such investment which would be studied and recouped over the years of business through cost savings and higher efficiency. The amount of transactions conducted by the large retailer every day and possibly having more than one outlet in different parts of the country make the investment in technology a must-have to remain competitive and provide accurate and timely information for the effective management of the business.

Disadvantages of large-scale retail businesses

  • Less ability to offer personal service

A small retailer may know all his clients personally due to constant interaction with them. He would know the tastes and preferences of his clients to be able to offer them a better personalized service, catering for their unique needs. A large retailer would not be able to do this as its aim is to sell, sell and sell. Time is money is such a large business and the more rapidly it sells, the higher the profit. Special small orders from customers are rarely accepted, especially if these do not generate enough cash to generate the required rate of return for the business. The customer may be considered nothing more than a number in a large superstore, but he would be a treasured regular customer for the small retail store.

  • Labour problems

The fact that it is constrained by time, pressure is transferred to the large retail store’s staff, which is expected to do more in less time. Most of the work is repetitive and they can hardly engage in conversations with the client or with colleagues. This leads to lower morale on the place of work and more costs of recruitment and retraining if workers regularly resign from their work.

  • Less control over pilfering

With a huge surface area full of thousands of items, it is difficult to have eyes all over the place to control pilfering. Large retailers are faced with the problem of people stealing small amounts from the shelves while no one is looking. Installation of closed-circuit cameras is essential but having someone to go over all the tapes in real-time to check that no one is slipping items into their handbag or clothing comes at a large cost. The temptation to steal is higher in a large shop than it is in a smaller shop where it is easier to be spotted by someone. Thieves may also think that it is less likely for larger retailers to notice occasional pilfered items due to the large quantities of material. Shoplifters are regularly convicted by large retailers than they are by the smaller ones. The business is faced with a loss-loss situation where it either invests in security or else it suffers the loss of pilferage. 

1 comment

Iris McCammon
Posted on Feb 15, 2012