What is meant by the phrase "Wheel of Retailing?  What are two examples that illustrate the application of this theory?

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kipling2448 | (Level 3) Educator Emeritus

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“Wheel of retailing” is not so much a theory as an observation.  All it means is that companies enter the retail market in their infancy with inexpensive goods of low to moderate quality and, once established, proceed to take those measures necessary to improve the quality of their products while increasing prices in accordance with the higher costs associated with manufacturing better products.  If successful, they have transitioned from the low to the high end of a particular market.  A good example of the successful application of this process is the Korean automobile manufacturer Hyundai.  Long a major industrial giant in its native South Korea, Hyundai was founded in 1947 as a construction company before eventually expanding and branching out to become its country’s largest automobile manufacturer.  The Hyundai Group, the conglomerate that founded that Hyundai Motor Company during the mid-1960s, entered the highly competitive U.S. automotive market in 1986, offering inexpensive, mostly low-end cars.  As it established itself in the United States, it rapidly introduced higher-end automobiles that remained economically competitive.  Today, the Hyundai Motor Company is a major presence in the U.S.

Japanese automobile manufacturers made similar transitions in the U.S. market, although under slightly different circumstances.  Prior to the energy crisis of the late 1970s, Japanese automobiles, mainly Datsun (later changed to Nissan), Toyota and Honda were all cheaply made and inexpensive subcompact cars competing for the low-end American market, which was dominated by large family cars produced by the so-called Big Three, Chrysler, General Motors and Ford.  The dramatic (by U.S. standards) rise in gasoline prices during the late 1970s and early 1980s suddenly created a market for smaller, more fuel-efficient cars.  The Japanese quickly and efficiently responded to the changed American market with vastly improved products.  As the energy crisis dissipated and American tastes returned to larger cars, the Japanese companies kept pace with their own larger – and more expensive – options.  By the mid-1980s, they were introducing their own lines of luxury automobiles under different names, for example, Honda introduced the Acura line, while Nissan introduced its Infiniti brand and Toyota kept pace with its Lexus line of luxury cars.

There are also unsuccessful examples of retailers attempting to ride the “wheel of retailing.”  K-Mart has made a number of attempts at breaking out of its reputation as a low-end chain by attempting to market more upscale lines of clothing.  Most recently, J.C. Penny’s has attempted to refine its image and appeal to more affluent consumers by changing its stores’ interior design and calling itself “JCP.”  Whether JCP will prove a successful transition remains to be seen, as the broader macroeconomic climate remains tenuous.

Many companies aspire to follow the path represented by the so-called “wheel of retailing.”  It is difficult for many newly-established retailers to enter the high-end markets.  Beginning at the bottom and working their up is generally the goal for most businesses.  For this reason, the “theory” of a “wheel of retailing” is less substantive than some might think, bearing in mind that the final stages of the "wheel of retail" are that companies work themselves out of the low- to mid-price market and are eventually replaced by new low-price market competitors.

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