Category killer

A category killer is a product, service, brand, or company that has such a distinct sustainable competitive advantage that competing firms find it almost impossible to operate profitably in that industry (or in the same local area). The existence of a category killer eliminates almost all market entities, whether real or virtual. Many existing firms leave the industry, thereby increasing the industry's concentration ratio.

An example of a category killer is a big-box retail chain such as Home Depot, Best Buy or Toys "R" Us that is focused on one or few categories of merchandise and offers a wide selection of merchandise in these categories at relatively low prices. The emergence of such stores has taken a toll on specialised local stores in the same market (such as toys), but also affected many larger department stores.

Another example of a category killer business is eBay. The online auction site has a near-monopoly because buyers and sellers naturally gravitate to the largest, most liquid market. As a result, the site has almost no competition and has forced similar auction sites (like those run by Yahoo!) into a very small portion of the market. Jupiter Communications has estimated that eBay earned 90% of all revenues in the consumer-to-consumer auction market in the year 2000.

Definition

The category killer is a term used to define a broad range of merchandises concentrated in a single outlet which far exceeds that of smaller outlets who cannot supply such a range in such depth, with heavily discounted prices or with such efficiency and ability to attract large numbers of potential buyers. This kind of company could provide an extensive selection of merchandise at low prices that smaller stores cannot compete with customers. For instance, discount toy chains, sporting goods chains, home improvement and office supply chains are the representative of category killers.

Examples of category killers

Since the advent of business, some firms have outperformed others within a sector. Companies that seem to dominate a retail or wholesale category are sometimes called category killers. An exceptionally aggressive off-price retailer can offer branded merchandise in clearly defined product categories at heavily discounted prices. The very low pricing strategy and ability to decimate much of the competition in their sector explains the name. The term is used in marketing to describe a product, brand, or company that seems to have a major competitive advantage that it seems to eliminate or come close to eliminating market competitors. These businesses mostly specialize in certain categories rather than try to dominate an entire spectrum like groceries or clothing.

Toys R Us

Toys R Us is a chain that mainly focuses on children or teenagers which produce toy-related merchandises specially. The company operates approximately 880 stores in the United States and 35 other countries. Toys R Us owns the FAO Schwarz brand and has a flagship store near Central Park in Manhattan. However, as the game and toy market is a competitive environment, Toys R Us maintains the edge by trying to be creative, innovative and speculates future marketing scenarios. It opened up a devoted online presence (see online presence management) in 1999 when it became a partner of Amazon. While that cooperative relationship ended in a lawsuit, the value of online combination and the bricks and mortar (B&M) has been understood by Toys R Us eventually.

Google

As one of the most famous search engines, Google does not have real competitors. However, advertisement revenue is the only financial source for search engine functions. Google began as a home business; now it has transformed itself into a multibillion-dollar multinational company which no other company can compete with in any real way. The company is trying to dominate the market share in many areas, such as the operating systems of smartphones. The Google-inspired Android operating system is now the dominant OS, holding about 80 percent of the market.

PetSmart

Several category killers have learned how to bypass the majority of the wholesaler process and maintain a warehouse effect in a soft retail environment. PetSmart is a good example of this type of company. The first PetSmart was opened in 1987 in the Phoenix, AZ area and went public in 1994. The company stores carry just about everything that is needed for dogs, cats, birds, and other more exotic pets. Because the pet market is so specialized, most small pet stores close or go out of business when a PetSmart is built in an area.

eBay

One of the best examples of a category killer is the online auction company eBay. The site has a near-monopoly because sellers and buyers will generally move toward the largest and most active market. Several online attempts have been made to compete, including Yahoo!, but none seems to have caused a problem for the auction giant. eBay survived the dot-com bubble bust in 2000 and hasn't looked back. Over the years, the company has purchased Skype, PayPal, and several other companies that increase profit margins and customer convenience.

Amazon.com

Originally a dedicated online book dealer, Amazon.com has become a mega giant of retail on the Internet. Marketing just about anything that is legal to sell, the company now holds about 30 percent of the eBook sales in the world. The company also has amassed a huge following because of its ability to ship quickly to just about any address. Recently, Amazon has been making forays into the delivery of fresh fruits, vegetables, and frozen goods to customers in urban areas. It has hub warehouses in multiple U.S. urban areas.

While it is not a hard and fast rule, those who go into business hope for market dominance. While that is rarely achieved, the desire for the owner to succeed includes selling more than competitors. Most category killers are chain stores that operate in a big box or maintain a large online presence. Retail marketers have relationships with wholesalers that reduce costs or actually have their own supply pipelines.

The super automotive category killer

Over the last 20 years, category killers have become a major retailing force in a number of product categories. With their relatively narrow product mix, but deep selection, category killers have come to dominate many high‐profile retail markets. Best Buy (home electronics and appliances) and Toys ‘R’ Us (toys) are two high‐profile examples. More recently, even small‐ticket product categories such as books, sunglasses, and even pet foods have seen the entry of category killers.

Until now, one big ticket retailing segment has remained category killer free ‐ the retail used‐car market. In late 1993, Circuit City Stores, then the USA’s largest retailer of home electronics and appliances, entered this market on a test basis with its CarMax store in Richmond, Virginia. This store was the first super automotive category killer (SACK). Encouraged and/or threatened by the apparent success of this retailing format, in early 1996 a number of firms have announced their entry into this market with similar formats. While several mass‐circulation publications have focused national attention on this format, little has appeared in the academic literature to date.

Characteristics of SACK

The SACK has many of the characteristics found in a typical category killer. Among them are:

1. Deep selections: Smaller SACK locations stock 500 vehicles in inventory. Large locations can stock up to 1,000 vehicles.
2. Efficient merchandise arrangements: Vehicles that are functionally similar, such as luxury sedans, are displayed together on the lot.
3. Use of technology: Computer kiosks display standard reports on each vehicle, including a picture and the vehicle’s location. The same information on the computer printout also appears on the car window.
4. Fixed prices: There is no price negotiation.
5. Volume sales: [1] In fiscal year 1995‐96, on an annualized basis, each CarMax location generated retail sales of approximately $100 million Estimates indicate that CarMax has garnered 10 percent of the dealer unit volume in the Richmond, Virginia market.

Consumer trends contributing to the emergence of the SACK

The retail automotive industry has become ripe for the emergence of the SACK as the motor vehicle is virtually the only big‐ticket consumer durable not sold using the category killer concept. The initial success of the SACK is traceable to many of the same factors that revolutionized retailing in other product categories.

Convenience

Consumers feel a “poverty of time.” As a result, consumers are spending less time on shopping and related activities. This poverty of time phenomenon is particularly applicable to shopping for automobiles. The buying process takes time. Few dealers carry a broad inventory of makes and models. The product is complex and requires detailed feature‐by‐feature comparisons. Thus, the consumer needs more time for information search and evaluation of alternatives. In addition, there is a high degree of financial risk. Therefore, buying a vehicle is an example of “extended consumer decision making,” even if the consumer is not a first‐time buyer.

Like other category killers, the SACK permits shoppers to use their time more efficiently. The deep selection alleviates the need to shop several dealers. The computerized information available for each car and the functional groupings of similar vehicles facilitate comparison shopping.

Automotive industry factors that led to the SACK

The recent convergence of two factors largely accounts for the recent application of the category killer concept to used vehicle retailing. First, and most importantly, the SACK concept requires a large, stable supply of “non‐lemon” vehicles. The supply problem was instrumental in Ford’s failure at this retailing concept in the early 1990s. Few, if any, national retailers have ever sold used durable goods, primarily because of the lemons phenomena. Several researchers have found the used vehicle market to be a lemons market. That is, on average the purchaser of a used vehicle incurs more problems than owners of the same vehicle who keep theirs. People tend to sell vehicles when they expect problems. Despite buyer efforts to detect these problems, neither the wholesale (dealer) nor retail buyer is able to ascertain all of the vehicle’s defects before purchase. Hence, used car buyers have traditionally purchased, on average, a lemon.

Facing this scenario, few retailers with brand name equity to protect would rationally enter this market. However, with the Big Three purchase of daily rental car companies in the late 1980s, auto manufacturers began to place over one million vehicles a year into short‐term fleets. Based on mileage and time‐in‐service formulae, these vehicles were “programmed” to return to the traditional used‐vehicle retail distribution system.

By the mid‐1990s, the leasing market provided even a larger source of program cars. With new car affordability an issue, new car dealers and auto manufacturers pushed leasing to reduce monthly payments. Fueling the growth in leasing was the proclivity of luxury car marketers to offer leasing factory incentives instead of dealer or retail cash rebates. Japanese manufacturers, who were establishing their luxury nameplates in the US market, embraced leasing as an alternative to the fire sale atmosphere that traditionally accompanies ash rebates. By the mid‐1990s, these two sources were supplying over three million non‐lemon used vehicles annually. Hence, one could retail these vehicles, confident they were not lemons.

The second factor was the changing nature of the standard new vehicle warranty in the US market. Over the last 30 years, manufacturer new car warranty terms have been as short as three months, (4,000 miles) and as long as 24 months, (24,000 miles) bumper‐to‐bumper with 60‐month (50,000 miles) powertrain coverage. By the early 1990s, the industry essentially had adopted a common 36‐month (36,000 miles) bumper‐to‐bumper, fully transferable warranty. Hence, a used car dealer could sell most program cars with a full new car warranty, honored nationally.

This warranty is critical to the success of the SACK concept. A program car retailer can place its brand name equity on the line by selling vehicles backed by the manufacturer’s nationwide warranty and serviced by its franchised dealers. Should the vehicle not perform to the customer’s expectation, the consumer will hold the vehicle manufacturer and its franchised dealer responsible. This nationwide warranty widens the trade area of the SACK, since service is independent of the purchase locale.

Since the SACK will service only a small fraction of the vehicles it sells, its service and parts departments are small, and are used primarily to condition cars for retail. Manufacturers reimburse their franchised dealers for warranty work at market labor rates (but at a lower than retail parts markup). Thus, new car dealers stand to benefit from increased service department revenues on the SACK sale of a program car.

Recommend books and articles

1. A Dictionary of Marketing (3 ed.), Charles Doyle [2]
2. Journal of Consumer Marketing,David J. Urban [3]
3. Category Killers: The Retail Revolution and Its Impact on Consumer Culture,Robert Spector,Harvard Business Press, (2005)
4. Category killer: pressure cooking-Battle in Manhattan,Krummert, Bob,Restaurant Hospitality, Feb 1999, Vol.83(2), p. 26
5. The super automotive category killer: Why now? What future?,Urban, D.J. ; Hoffer, G.E. Journal of Consumer Marketing, 1997, Vol.14(1), pp. 20–30 [Peer Reviewed Journal]

See also

• Types of retail outlets
• Killer app
• Unfair competition