CHAPTER 1

Introduction
to the World
of Retailing
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 01

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What is retailing?
• What do retailers do?
• Why is retailing important in our society?
• What career and entrepreneurial opportunities does
retailing offer?
• What types of decisions do retail managers make?

1-2
What is Retailing?
Retailing – a set of business
activities that adds value to the
products and services sold to
consumers for their personal or
family use.

A retailer is a business that sells

products and/or services to
consumers for personal or family
use.

1-3
 Examples of Retailers

• Retailers:
Kohl’s, Macy’s,
Wendy’s,
Amazon.com, Jiffy
Lube, AMC Theaters,
American Eagle
Outfitter, Avon, J.Crew

• Firms that are retailers and wholesalers - sell to other

business as well as consumers:
Office Depot, The Home Depot, United Airlines, Bank of
America, Costco
1-4
Do Retailers Add Value?

a box of crackers at a grocery store

• costs $1 to manufacturer
Example
• sells at a price of $2

Retailers add significantly to the prices consumers face

Why not buy directly from the manufacturer?

Does that mean that grocery stores are very profitable?

1-5
Why Not Get Rid of the Middlemen?

Price to Price to Price to

Distributor Retailer Consumer
$1.00 $1.20 $2.00

$.85 $.15 $.70

Manufacturer Distributor Retailer Consumer

Vendor Wholesaler
1-6
How Retailers Add Value
■ Provide Assortment
Buy other products at the
same time
■ Break Bulk
Buy it in quantities
customers want
■ Hold Inventory
Buy it at a convenient
place when you want it
■ Offer Services
See it before you buy; get
credit; layaway
Ryan McVay/Getty Images

1-7
The Retailer’s Role in a Supply Chain
• Retailers are the final business within a supply chain
which links manufacturers to consumers.

• A Supply Chain is a set of firms that make and deliver a

given set of goods and services to the ultimate consumer.

• Wholesalers buy and store merchandise in large

quantities from manufacturers and then resell the
merchandise (usually in smaller quantities) to retailers.

1-8
 Manufacturing, Wholesaling
and Retailing
• Vertical Integration – firm performs more than one set of activities in the channel
• Ex: retailer invests in wholesaling or manufacturing

• Backward Integration – retailer performs some distribution and manufacturing

activities
• Ex: JCPenney sells Arizona jeans (Private Label)

• Forward Integration – manufacturers undertake retailing activities

• Ex: Ralph Lauren (New York Jones, Liz Claiborne) operates its own stores

• Large retailers engage in both wholesaling and retailing

• Ex: Wal-Mart, Lowe’s, Safeway, Brown Shoe Company

1-9
Distribution Channel

1-10
Differences in Distribution Channels
Around the World

1-11
 What have created these differences
in distribution systems?

Social & Political • China, India: To reduce unemployment by

Objectives protecting small businesses
• EU: To protect small retailers
• To preserve green spaces/town centers
Geography • Much lower population density in the US than in India,
China, and EU (where less low-cost real estate are
available for building large stores)
Market size • Large retail markets in US, India, China
• Countries in EU – distribution channels and retail
chains operate in a single country (no economy of
scales to be achieved; trade barriers still exist)

1-12
Structure of Retailing and Distribution Channels
around the World: The United States

The United States CHINA

• The nature of retailing and

distribution channels in the U.S.
is unique.
• Has the greatest retail density
• Has the greatest concentration of
large retail firms
• Large enough to operate their
own warehouses, eliminating the
need for wholesaling.
• The combination of large stores
and large firms result in a very
efficient distribution system.
1-13
 Social and Economic
Significance of Retailing
• Retail Sales:
• Over $4.3 trillion in annual U.S. sales
in 2011
• More than 8% of the U.S GDP comes
from retailing

• Employment:
• Employs over 14 million people in
2011
• One of the largest sectors for job
growth in US

• Social responsibility

• Global player
1-14
Social Responsibility
• Corporate social responsibility
• The voluntary actions taken by a company to address the ethical,
social, and environmental impacts of its business operations, in
addition to the concerns of its stakeholders

1-15
 Social Responsibility
• Examples:
• Target stores give to local
communities as well as through its
“Bullseye Gives” program.
• McDonald’s is developing LEED-
certified buildings.
• Nike is creating shoes that score
high on the sustainability index.
• Home Depot partners with Habitat
for Humanity to build houses and
donate supplies.

1-16
World’s 20 Largest Retailers

1-17
Opportunities in Retailing:
Management Opportunities
• People with a wide range of skills and interests needed
because retailers’ functions include
• Finance
• Purchase
• Accounting
• Management information system (MIS)
• Supply management including warehouse and distribution
management
• Design and new product development

1-18
Opportunities in Retailing:
Management Opportunities
• Financially rewarding
• 5-year salary of buyers: $50,000 - $60,000
• 5-year salary of store managers: $120,000 - $160,000

1-19
 Opportunities in Retailing:
Entrepreneurial Opportunities
• Retailing provides opportunities for Wal-Mart: Sam Walton
people who want to start their own
business
• Some of the world’s richest people
are retailing entrepreneurs
IKEA: Ingvar Kamprad
• Examples of retailing entrepreneurs
• Do Won and Jin Sook Chang
(Forever 21)
• Jeff Bezos (www.Amazon.com)
• Ingvar Kamprad (IKEA)
• Howard Schulz (Starbucks) 1-20
Career Opportunities in Retailing
Start Your Own Business
• List of Retail Entrepreneurs on Forbes 400 Richest
Americans
• Walton Family (Wal-Mart)
• Fisher (The Gap)
• Wexner (The Limited)
• Menard (Menard’s)
• Marcus (The Home Depot)
• Kellogg (Kohl’s)
• Schulze (Best Buy)
• Levine (Family Dollar)
• Gold (99Cent Only)

1-21
Retail Management Decision Process

1-22
Strategic vs. Tactical Decisions
• Doing the Right Thing (direction) vs..
• Doing Things Right (execution)
• Strategic Decisions Are:
• Made Infrequently
• Long-term
• Require significant investment
• Not easily reversed
• Location, Organization Design, Information and
Distribution Systems, Customer Service

1-23
Retail Strategy
• Need to identify the
competition
• Intratype competition
• (e.g., Dillard’s vs..
JCPenney)
• Intertype competition
• (e.g., Dillard’s vs.. Wal-
Mart)

• Scrambled
merchandising

1-24
Retail Strategy
• Identifying customers
• What are the significant
demographic and life-
style trends
• Who are your target
customers

1-25
Retail Strategy

• A retail strategy should

identify
• the target market
• the product and service mix
• a long-term comparative
advantage

1-26
Whole Foods Implementation
• Strategy - organic and natural foods supermarket chain
Assortment beyond organic/natural foods
• Private labels - Whole Food™, 360 Day Value™
• Love, trust, and employee empowerment
• Equality in compensation

1-27
Decision Variables for Retailers
Customer
Service

Store Design Merchandise

and Display Assortment

Retail
Strategy

Pricing Location

Communication
Mix

1-28
Ethical Situations for a Retail Manager
• Should a retailer sell merchandise that they suspect
utilized child labor?
• Should it advertise that its prices are the lowest in an area
even though some items are not?
• Should a buyer accept an expensive gift from a vendor?
• Should salespeople use high-pressure sales when they
know the product is not the best for the customer’s
needs?
• Should a retailer give preference to minorities when
making a promotion decision?
• Should a retailer treat some customers better than
others?
1-29
Checklist for Making Ethical Decisions

1-30
You are Faced with an Ethical Decision:
What Can You Do?
• Ignore your personal values and do what your company
asks you to do – you will probably feel dissatisfied with
your job .

• Take a stand and tell your employer what you think. Work
to change the policies.

• Refuse to compromise your principles – you could lose

your job!

1-31
Types of Jobs in Retailing
Appendix 1A
• Most entry level jobs are in store management or buying,
but there’s…
• Accounting and finance
• Real estate
• Human resource management
• Supply chain management
• Advertising
• Public affairs
• Information systems
• Loss prevention
• Visual merchandising

1-32
Misconceptions About
Careers in Retailing
• College not needed
• Low pay
• Long hours
• Boring
• Dead-end job
• No benefits
• Everyone is part-time
• Unstable environment The McGraw-Hill Companies, Inc./Andrew Resek, photographer

• No opportunity for women and minorities

1-33
Why You Should Consider Retailing
• Entry level management positions:
• Department manager or assistant buyer/planner
• Manage and have P&L responsibility on your first job
• Starting pay average with great benefits
• Some retailers pay graduate school
• No two days are alike
• Buying and planning for financially analytically oriented
• Management for people-people

1-34
Keywords
• breaking bulk A function performed by retailers or wholesalers in which they
receive large quantities of merchandise and sell them in smaller quantities.
• ethics A system or code of conduct based on universal moral duties and
obligations that indicate how one should behave.
• holding inventory A major value-providing activity performed by retailers
whereby products will be available when consumers want them.
• intertype competition Competition between retailers that sell similar
merchandise using different formats, such as discount and department
stores.
• intratype competition Competition between the same type of retailers (e.g.,
Kroger versus Safeway).
• wholesaler A merchant establishment operated by a concern that is primarily
engaged in buying, taking title to, usually storing, and physically handling
goods in large quantities, and reselling the goods (usually in smaller
quantities) to retailers or industrial or business users.

1-35
 CHAPTER 1

Types of
Retailers
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 02

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What trends shape today’s retailers?
• What are the different types of retailers?
• How do retailers differ in terms of how they meet the
needs of their customers?
• How do service retailers differ from merchandise
retailers?
• What are the types of ownership for retail firms?

1-37
General Trends in Retailing
• New types of retailers
• Globalization
• Growth in services
retailing
• Growth in
omnishopping by
traditional retailers
• Increase use of
technology to reduce
cost; Increase value
delivered
NAICS Codes for Retailers

1-39
Types of Retailers
• Retailers use different retail mixes
-merchandise:
variety (breadth) / assortment (depth)
stock keeping unit (SKU)
-services
-store design, visual merchandising
-location
-pricing

• Infinite variations
• Some combination of retail mixes satisfy the needs of
significant segments and persist over time.
1-40
Retailer Characteristics
• Variety (breadth)

• Assortment (depth)

• Services offered

• Prices and the cost of offering breath and depth of

merchandise and services

1-41
 Merchandise Offering
Variety (breadth of merchandise): wide vs. narrow
- The number of merchandise categories

Assortment (depth of merchandise): deep vs. shallow

-the number of items in a category (SKUs)
 Services Offered
• Retailers differ in
the services they
offer customers
• Wheelworks offers
assistance in
selecting the
appropriate bicycle
as well as bicycle
repairs.
• Wal-Mart, however,
doesn’t provide any
additional services.
Prices and the cost of offering breath and depth of
merchandise and services
• Stocking a deep and broad assortment (like Wheelworks)
is costly for retailers.

Many SKUs

Because the retailer must have backup stock for each SKU
in addition to holding the inventory

Inventory Investment Cost

1-44
Types of Merchandise Retailers

Food Retailers General Merchandise Retailers

Department Stores
Specialty Stores
Mom and Pop Stores Discount Stores
Convenience Stores
Supermarkets Category Specialists
Supercenters Off-Price Retailers
Warehouse Clubs
Value Retailers
Sales and growth rate for retail sectors

1-46
Characteristics of Food Retailers
 Supermarkets
• Conventional supermarkets
• Perishables (meat, dairy, produce, and baked
goods) account for 30% of supermarket sales

• Limited assortment supermarkets

(extreme value food retailers)
• 2000 SKU
• Offer one or two brands and sizes
• Designed to maximize efficiency and reduce
costs
• Offer merchandise at 40-60% lower prices
than conventional supermarkets
ALDI

ALDI provides quality merchandise at low prices by reducing its

assortment in order to control store operating expenses

1-49
Trends in Supermarket Retailing
• Competition
• Supercenters
• Warehouse Clubs
• Convenience Stores
• Extreme Price Retailers
• Convenience Stores
• Drug Stores

• Changing Consumption Patterns

Time Pressure Eating Out More Meal Solutions

1-50
 Conventional
Supermarket Survival Pack

• Emphasize Fresh Perishables

• Wegmans
• Target health conscious and
ethnic consumers
• Offer more private label brands
• Provide a better in-store
experience
Chef-crafted meals on the go at EatZi’s
Supercenters and Warehouse Clubs
Supercenters (Hypermarkets) Warehouse Clubs

• The fastest growing retail • Offer a limited and irregular

category assortment of food and general
• Large stores (185,000 square merchandise with little service
feet) that combine a at low prices
supermarket with a full-line • Use low-locations, inexpensive
discount store store design, little customer
• One-stop shopping experience service
• Low inventory holding costs by
carrying a limited assortment of
fast selling items
Convenience Store
• Tailors assortments to
local market
• Makes more convenient
to shop
• Offers fresh, healthy
food
• Fast, casual restaurants
• Financial services
available
• Opening smaller stores
closer to consumers (like
airports)
 Characteristics of
General Merchandise Retailers
 Department Store Retailing
• Broad variety

• Deep assortment

• Customer service

• Merchandise displayed into distinct

departments

• Soft goods

• Hard goods
 Issues in Department Store Retailing
• Competition
• Discount stores on price
• Specialty stores on service, depth of
assortment
• Lower cost by reducing service
• Centralized cash wraps
• More sales
• Customers wait for sale
• Focus on apparel and soft home
• Develop private labels and exclusive
brands
Department Stores:
What To Do With an Eroding Market
• Department stores are:

• Attempting to increase the

amount of exclusive
merchandise they sell
• Increase private-label
merchandise
• Expand multichannel and
social media presence
 Issues in Full-line Discount Store Retailing

• Broad variety, limited services, and

low prices
• Only big left
• Wal-Mart, Target
• Wal-Mart’s dominance
• Differentiate strategy
McGraw-Hill Companies, Inc.
Gary He, photographer

• Wal-Mart = Low price and good value

• Target = More Fashionable Apparel
• Competition from category
specialists
• Toys-R-Us, Best Buy, Sports Authority
 Category Specialists
• Deep and narrow
assortments
• Destination stores
• Category killers
• Low price and service
• Intense competition
• Wholesaling to business
customers and retailing to
consumers Bass Pro Shops

• Incredible growth
 Issues in Specialty Store Retailing
• Concentrate on a limited
number of complementary
merchandise categories
• Narrow but deep assortments
• Sales associates expertise
• Among the most profitable and
fastest growing firms in the
world
• Growing interest in resale
stores
McGraw-Hill Companies, Inc./Andrew Resek, Photographer
 Issues in Drug Store Retailing
• Specialty stores that concentrate
on health and beauty care
• Consolidation
• Walgreens, CVS, Rite-Aid
• Competition
• supermarkets, discount stores and
mail-in orders
• Evolution to a new Format
• Stand alone sites with drive-thru
windows
• Offering more frequent purchase
food items
• Improved systems provide
personalized service
Issues in Extreme Value Retailing
• Focuses on lower income consumers
• Names mostly imply good value not $1 price points
• Low cost location
• Limited services
• More private-label options and impulse buys
• Adding food services
• One of the fastest growing retail segments
• Dollar Tree
• Family Dollar
• Dollar General

1-62
 Off-Price Retailers
• Close-out retailers
• Offer an inconsistent assortment of brand name merchandise
at low prices
• Brand name and designer-label merchandise at 20-60%
lower than MSRP
• Offer closeouts and irregulars
• TJX Companies (which operates T.J.Maxx, Marshalls,
Winners, HomeGoods, TKMaxx, AJWright, and HomeSense),
• http://www.Overstock.com and http://www.Bluefly.com

1-63
Services Retailing
• Primarily sell services rather than merchandise
• Intangibility
• Problems in evaluating service quality
• Performance of service provider
• Simultaneous production and delivery
• Importance of service provider
• Perishability
• No inventory, must fill capacity
• Inconsistency of the Offering
• Importance of HR management

1-64
Services Retailing
• Aging population will
increase demand for
health care services
• Young people are
spending more time on
health and fitness
• Busy parents are using
services like home
cleaning, lawn services,
and meal preparation to
balance lifestyles
Examples of Service Retailers
Type of Service Service Retail Firms

Airlines American, Delta, British Airways, Singapore Airways

Automobile maint/repair Jiffy Lube, Midas, AAMCO
Automobile rental Hertz, Avis, Budget, Alamo
Banks Citibank, NCNB, Bank of America
Child care centers Kindercare, Gymboree
Credit cards American Express, VISA, Mastercard
Education University of Florida, Babson College
Entertainment parks Disney, Universal Studios, Six Flags
Express package delivery Federal Express, UPS, US Postal Service
Financial services Merrill Lynch, Dean Witter
Fitness Jazzercise, Bally’s, Gold’s Gym
Health Care Humana, HCA
Home maintenance Chemlawn, MiniMaid, Roto-Rooter
Merchandise/Service Continuum
Types of Retail Ownership
• Independent, Single
Store Establishments
• Wholesale-sponsored
voluntary group
• Corporate Retail
Chains
• Franchises

(c) Brand X Pictures/PunchStock

Retailers Using
Franchise Business Model
 Franchising
• 30 – 40% of US retail sales
• Franchisee pays fixed fee
plus % of sales
• Franchisee implements
program
• Why is this ownership
format efficient?

The McGraw-Hill Companies, Inc./Jill Braaten, photographer

Reasons for Franchising Growth

Technological advances

Profitable utilization of capital resources

Attainment of the “American Dream”

Demographic expansion

Product/service consistency
1-71
Reasons for Franchising Failure

Inept management

Fraudulent activities

Market saturation

1-72
Franchisor Positions
in the Marketing Channel

Manufacturer - retailer

Manufacturer - wholesaler

Wholesaler - retailer

Service sponsor - retailer

1-73
Franchisor Benefits
Continuous market

Market information

Money

Royalty fees

Sales of products

Rental and lease fees

License fees

Management fees
1-74
Franchising Trends for the New
Millennium
Sustained growth

Enduring plus un-imagined applications

International expansion

Increasing tensions

Greater emphasis on financial returns

1-75
Keywords
• assortment The number of SKUs within a merchandise category. Also called depth of
merchandise.
• breadth of merchandise The number of different merchandise categories within a
store or department.
• category killer A discount retailer that offers a narrow but deep assortment of
merchandise in a category and thus dominates the category from the customers’
perspective. Also called a category specialist.
• category specialist A discount retailer that offers a narrow but deep assortment of
merchandise in a category and thus dominates the category from the customers’
perspective. Also called a category killer.
• convenience store A store that provides a limited variety and assortment of
merchandise at a convenient location in a 2,000- to 3,000-square-foot store with
speedy checkout.
• conventional supermarket A self-service food store that offers groceries, meat, and
produce with limited sales of nonfood items, such as health and beauty aids and
general merchandise.
• department store A retailer that carries a wide variety and deep assortment, offers
considerable customer services, and is organized into separate departments for
displaying merchandise.

1-76
Keywords
• depth of merchandise The number of SKUs within a merchandise category. Also
called depth of merchandise.
• discount store A general merchandise retailer that offers a wide variety of
merchandise, limited service, and low prices.
• franchising A contractual agreement between a franchisor and a franchisee that
allows the franchisee to operate a retail outlet using a name and format developed and
supported by the franchisor.
• full-line discount store Retailers that offer a broad variety of merchandise, limited
service, and low prices.
• hypermarket Large (100,000–300,000 square feet) combination food (60–70 percent)
and general merchandise (30–40 percent) retailer.
• North American Industry Classification System (NAICS) Classification of retail firms
into a hierarchical set of six-digit codes based on the types of products and services
they produce and sell.
• off-price retailer A retailer that offers an inconsistent assortment of brand-name,
fashion-oriented soft goods at low prices.
• specialty store A type of store concentrating on a limited number of complementary
merchandise categories and providing a high level of service.

1-77
Keywords
• stock-keeping unit (SKU) The smallest unit available for keeping inventory control. In
soft goods merchandise, an SKU usually means a size, color, and style.
• supercenter Large store (150,000 to 220,000 square feet) combining a discount store
with a supermarket.
• supermarket A conventional supermarket is a large, self-service retail food store
offering groceries, meat, and produce, as well as some nonfood items, such as health
and beauty aids and general merchandise.
• value retailers Small, full-line discount stores that offer a limited merchandise
assortment at very low prices.
• variety The number of different merchandise categories within a store or department.
• warehouse club A retailer that offers a limited assortment of food and general
merchandise with little service and low prices to ultimate consumers and small
businesses.
• wholesale-sponsored voluntary cooperative group An organization operated by a
wholesaler offering a merchandising program to small, independent retailers on a
voluntary basis.

1-78
 CHAPTER 1

Multichannel
Retailing
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CHAPTER 03

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What are the unique customer benefits offered by the
retail channels – stores, catalogs, Internet, and
mobile?
• Why are retailers moving toward using all four
channels?
• How do multichannel retailers provide more value to
their customers?
• What are the key success factors in multichannel
retailing?
• How might technology affect the future shopping
experience?
1-80
 The Multichannel Retailer (omniretailer)
A retailer that sells merchandise or service through more than one
channel. By using a combination of channels, retailers can exploit the
unique benefits provided by each channel.

Retailer Steve Cole/Getty Images

The McGraw-Hill Companies,

Inc./Andrew Resek, photographer Digital Vision / Getty Images

1-81
U.S. RETAIL SALES BY CHANNEL
Benefits of Multichannel Retailing

Overcoming the
Limitations of an
Existing Format

Low-Cost, Consistent
Increased Assortments Current Information
Execution

1-83
Why are Retailers Using Multiple
Channels to Interact with Customers?
• Customers want what they
want, when they want it.
• Customers want new ways
customer to engage with retailers.

store kiosk catalog call center web/e-mail mobile

 Why are store-based retailers evolving
into multichannel retailers?
• Sales through an electronic
channel are growing at over 20%
per year
• Adding an electronic channel
creates immediate possession
utility
• Multichannel retailers can attract
more customers and satisfy
existing customers better
• The growth of sales in stores is
declining
Benefits Provided by Different Channels
Unique Benefits Provided by Store Channel

• Browsing
• Touching and feeling
• Personal service
• Cash payment
• Entertainment and social
interaction (c) Brand X Pictures/PunchStock

• Immediate gratification
• Risk reduction

Royalty-Free/CORBIS
Benefits Provided by Catalog Channel
Convenience
Information
Safety

Hoby Finn/Getty Images

1-88
What’s the Big Deal About
Shopping on the Internet?
• Almost 75% of U.S. consumers use the Internet to
search for information about clothes, shoes, toys, and
health and beauty products before they buy an item.
• 83% of customers search online before buying
electronics, computers, books, music or movies.
• Internet channels allow retailers to offer a great
assortment of products and provide more information
to customers.
• The Internet allows retailers to collect information
about consumer shopping habits.
• The Internet allows the retailer to enter new markets
economically.
1-89
Internet Channel
• Deeper and broader selection
• More tools for evaluating merchandise
• Personalization
• Information is tailored to individual consumers to help them make
quicker and better purchase decisions
• Customized information -- side by side comparisons
• Virtual try on
• Information for solving problems, not just merchandise
characteristics
• Virtual Communities

1-90
Mobile Internet Shopping
• Mobile
• Portable
• Location sensitive
• Push notifications
• Touchscreen
• Smaller screen size
• Apps
 Challenges of Effective Multichannel Retailing
• Centralized vs. decentralized
multichannel retailing

• Multichannel supply chains

and information systems
• Distribution strategies for stores,
catalog, and Internet channels
Challenges of Effective Multichannel Retailing

• Integrated Shopping Experience

• Communicate with customers anytime,
anywhere through multiple channels
• Website, Store, Kiosks, Handheld
Devices
• Integrating legacy systems for
seamless customer interface

• Merchandise assortment

• Pricing strategies
Today’s empowered consumers live in a multi-channel world –
research products online, buy offline, and demand service everywhere

Web & Email

Consumers buy • 24x7
what they want, • Visual
when they want,
Call Center
wherever they want
• Convenient
• Immediate
Brick & Mortar
• Touch/Feel
• Experience driven

Kiosks
• Visual
• Convenient
Customer
Handheld Devices
• Immediate
• 24x7
Shopping in the Future
Shopping Experience:
Personalization Potential

1-96
Keywords
• catalog retailing Nonstore retail format in which the retail offering is
communicated to a customer through a catalog.
• channel migration When consumers’ collect information about products on
one company’s channel and then buys the product from another competitor.
• direct selling A retail format in which a salesperson, frequently an
independent distributor, contacts a customer directly in a convenient location
(either at a customer’s home or at work), demonstrates merchandise benefits,
takes an order, and delivers the merchandise to the customer.
• disintermediation When a manufacturer sells directly to consumers, thus
competing directly with its retailers.
• electronic retailing A retail format in which the retailers communicate with
customers and offer products and services for sale over the Internet.
• Internet channel, Internet retailing, E-channel See electronic retailing.
• multichannel retailer Retailer that sells merchandise or services through
more than one channel.

1-97
 CHAPTER 1

Customer
Buying
Behavior
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CHAPTER 04

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• How do customers decide which retailer to go to and what
merchandise to buy?
• What social and personal factors affect customer
purchase decisions?
• How can retailers get customers to visit their stores more
frequently, and buy more merchandise during each visit?
• How do retailers group customers into market segments?

1-99
Illustration of Buying Process
• Eva Mendoza, a student at the University of Washington,
is beginning to interview for jobs.
• For the first interviews on campus,
Eva planned to wear the blue suit
her parents bought her
several years ago.
• But after looking at her suit, she
realizes that it’s not stylish, and
it shows signs of wear. © Digital Vision

• She wants to make a strong first impression during her

interviews, so she decides to buy a new suit.

1-100
Illustration (Continued)
• Eva surfs the Internet for tips on
dressing for interviews. She surfs
fashion blogs like Nubry and checks
what her friends are wearing on
Facebook and what they have
pinned on Pinterest.

• Before going to the Northgate Mall

in Seattle, she issues a status
update on her Facebook page
announcing her intentions to go to
the mall and inviting her friends to
join her. Her friend Britt decides to
meet her at the mall.

• They first go to Macy’s and are

approached by a salesperson who
asks Eva what type of suit she
wants.
Illustration (Continued)
• Eva wanders into Macy’s, as a salesperson approaches
her in the career women’s department.
• After asking her what type of suit she wants and her size,
the salesperson shows her three suits. Eva photographs
them with her cell phone, and sends them to her friend
Betsy who couldn’t make it.
• Eva, Britt, and the salesperson decide the second suit is
more attractive and appropriate.

© Bananastock/Punchstock
1-102
Illustration (Continued)
• Eva is happy with the aesthetics of the suit:
its color, fit, fabric, and length. Although, she
is about the costs of dry cleaning, and she
realizes she’s spending more money than
she had planned.
• Then Eva decides to buy it after another
customer in the store tells her she
appears very professional in the suit
• As the salesperson walks with Eva to the cash register,
they pass the shoes. Britt tells Eva, “You need to buy
shoes that go with your suit.” She finds a pair of pumps
that she likes and then realizes she can buy them for $20
cheaper online and have them delivered the next day.
1-103
Stages in the Buying Process
Types of Needs

• Utilitarian Needs –satisfied

when purchases accomplish
a specific task. Shopping
needs to be easy, and
effortless like Sam’s or a
grocery store.
• Hedonic needs – satisfied
when purchases accomplish
a need for entertainment,
emotional, and recreational
experience as in department
stores or specialty stores.
Hedonic Needs that Retailers can Satisfy
• Stimulation
• Ex: Background
music, visual
displays, scents
• Satisfy need for
power and status
• Ex: Canyon Ranch –
upscale health resorts
• Adventure
• Treasure hunting for
bargains
Conflicting Needs
• Ex: Eva’s hedonic needs conflict with her budget, and her
utilitarian need to get a job.

• Customers make trade-offs between their conflicting

needs.

• Cross-shopping

1-107
Information Search
• Amount of information search depends on the value from
searching versus the cost of searching
• Factors Affecting Amount of Information Search
• Product Characteristics
• Complexity
• Cost
• Customer Characteristics
• Past experience
• Perceived risk
• Time pressure
• Market Characteristics
• Number of alternative brands

1-108
Sources of Information

• Internal
• Past experiences
• Memory

• External
• Consumer reports Digital Vision / Getty Images

• Advertising
• Word of mouth
• Internet
• Social Media

© Dynamic Graphics/Picture Quest

How Can Retailers Limit
the Information Search?
• Information from sales
associates
• Provide an assortment of
services
• Provide good assortments
• Everyday low pricing
• Credit
• Conversion rate-the
percentage of customers
who enter a store or access
a website and then buy a
product from that same store
or website.
Royalty-Free/CORBIS
Internet, Information Search,
and Price Competition

• Profound impact on consumers’ ability to gather external

information

• Number of stores visited is no longer limited by physical

distance

• Information about the quality and performance at a low

search cost

• Retailers using an Internet channel can differentiate their

offerings by providing better services and information
1-111
Evaluation of Alternatives
• Multiattribute attitude model:
• Customers see a retailer, product, or service as a collection of
attributes or characteristics

• Predict a customer’s evaluation of a retailer, product, or service

based on:
• Its performance on relevant attributes
• The importance of those attributes to the customer

1-112
Evaluation of Retailers
Information Needed to
Use Multi-Attribute Model

• Alternative consumer considering

• Characteristic/Benefits sought in making store and

merchandise choices

• Ratings of alternative performance on criteria

• Importance of criteria to consumer

1-114
Getting into the Consideration Set
• Consideration set: the
set of alternatives the
customer evaluates
when making a choice
of what retailer to
patronize.
• Increase beliefs about
performance
• Change customers’
importance weights
• Add a new benefit
 Purchasing Merchandise or Services

Customers do not always purchase a brand with the

highest overall evaluation.
• The high-rated item may not be

The McGraw-Hill Companies, Inc./Jill Braaten, photographer

available in the store.
• How can a retailer increase the
chances that customers will convert
their merchandise evaluations into
purchases?

1-116
Postpurchase Evaluation
• Satisfaction
• A post-consumption evaluation of how well a store or product
meets or exceeds customer expectations

• Postpurchase evaluation becomes part of the customer’s

internal information that affects future store and product
decisions

• Builds store and brand loyalty

1-117
 Types of Buying Decisions
• Extended Problem Solving
• High financial or social risk
• Limited Problem Solving
• Some prior buying
experience
• Habitual Decision Making
• Store brand, loyalty
 Extended Problem Solving
Consumers devote time and effort analyzing alternatives
• Financial risks – purchasing
expensive products or
services
• Physical risks – purchases
that will affect consumer’s
health and safety
• Social risks – consumers
will believe product will
affect how others view them
1-119
 What do Retailers Need to do for Customers
Engaged in Extended Problem Solving

• Provide a Lot of
Information
• Use salespeople rather
than advertising to
communicate
with customers
• Reduce the Risks
• Offer guarantees
• Return privileges
© Royalty-Free/CORBIS
Limited Problem Solving
Purchase decisions process involving moderate
amount of effort and time

• Customers engage in this when they have had prior

experience with products or services
• Customers rely more upon personal knowledge
• Majority of customer decisions involve limited problem
solving

1-121
What do Retailers Need to do for Customers
Engaged in Limited Problem Solving?
• It depends…
• If the customer Is coming to you, provide a positive
experience and create loyalty
• Make sure customer is satisfied
• Provide good service, assortments, value
• Offer rewards to convert to loyal customer
• If the customer goes to your competitor’s store,
change behavior
• Offer more convenient locations, better service and
assortments

1-122
 Encouraging Impulse Buying
• Impulse buying: unplanned
purchase, and one common type
of limited problem solving
• Influence by using prominent
point-of- purchase (POP) or point-
of-sale (POS)
• Have salespeople suggest add-ons
• Have complementary merchandise

PhotoLink/Getty Images
displayed near product of interest
• Use signage in aisle
• Put merchandise where customers are
waiting
Habitual Problem Solving
Purchase decision process involving little or no conscious effort

• For purchases that aren’t

important to the consumer

• For merchandise consumers

have purchased in the past

• For consumers loyal to

brands or a store
 Customer Loyalty
• Brand Loyalty
• Committed to a specific brand
• May switch retailers to buy brand

• Store Loyalty
• Committed to a specific retailer
• Reluctant to switch retailers
What do Retailers Need to do for Customers
Engage in Habitual Decision Making?
• It depends…
• If the customer habitually comes to you, reinforce
behavior
• Make sure merchandise in stock
• Provide good service
• Offer rewards to loyal customer

• If the customer goes to your competitor’s store, break the

habit
• Offer special promotions

1-126
Social Factors
Influencing the Buying Decision Process
 Family Influences Buying Decisions
• Purchases are for entire
family to use

• Whole family participates in

decision making process

• Retailers work to satisfy

needs of all family
members
Reference Groups
• A reference group is one or more
people whom a person uses as a
basis of comparison for beliefs,
feelings and behaviors.

• Reference groups affect buying

decisions by:
• Offering information

(c) image100/PunchStock
• Providing rewards for specific
purchasing behaviors
• Enhancing a consumer’s self-
image
Culture
• Culture is the meaning, beliefs, morals and values shared
by most members of a society.

Example:
• U.S. Hispanic population is growing faster than any other
market segment and Hispanics’ purchasing power is rising
faster than the general population.
• Many retailers are employing bilingual sales associates
• Restaurants are offering both Spanish and English menus

1-130
Market Segmentation

• Retail Market
Segment- a group of
customers who are
attracted to the
same retail mix
because they have
similar needs.
Criteria for Evaluating Market Segments

Actionable
• Retailer should know what to
do to satisfy needs for the
customers are in the segment

Identifiable
• Retailer is able to
determine which
customers are in the
segment

1-132
Criteria for Evaluating Market Segments

Substantial
• Market segment must be
larger enough or its buying
power significant to generate
sufficient profits

Reachable
• Retailer can target
promotions and other
elements of the retail mix to
customers in the segment

1-133
Approaches for Segmenting Markets
Approaches for Segmenting Markets
• Geographic segmentation groups customers according
to where they live.

• Demographic segmentation groups consumers on the

basis of easily measured, objective characteristics such
as age, gender, income, and education.

• Geodemographic segmentation uses both geographic

and demographic characteristics to classify consumers.

1-135
Approaches for Segmenting Markets

• Lifestyle, or psychographics , refers to how people live,

how they spend their time and money, what activities they
pursue, and their attitudes and opinions about the world in
which they live.

• Buying situations can influence customers with the

same demographics or lifestyle.

• Benefit segmentation groups customers seeking similar

benefits.

1-136
Keywords
• complexity The ease with which consumers can understand and use a new fashion.
• cross-shopping A pattern of buying both premium and low-priced merchandise or patronizing
expensive, status-oriented retailers and price-oriented retailers.
• everyday low pricing (EDLP) A pricing strategy that stresses continuity of retail prices at a level
somewhere between the regular nonsale price and the deep-discount sale price of the retailer’s
competitors.
• impulse buying A buying decision made by customers on the spot after seeing the merchandise.
• information search The stage in the buying process in which a customer seeks additional
information to satisfy a need.
• lifestyle Refers to how people live, how they spend their time and money, what activities they
pursue, and their attitudes and opinions about the world they live in.
• multiattribute attitude model A model of customer decision making based on the notion that
customers see a retailer or a product as a collection of attributes or characteristics. The model can
also be used for evaluating a retailer, product, or vendor. The model uses a weighted average score
based on the importance of various issues and performance on those issues.
• postpurchase evaluation The evaluation of merchandise or services after the customer has
purchased and consumed them.
• satisfaction A post-consumption evaluation of the degree to which a store or product meets or
exceeds customer expectations.
• store advocates Customers who like a store so much that they actively share their positive
experiences with friends and family.
1-137
 CHAPTER 1

Retail Market
Strategy
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CHAPTER 05

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Questions
• What is a retailing strategy?
• How can a retailer build a sustainable competitive
advantage?
• What steps do retailers go through to develop a
strategy?
• What different strategic growth opportunities can
retailers pursue?
• What retailers are best positioned to become
global retailers?

1-139
More attention to long-term strategic
planning than ever before
• Due to the
emergence of
• New competitors
• New formats
• New technologies
• Shifts in customer
needs
Elements in Retail Strategy
• Target Market
• the market segment(s) toward which the retailer
plans to focus its resources and retail mix
• Retail Format
• the nature of the retailer’s operations—its retail
mix
• Sustainable Competitive Advantage
• an advantage over the competition that is not
easily duplicated and can be maintained over a
long time.
1-141
Retail Market
•Retail market:
• A group of consumers with similar needs and a group of
retailers that satisfy those needs using a similar retail
channel and format.

1-142
Criteria For Selecting A Target Market
• Attractiveness --
large, growing,
• Little competition
• More profits
• Consistent with your
competitive
advantages

Rim Light / PhotoLink / Getty Images

Can A Retailer Develop a Sustainable
Competitive Advantage by:
• Dropping the Price of Your Merchandise?
• Building a Store at the Best Location?
• Deciding to Sell Some Hot Merchandise?
• Increasing Your Level of Advertising?
• Attracting Better Sales Associates by Paying Higher
Wages?
• Providing Better Customer Service?

1-144
Sources of Competitive Advantage
More Sustainable Less Sustainable

• Location • Better computers

• Customer loyalty • More employees
• Customer service • More merchandise
• Exclusive merchandise • Greater assortments
• Low-cost supply chain • Lower prices
management • More advertising
• Information systems • More promotions
• Buying power with vendors • Cleaner stores
• Committed employees
Customer Loyalty
• More than simply liking one retailer over another
• Customers will be reluctant to patronize
competitive retailers
• Retailers build loyalty by:
• Developing a strong brand for the store or store brands
• Developing clear and precise positioning strategies
• Creating an emotional attachment with customers
through loyalty programs

1-146
 Retail Branding
Stores use brand (store’s name and store brands –
private label brands) to build customer loyalty

• Retail brand
• Can create an emotional
tie with customers that
build their trust and
loyalty
• Facilitates store loyalty
because it stands for a
predictable level of quality
Approaches for Building Customer Loyalty
• Brand Image
• Positioning
• Unique Merchandise
• Customer Service
• Customer Relationship Management Programs

1-148
Example of Positioning

1-149
Vendor Relationships
• Low Cost - Efficiency Through Coordination
• Electronic Data Interchange (EDI)
• Collaborative Planning and Forecasting to Reduce
Inventory and Distribution Costs

• Exclusive Sale of Desirable Brands

• Special Treatment
• Early Delivery of New Styles
• Shipment of Scare Merchandise

1-150
Human Resources Management
• “Employees are key to build a sustainable
competitive advantage”

• Strategies for Recruiting and Retaining Talented

Employees
• Employee Branding
• Develop positive organizational culture

1-151
Distribution and Info Systems

Flow of Information
By decreasing costs here,
Vendor
there is more money available
Distribution Center to invest in:

Store
-Better services
-Increase in breadth and depth
-Decrease in prices
Location
• What are the three most important things in
retailing?
• “location, location, location”

• Location is a competitive advantage

• A high density of Starbucks stores
• Creates a top-of-mind awareness
• makes it very difficult for a competitor to enter a market
and find a good locations

1-153
Growth Strategies
• Market Penetration

• Market Expansion

• Retail Format Development

• Diversification
• Related vs. Unrelated

Ryan McVay/Getty Images

1-154
Growth Opportunities
Market Penetration
• Attract customers from target market – Walgreens
“on every corner”
• Get current customer to visit store more often or
buy on each visit
Cross Selling – sales associates in one department sell
complimentary merchandise from other departments
Example: Manicurist sells services plus hand lotion or nail
polish
Example: Salesperson sells leaf blower directs customer to
electrical department to purchase a 100 foot extension
cord.

1-156
Market Expansion
• Market expansion growth opportunity involves
using the existing retail format in new market
segments
• Dunkin’ Donuts – new stores (and at gas stations)
outside northeastern
• Abercrombie & Fitch (for college students) opens lower-
priced chain Hollister Co. for high school students

1-157
Retail Format Development
• Develops a new retail format with a different retail mix
for the same target market
• Multi-channel retailing
• UK based TESCO:
• Tesco Express: small stores located close to where
customers live and work
• Tesco Metro: bring convenience to city center
location by specializing in ready-to-eat meals
• Tesco Superstores: traditional stores
• Tesco Extra: one-stop destination with the widest
range of food and non-food products

1-158
Diversification
• Introduces a new retail format toward a market
segment that is not currently served by the retailer
• Related diversification
• Unrelated diversification
• Vertical integration into wholesaling or
manufacturing

1-159
 Global Growth Opportunities
• China
• Increasing operating costs
• Lack of managerial talent
• Underdeveloped and
inefficient supply chain
• India
• Prefers small family-owned
stores
• Restricts foreign investment
Key to Success in Global Retailing
• Globally sustainable competitive advantage
• Low cost, efficient operations - Wal-Mart, Carrefour
• Strong private label brands: Starbucks, KFC
• Fashion Reputation - The Gap, Zara, H&M
• Category dominance – Best Buy, IKEA, Toys R Us
• Adaptability
• Global Culture
• Financial Resources

1-161
International Market Entry Strategies

Direct Investment
Joint Ventures
Strategic Alliances

Franchising

1-162
Stages in the Strategic Retail Planning Process
Elements in a Situation Audit
Market Factors
• Market size – large markets attractive to large
retail firms
• Growth – typically more attractive than mature or
declining
• Seasonality – can be an issue as resources are
necessary during peak season only
• Business cycles – retail markets can be affected
by economic conditions – military base towns

1-165
Competitive Factors
• Barriers to entry
• Scale economies of big box retailers
• Service and unique, high-end products of small
retailers
• Bargaining power of vendors
• Markets are less attractive when only a few
vendors control the merchandise sold within it

1-166
Competitive Factors
• Competitive rivalry
• Defines the frequency and intensity of reactions
to actions undertaken by competitors
• Conditions leading to intense rivalry: a large
number of same size retailers, slow growth,
high fixed costs, a lack of perceived differences
between competing retailers

1-167
Questions for
Analyzing the Environment
• New developments or changes -- technologies,
regulations, social factors, economic conditions
• Likelihood changes will occur
• Key factors determining change
• Impact of change on retail market firm,
competitors

1-168
Performing a Self-Analysis
• At what is our company good?
• In which of these areas is our company better
than our competitors?
• In which of these areas does our company’s
unique capabilities provide a sustainable
advantage or a basis for developing one?

Stockbyte/Punchstock Images

1-169
Keywords
• brand image Set of associations consumers
have about a brand that are usually organized
around some meaningful themes.
• positioning The design and implementation of a
retail mix to create in the customer’s mind an
image of the retailer relative to its competitors.
Also called brand building.

1-170
 CHAPTER 1

Financial
Strategy
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CHAPTER 06

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• How is a retail strategy reflected in retailers’
financial objectives?
• How do retailers need to evaluate their
performance?
• What is the strategic profit model, and how is it
used?
• What measures do retailers use to assess their
performance?

1-172
Objectives and Goals
• Financial – not necessarily profits, but return on assets
(ROA) is the primary focus. ROA is the profit generated
by the assets possessed by the firm.

• Societal – helping to improve the world around us.

Societal objectives are related to broader issues that
make the world a better place to live. (Tom’s Shoes)

• Personal – include self-gratification, status, respect

1-173
Components of the
Strategic Profit Model

Strategic Profit Model-

is a method for
summarizing the factors
that affect a firm’s
financial performance,
as measured by return
on assets.
 The Strategic Profit Model:
An Overview

Profit Margin x Asset turnover = Return on assets

Net profit x Net sales (crossed out) = Net profit
Net sales (crossed out) Total assets Total assets

Net Profit Margin: reflects the profits generated from each dollar of sales
Asset Turnover: assesses the productivity of a firm’s investment in its assets
Different Approaches for ROA

1-176
Fiscal Annual Income Statement for Costco and
Macy’s
Profit Management Path for
Costco and Macy’s
Profit Margin Management Path
• Net Sales = Gross Sales + Promotional Allowances –
Returns, Discounts, and Credits for Damaged Goods

• Cost of Good Sold (COGs) – Amount a retailer pays to

vendors for the merchandise it sells.

• Gross Margin (GM) = Net Sales – COGs

• Important measure in retailing because it indicates how
much profit the retailer is making on merchandise sold
without considering operating costs and expenses.

1-179
Profit Margin Management Path
• Operating Expense
• Variable (e.g.. sales commissions)
• Fixed (rent, depreciation, staff salaries)
• Selling, general, and administrative (SG&A) expenses

1-180
Profit Margin Management Path
• Operating profit margin
• Operating profit margin = Gross margin - Operating
expenses - Extraordinary (recurring) operating
expenses
• Also called EBITDA

• Net profit margin = Operating profit margin –

Extraordinary (nonrecurring) expenses - Taxes - Interest
– Depreciation

1-181
Profit Margin Management Path
• Gross margin percentage is gross margin divided
by net sales.
• Retailers use to compare
• the performance of various types of merchandise
• their own performance with that of other retailers with
higher or lower levels of sales.

Gross margin
= Gross margin %
Net sales

1-182
Profit Margin Management Path
• SG & A or operating expenses can be expressed
as a percentage of net sales to facilitate
comparisons across items, stores, and
merchandise categories within and between firms.

Operating expenses
= Operating expenses %
Net sales

1-183
Profit Margin Management Path
• Operating income percentage is gross margin
minus operating expenses divided by net sales

Gross margin - Operating expenses

= Operating income
Net sales percentage

1-184
Asset Management Path
• Assets:
• Economic Resources (e.g., inventory, buildings,
computers, store fixtures) owned or controlled by a firm

• Current Asset and Fixed Asset

• Current Assets = Cash + Account Receivable + Inventory
+ Other current assets
• Current Assets can easily be converted to cash within one
year.

1-185
Asset Management Path
• Accounts receivable are primarily the monies owed to the
retailer by customers that have bought merchandise on
credit.
• Fixed Assets = Fixture, Stores (owned)
• Asset Turnover = Sales/Total Assets
• Inventory Turnover = COGS/Avg. Inventory (cost)

Net sales
= Asset turnover
Total assets

Cost of goods sold

= Inventory turnover
Average inventory at cost

1-186
Asset Information from Costco and Macy’s

* *

* ($ millions)
Asset Management Path for Macy’s and
Costco
Inventory Turnover
• A Measure of the Productivity of Inventory:
• It is used to evaluate how effectively retailers utilize their
investment in inventory
• Shows how many times, on average, inventory
cycles through the store during a specific period
of time (usually a year)
• Merchandise Inventory-is a critical retailer asset
that provides benefits to customers
Inventory Turnover = COGS/avg inventory (cost)
Inventory Turnover = Sales/ avg inventory (retail)

1-189
Strategic Profit Model Ratios for Selected
Retailers
Income Statement Information for Gifts To Go Stores
and Proposed Gifts-To-Go Internet Channel
Balance Sheet Information for Gifts To Go Stores and
Proposed Gifts-To-Go Internet Channel
Analysis of Financial Strength
• Cash-Flow Analysis
• Retailers need cash to meet their obligations — i.e., salary,
rent, vendors, etc.
• Cash flow is calculated by making adjustments to net profit
involving adding or subtracting differences in revenue and
expenses that occur from one period to the next.

1-193
Analysis of Financial Strength
• Debt-Equity Ratio
• The retailer’s short- and long-term debt divided by the
value of the owners’ or stockholders’ equity.
• Liabilities-are a company’s debts such as its accounts
payable which is the money it owes its vendors for
merchandise.

• Current Ratio
• The is short-term assets divided by short-term liabilities,
it evaluates the retailer’s ability to pay its short-term debt
obligations.

1-194
Analysis of Financial Strength
• Quick Ratio
• “acid-test ratio”
• (Short-term assets – inventory)/ Short-term liabilities
• More stringent test because it removes inventory from
the short-term assets.
• If a retailer needs cash to pay its short-term liabilities, it
cannot rely on inventory to provide an immediate source
for cash.

1-195
Setting and Measuring Performance
Objectives
• Retailers will be better able to gauge performance
if it has specific objectives in mind to compare
performance.

• Should include:
• numerical index of performance desired
• time frame for performance
• necessary resources to achieve objectives

1-196
Setting Objectives
in Large Retail Organizations
Top-Down Planning
Corporate Developmental Strategy

Category, Departments
and sales associates
implement strategy
Setting Objectives
in Large Retail Organizations
Corporate

Bottom-Up Planning
Buyers and Store Operation managers
managers estimate must be involved in
what they can objective setting
achieve process
Productivity Measures
Input Measures – assess the amount of resources or
money used by the retailer to achieve outputs such as
sales.

Output measures – asses the results of a retailer’s

investment decisions.

Productivity measure – determines how effectively retailers

use their resource – what return (e.g., profits) they get on
their investments (e.g., expenses).

1-199
Financial Performance of Retailers

Outputs – Performance Inputs Used by Retailers

• Sales • Inventory ($)

• Real Estate (sq. ft.)
• Profits
• Employees (#)
• Cash flow
• Overhead (Corporate
• Growth in sales, profits Staff and Expenses)
• Same store sales growth • Advertising
• Energy Costs
• MIS expenses
Examples of Performance Measures
Used by Retailers
Assessing Performance

• Growth in Stockholder Value – Stock Price

• Accounting Measures – ROA (Risk adjusted)

• Benchmark
• Performance Over Time
• Compare performance indicator for three years
• Performance Compared to Competitors
• Compare performance indicators with major competitors for one
year, most recent

1-202
Performance Measures for Costco and
Macy’s Over Time
 CHAPTER 1

Retail
Locations
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CHAPTER 07

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What types of locations are available to retailers?
• What are the relative advantages of each location
type?
• Why are some locations particularly well suited to
specific retail strategies?
• Which types of locations are growing in popularity
with retailers?

1-205
What Are the Three Most Important
Things in Retailing?

Location! Location! Location!

Eddie Tan/Life File/Getty Images

Facts on Retail Space
• Currently the U. S. has 20 square feet of retail
space in shopping centers for every person.
• The highest country in the world
• The second-highest country:
• Sweden – 3.1 square feet per person

1-207
 Why is Store Location
Important for a Retailer?
• Location is typically prime
consideration in customer’s store
choice.
• Location decisions have strategic
importance because they can
help to develop sustainable
competitive advantage.
• Location decisions are risky:
invest or lease?
F. Schussler/PhotoLink/Getty Images
Types of Retail Locations
Types

• Unplanned locations- do not have

centralized management that
determines what stores will be in
a development.
• Planned locations-the shopping
center and/or manager makes
and enforces policies that govern
store operations.
• Gross leasable area- Total floor
area designed for the retailer’s
occupancy.
Types of Retail Locations
• Free Standing Sites
• City or Town Locations
• Inner City
• Main Street
• Shopping Centers
• Strip Shopping Centers
• Shopping Malls
• Other Location Opportunities
Selecting a particular location type
• Involves evaluating a series of trade-offs between
• The size of the trade area (geographic area
encompassing most of the customers who would
patronize a specific retail site)
• the occupancy cost of the location
• The pedestrian and vehicle customer traffic
• The restrictions placed on store operations by the
property manager
• The convenience of the location for customers

1-211
Tradeoff Between Locations

There are relative advantages

and disadvantages to consider
Rent with each location.

Traffic
Types of Locations

1-213
Unplanned Retail Locations
• Freestanding Sites – location for individual store
unconnected to other retailer
• Advantages:
• Convenience
• High traffic and visibility
• Modest occupancy cost
• Separation from competition
• Few restrictions
• Disadvantages:
• No foot traffic
The McGraw-Hill Companies, Inc./Andrew Resek, photographer
• No drawing power

1-214
 City or Town Locations
• Gentrification is bringing
population back to the cities.
• Advantage to Retailers:
• Affluence returned
• Young professionals
• Returned empty-nesters
• Incentives to move provided by The McGraw-Hill Companies, Inc./Andrew Resek, photographer
cities
• Jobs!
• Low occupancy costs
• High pedestrian traffic
Central Business District (CBD)
• Draws people into areas during business hours
Advantages

• Hub for public transportation

• Pedestrian traffic
• Residents

• High security required

Disadvantages

• Shoplifting
• Parking is poor
• Evenings and weekends are slow

Spike Mafford/Getty Images

 Main Streets vs. CBDs
• Occupancy costs lower than
CBDs
• Traditional downtown shopping
area
• They don’t attract as many
people
• There are not as many stores
• Smaller selections offered
• Some planners restrict store
operations
Inner City
• Inner city retailers
achieve high sales
volume, higher margins
and higher profits
• Unmet demand tops
25% in many inner city
markets
Shopping Centers
• A shopping center is a group of
retail and other commercial
establishments that is planned,
developed, owned, and
managed as a single property.

• Shopping center management

controls:
• Parking
• Security
• Parking lot lighting
• Outdoor signage
• Advertising The McGraw-Hill Companies, Inc./Andrew Resek, photographer

• Special events for customers

Types of Shopping Centers
• Neighborhood and Community Centers (Strip
Centers)
• Power Centers
• Enclosed Malls
• Lifestyle Centers
• Mixed-Use Developments
• Outlet Centers
• Theme/Festival Centers
• Omnicenters

1-220
Neighborhood and Community Centers

Managed as a unit
Advantages

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

Convenient locations
Easy parking
Low occupancy costs

Disadvantages
Limited trade area
Lack of entertainment
No protection from weather

Attached row of stores

Onsite parking
 Power Centers
• Shopping centers that consist primarily of collections of
big-box retail stores such as discount stores (Target), off-
price stores (Marshall’s), warehouse clubs (Costco), and
category specialists (Lowe’s, Best Buy, Bed Bath &
Beyond, Dick’s Sporting Goods)
• Open air set up
• Free-standing anchors
• Limited small specialty stores
• Many located near enclosed malls
• Low occupancy costs
• Convenient
• Modest vehicular and pedestrian traffic
• Convenient
• Large trade areas 1-222
Shopping Malls

• Regional shopping
malls (less than 1
million square feet)

• Super regional malls

(more than 1 million
square feet)

The South China Mall in Dongguan, China

Advantages and Disadvantages of Shopping Malls
Advantages: Disadvantages:
• Many different types of stores •Occupancy costs are high
• Many different assortments •Tenants may not like mall
available management control of
• Attracts many shoppers operations
• Main Street for today’s •Competition can be intense
shoppers •Customers may not have time
• Never worry about the to stroll through a mall
weather
• Comfortable surrounding to
shop
• Uniform hours of operation
Lifestyle Centers
• Usually located in affluent residential neighborhoods
• Includes 50K sq. ft. of upscale chain specialty stores
• Open-air configuration
• Design ambience and
amenities
• Upscale stores
• Restaurants and often
a cinema or other
entertainment
• Small department store
format

1-225
 Mixed Use Developments (MXDs)

• Combine several different

uses into one complex,
including shopping centers,
offices, hotels, residential
complexes, civic centers,
and convention centers.
• Offer an all-inclusive
environment so that
consumers can work, live,
and play in a proximal area
Outlet Centers
These shopping centers contain mostly
manufacturers and retail outlet stores

Courtesy of Beall’s, Inc. 1-227

Theme/Festival Centers
• Located in places of historic interests or for tourists
• Anchored by restaurants and entertainment facilities

1-228
Larger, Multi-format Developments:
Omnicenters
• Combines enclosed malls, lifestyle center, and
power centers

• Larger developments are targeted

• to generate more pedestrian traffic and longer shopping
trips
• To capture cross-shopping consumers

1-229
Other Location Opportunities

• Airports
• Resorts
• Store within a Store
• Temporary or pop-up stores

1-230
Alternative Locations
Pop-Up Stores and Other Temporary Locations

• Temporary locations that focus on new products or a

limited group of products.
• Create buzz, test new concepts, or even evaluate a
new neighborhood or city.
• Temporary stores to take advantage of the holiday
season in December
• Visibility and additional sales at
festivals or concerts, weekend
crafts fairs, or farmers’ markets.

1-231
Alternative Locations
Store within a Store
• Located within other, larger stores
• Examples:
• Grocery store with service providers (coffee bars,
banks, clinics, video outlets)
• Sephora in JCPenney

1-232
Alternative Locations
Merchandise Kiosks

• Merchandise Kiosks
– small temporary
selling stations
located in walkways
of enclosed malls,
airports, train
stations or office
building lobbies.

Kent Knudson/PhotoLink/Getty Images

Alternative Locations
Airports

Airports: Why wait with nothing to do?

Rents are 20% higher than malls
Sales/square ft are 3-4 times higher than malls
Best airports are ones with many connecting flights
Kim Steele/Getty Images

1-234
Matching Location to Retail Strategy
• The selection of a location type must reinforce the
retailer’s strategy be consistent with
• the shopping behavior
• size of the target market
• The retailer’s position in its target market

• Department Stores  Regional Mall

• Specialty Apparel  Central Business District, Regional
malls
• Category Specialists  Power Centers, Free Standing
• Grocery Stores  Strip Shopping Centers
• Drug Stores  Stand Alone

1-235
Shopping Behavior of Consumers
in Retailer’s Target Market
• Factors affecting the location choice
• Consumer Shopping Situations
• Convenience shopping
• Comparison shopping
• Specialty shopping

• Density of Target Market

• Ex. Convenience stores in CBD; comparison shopping stores
next to Wal-Mart

• Uniqueness of Retailing Offering

• Convenience of locations is less important
• Ex. Bass Pro Shop

1-236
Convenience Shopping
• Minimize the
customer’s effort to
get the product or
service by locating

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

store close to where
customers are
located
Comparison Shopping
• Customers have a
good idea of what
type of product they
want, but don’t have
a strong preference
for brand, model or
retailer.
Typical for furniture,
• Competing retailers appliances, apparel,
locate consumer electronics, hand
tools and cameras.
• Near one another
Ryan McVay/Getty Images
Specialty Shopping

• Customers know
what they want
• Designer labels

• Convenient location
matters less
LEGAL CONSIDERATIONS
Environmental Issues
• “Above-ground” risks - such as asbestos-containing
materials or lead pipes used in construction.
• Hazardous materials - e.g. dry cleaning chemicals, motor
oil, that have been stored in the ground.

• Retailers’ remedies to protect themselves from hazards.

• Stipulate in the lease that the lessor is responsible for
removal and disposal of this material if it’s found.
• Buy insurance that specifically protects it from these
risks.

1-240
LEGAL CONSIDERATIONS
Other Legal Issues
• Zoning and Building Codes
• Zoning determines how a particular site can be used
• Building codes determine the type of building, signs,
size, type of parking lot, etc. that can be used
• Signs
• Restrictions on the use of signs can also impact a
particular site’s desirability
• Licensing Requirements
• Some areas may restrict or require a license for
alcoholic beverages

1-241
 CHAPTER 1

Retail Site
Location
CHAPTER 08

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What factors do retailers consider when determining where to
locate their stores?
• What is a trade area for a store, and how do retailers
determine the trade area?
• What factors do retailers consider when deciding on a
particular site?
• How do retailers forecast sales for new store locations?
• Where can retailers get information to evaluate potential
store locations?
• What issues are involved in negotiating leases?

1-243
Metropolitan Statistical Area
• Metropolitan Statistical Area- A city with 50,000 or more
inhabitants or an urbanized area of at least 50,000
inhabitants and a total MSA population of at least 100,000.

• Micropolitan Statistical Area- A city with only 10,000

inhabitants in its core urban area.

1-244
Evaluating Specific Areas for Locations
Economic Conditions
• The growth of population and employment

• How long the growth will continue, and how it will effect
demand for merchandise sold in stores
• Which areas growing quickly and why
• Example- Seattle and proximity to Microsoft

1-246
Competition
• Level of competition
affects the demand
• Some retailers are
going urban
• Lack of competition
• High level of
disposable income
• Large, untapped labor The McGraw-Hill Companies, Inc./John Flournoy, photographer

force
Strategic Fit
• Demographic, lifestyle profile, size and composition
of households in an area
• Area needs to have consumers in the retailer’s
target market

McDonald’s – families with kids

Royalty-Free/CORBIS
REI – outdoor enthusiasts

The McGraw-Hill Companies, Inc./John Flournoy, photographer

1-248
Operating Costs
• Vary across areas

• Affected by proximity of
area considered vs. other
areas where retailer
operates

• Local and state legal

environment has effect
How Many Stores to Open in an Area?

Economies of Scale vs. Cannibalization

One promotional costs for all stores open stores as long as

profits increase

Justifies cost of distribution center

Increases sales per store

Target needs of regional market

Management has control of market

 Evaluating a Site
for Locating a Retail Store
• When evaluating and selecting a specific site, retailers
consider:
• The characteristic of the site (traffic flow, parking, visibility,
adjacent tenants, and restrictions and costs)
• The characteristic of the trading area
• The estimated potential sales that can be generated

Stockbyte/Punchstock Images
1-251
Site Characteristics
Traffic Flow and Accessibility
• Traffic flow- the number of vehicles
and pedestrians that pass by the site
• When traffic is greater, more
customers shop
• Good for convenience retailers
• Not necessary for destination retailers
• Too much can impede access to store
• Accessibility to store is as important
as traffic flow
• Accessibility is the ease with which
customers can get in and out

PhotoLink/Getty Images
Convenience of
Going to Site Accessibility
• Road pattern and condition
• Natural and artificial barriers
• Visibility
• Traffic flow
• Parking
• Congestion
• Ingress/egress

©McGraw-Hill Companies/Jill Braaten, photographer

What Should Retailers Consider
Regarding Parking?
• Observe shopping center at various times
• Employee parking availability
• Shoppers that use cars
• Parking by non-shoppers
• Typical length of
a shopping trip

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

1-255
 Adjacent Tenants
• Complementary (also competing) adjacent retailers build traffic

• What other retailers would Save-a-Lot want to be located near?

• Big Lot, Family Dollar, or even Wal-Mart
• All target price-sensitive consumers
• In an enclosed mall, what retailers would Abercrombie & Fitch
want to be located near?
• American Eagle Outfitter, Ann Taylor, Body Shop, Electronic
Boutique?
• Principle of Cumulative Attractiveness
1-256
Restrictions and Costs
• Restrictions
• Signage
• Tenant Mix
• Operating hours
• Costs
• Rent
• Common Area Maintenance Fee/Insurance
• Advertising Fee

1-257
Locations within a Shopping Center
• Affects both sales and occupancy costs

• In a strip shopping center – closest to the supermarket for

impulse buying

• In a enclosed shopping mall – retailers who sell comparison

shopping goods locate close to the department store anchors

• Locate stores that appeal to similar target markets because

consumers shop at places with a good assortment of
merchandise

1-258
Trade Area Definition
• A contiguous geographic area that accounts for the majority
of a store’s sales and customers
• Primary zone
• 60 to 65 percent of its customers
• Secondary zone
• 20 percent of a store’s sales
• Tertiary zone
• customers who occasionally shop at the store or shopping center

1-259
Factors Affecting
the Size of the Trade Area
• Accessibility
• Natural & Physical Barriers
• Type of Shopping Area
• Type of Store
• The nature of merchandise, assortment, location of
alternative sources for the merchandise
• Competition
• Parasite Stores

1-260
Measuring the Trade Area for a Retail Site
• Customer spotting- process of locating the residences of
customers for a store on a map and displaying their positions
relative to the store location.
• Use Census Data (census block)
• Only once in 10 years.
• Each household in the country is counted to determine the number of
persons per household, household relationships, sex, race, age and
marital status.

1-261
Geographic Information System (GIS)
• GIS – a system of hardware and software used to
store, retrieve, map and analyze geographic data
along with the operating personnel and the data that
goes into the system.
• Coordinate system (latitude and longitude)
• Spatial features (rivers and roads)

1-262
Geographic Information System (GIS)
• GIS – a system of hardware and software used to
store, retrieve, map and analyze geographic data
along with the operating personnel and the data that
goes into the system.
• Some firms offer services combine GIS with updated
census data, consumer spending patterns and lifestyles
• ESRI (www.esri.com)
• Claritas (www.Claritas.com)
• MapInfo (www.Mapinfo.com)

1-263
Example: ESRI data
• For the potential site’s addresses, the system provides the
data for 2009 and projected for 2014 on the people living
within a three-, five-, and 10-mile radius from the sites

■ Gender ■ Travel time to work

■ Income ■ Transportation mode to work
■ Disposable income ■ Household composition
■ Net worth ■ Household expenditures by NAICS
■ Education categories
■ Age ■ Geodemographic market segment
■ Race/ethnicity ■ Market potential index
■ Employment status ■ Spending potential index
■ Occupation

1-264
Tapestry Segment
Example: Metro Renters

• Young – 20’s
• Well educated
• Professional
• Large cities
• Median income
$50,000
• Spend on themselves
• Surf Internet
Competition in the Trade Area
• Need to Know Amount and Type of Competition
• Sources for Measuring Competition
• The Internet - lists current locations and future sites
• Trade associations
• Chambers of commerce
• Chain Store Guide (csgis.com)
• Government
• Economic Development Councils

1-266
Estimating Potential
Sales for a Store Site
• Huff’s Model
• Based on the premise that the probability
which a given customer will shop in a
particular store
or shopping center becomes larger as the
size
of store or center grows and distance or
travel time from customer shrinks

• Analog Approach
• Regression Analysis
Royalty-Free/CORBIS
Huff’s Gravity Model
S j  Tij b
Pij  n
 S j  Tij b
j 1
Where
Pij  Probability of a customer at a given point of origin i traveling to a
particular shopping center j
S j  Size of shopping center j

Tij  Travel time or distance from customer' s starting point to shopping

center
b  An exponent to Tij that reflects the effect of travel time on different
kinds of shopping trips
Application of Huff Gravity Model

1-269
Application of
Huff Gravity Model Continued

PRC = 10,000/5 2 = .889

10,000/52 + 5,000/52

POH = 10,000/152 = .182

10,000/152 + 5,000/52

.889 x $3 million + .182 x $3 million = $4,910,000

Regression Analysis
and Analog Approach
• Multiple Regression Analysis = Factors affecting the sales
of existing stores in a chain will have the same impact
upon the stores located at new sites being considered.

• Analog Approach = retailer describes the site and trade

area characteristics for its most successful stores and
attempts to find a similar site.

1-271
Regression Model
for Estimating Store Sales
• Stores sales = 275 x number of households in trade area
(15 minute drive time)
• + 1,800,000 x percent of household in trade with children
under 15
• + 2,000,000 x % of households in trade area in Tapestry
segment “aspiring young ”
• + 8 x shopping center square feet
• + 250,000 if visible from street
• + 300,000 if Wal-Mart in center

1-272
Application of Regression Model

Store Sales A = $7,635,000

= 275x11,000 + 1,800,000 x 0.7 + 2,000,000 x 0.6
+ 8 x 200,000 + 250,000 + 300,000

Store Sales B = $6,685,000

= 275x15,000 + 1,800,000 x 0.2 + 2,000,000 x 0.1
+ 8 x 250,000

1-273
Types of Leases
Percentage
Fixed - Rate
• Percentage leases – lease based on a % of sales.
• Retailers also typically pay a maintenance fee-based on a
percentage of their square footage of leased space.
• Most malls use some form of percentage lease.

1-274
Variations of Percentage Leases
• Percentage lease with specified maximum - percentage of
sales up to a maximum amount
• Rewards retailer performance by allowing retailer to hold rent
constant above a certain level of sales
• Percentage lease with specified minimum - retailer must pay
a minimum rent no matter how low sales are
• Sliding scale - percentage of sales as rent decreases as
sales go up

1-275
Fixed Rate Leases
• Fixed Rate Leases - used by community and
neighborhood centers
• Retailer pays a fixed amount per month over the life of the
lease.
• Not as popular as percentage leases
• Graduated Lease - a variation of the fixed rate lease
• Rent increases by a fixed amount over a specified period of
time.

1-276
Terms of the Lease

• Prohibited Use Clause

• Limits the landlord from leasing to certain tenants.
• Some tenants take up parking spaces and don’t bring in
shoppers: bowling alley, skating rink, meeting hall, dentist,
or real estate office
• Some tenants could harm the shopping center’s
wholesome image: bars, pool halls, game parlors, off-track
betting establishments, massage parlors and adult retailers

1-277
Terms of the Lease

• Exclusive Use Clause

• Prohibits the landlord from leasing to retailers selling
competing merchandise
• Specify no outparcels
• Specify if certain retailer leaves center, they can
• terminate lease

1-278
 CHAPTER 1

Information
Systems and
Supply Chain
Management
CHAPTER 10

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• How does merchandise and information flow from the vendor
to the retailer to consumers?
• What activities are undertaken in a distribution center?
• What information technology (IT) developments are
facilitating vendor-retailer communications?
• How do retailers and vendors collaborate to make sure the
right merchandise is available when customers are ready to
buy it?
• What are the benefits to vendors and retailers of
collaboration on supply chain management?
• What is RFID, and how does it affect retailing?

1-280
Supply chain management …..
• Efficient and effectively manage the flow of merchandise from
the vendors to the retailer’s customers.
• Integration of suppliers, manufacturers, warehouses, stores,
and transportation intermediaries into a seamless value
chain.
• Merchandise is produced and distributed in the right
quantities; to the right locations; and at the right time.
• Minimization of system wide
costs, while satisfying the
service levels their
customers require.

Ryan McVay/Getty Images

1-281
Illustration of a Supply Chain
Why is Efficient Supply Chain Management
so Important to Retailers?
• Strategic advantage-
difficult to duplicate
• Improved product
availability
• Higher return on
investment
Strategic Importance of
Supply Chain Management
• Opportunity to increase sales by making sure the
right merchandise is in the right place at the right
time
• Fewer stock-outs
• Greater assortment with less inventory
• Opportunity to reduce costs
• Transportation costs
• Inventory holding costs
• Improved ROA

1-284
Strategic Advantage : ZARA
• Timely information from store
mangers with handheld devices to
the corporate office.

• Shorter cycle time from design to

production to delivery to stores.

• Shorter lead time – own production,

small quantity production in close
proximity, efficient logistics,
premium transportation, frequent
delivery.

• No discounts necessary
Strategic Advantage : Wal-Mart
• Wal-Mart’s success is from its information and
supply chain management systems
• Why are competitor’s lagging behind?
• Made a substantial investment in developing its systems
and has the scale economies.
• Through experience and learning, changes are always
made to improve the system.
• Coordinated effort of employees and functional areas
throughout the company.

1-286
Improved Product Availability
• Benefits of Efficient These benefits translate into
greater sales, lower costs,
Supply Chain higher inventory turnover, and
Management to lower markdowns for retailers
Customers:
• Reduced stockouts –
merchandise will be
available when the
customer wants them
• Tailoring assortments –
the right merchandise is
available at the right store

Ryan McVay/Getty Images

Higher Return on Assets
Return on assets = Net profit margin x Asset turnover

Net profit = Net profit x Net sales

Total assets Net sales Total assets
Efficient Supply Chain Management leads to 
• Increased Sales from more attractive assortments in stock
• Improved Net Profit Margins from increased gross margin and
lowered expenses
• Lowered inventory from less backup inventory in stock and higher
asset (inventory) turnover

Same Sales Using Less Inventory

1-288
Information and Merchandise Flows
Information Flows
Information Flows
When a customer purchases a toaster oven, sales
associate scans UPC (universal product code)
code on merchandise and customer credit
card/loyalty card (Flow 1)

Steve Cole/Getty Images

Information about purchase is

transmitted from POS terminal to the
buyer/planner. The planner uses this
information to monitor and analyze sales
and decide to reorder more toaster
ovens or reduce its prices if sales are
below expectations (Flow 2)
Information Flows
Sales transaction data are sent directly from the store to the
vendor, and the vendor decides when to ship more toaster
ovens to the distribution center and stores (Flow 3)

StockTrek/Getty Images

When inventory drops to a specified level in the

distribution center, buyer/planner communicates
with vendor, and then places a purchase order
to re-supply stores with toaster ovens (Flow 4)
Information Flows

Buyer/planner notifies distribution center

about incoming orders and how they are
to be distributed to stores (Flow 5)
PhotoLink/Getty Images

Store managers inform distribution

center about receipt of toaster ovens
and coordinate deliveries (Flow 6)

When the manufacturer ships the toaster

ovens to the distribution center, it sends an
advanced shipping notice to the distribution
David Buffington/Getty Images
center (Flow 7)
Data Warehousing
• Data warehousing is the coordinated and periodic copying of
data from various sources, both inside and outside the
enterprise, into an environment ready for analytical and
informational processing

• Wal-Mart makes good use of its data warehouse. Experts

estimate that it is second in size only to that of the U.S.
government

1-294
Data Warehousing
Electronic Data Interchange
• EDI is the computer-to-computer exchange of
business documents between retailers and vendors
• Merchandise sales, inventory on hand, orders
• Advanced shipping notices,
• Receipt of merchandise, invoices for payment

1-296
Electronic Data Interchange
• EDI is the computer-to-computer exchange of
business documents between retailers and vendors
• Standards:
• UCS (Uniform Communication Standard)
• VICS (Voluntary Interindustry Commerce Solutions)
• Transmission system:
• Intranet: local area network (LAN) that employs Internet
technology
• Extranet: collaborative network that uses Internet
technology to link businesses with suppliers, customers,
etc.

1-297
EDI Security
• There are implications of security failures (loss of
data, loss of public confidence), but retailers have
security policy objectives:
Authentication – system assures
person on other end of session is who
it claims to be
Authorization - that person has
permission to carry out request
Integrity – info arriving is the same that Ryan McVay/Getty Images

was sent

1-298
The Physical
Flow of Merchandise - Logistics
• Logistics:
• The aspect of supply chain that refers to the planning,
implementation, and control of the efficient flow and
storage of goods, services, and related information from
the point of origin to the point of consumption to meet
customers’ requirements.

1-299
Merchandise Flow
Retailers can have merchandise
shipped directly to their stores
(path 3) or to their distribution
centers (paths 1 and 2)
Activities Performed by Distribution Centers
• Managing inbound transportation
• Dispatcher
• Receiving and checking merchandise
• Storing or cross docking merchandise
• Getting merchandise floor ready
• Ticketing and marking
• Putting on hangers
• Preparing to ship merchandise to a
store
• Managing outbound transportation
Advantages of Using a Distribution Center
• More accurate sales forecasts are
possible when retailers combine
forecasts for many stores
serviced by one distributor
• Enables retailers to carry less
merchandise in the store
• Easier to avoid running out of
stock
• Retail store space is more
expensive than space at the
distribution center
Outsourcing Logistics
• Retailers consider outsourcing logistical functions if
those functions can be performed better or less
expensively by third-party logistics companies.

• Transportation
• Warehousing
• Freight Forwarders
• Integrated Third-Party Logistics Services

1-303
Pull and Push Supply Chain
Push Supply Chain Pull Supply Chain

Merchandise is allocated Orders for merchandise are

to stores generated at the store level
on the basis of on the basis of
forecasted demand POS sales data

Less costly than a pull supply chain Less likely to be overstocked or out of
Less sophisticated information system sock
needed to support it Increases inventory turnover
Efficient for merchandise that has Responsive to changes in customer
steady, predictable demand demand
Efficient when demand is uncertain,
and hard to forecast
Advantages of Direct Store Delivery
• Gets merchandise faster, and is
thus used for perishable goods
(meat and produce)
• Helps the retailer’s image of
being the first to sell the latest
product (video games) or fads
• Some vendors provide direct
store delivery for retailers to
ensure that their products are on
the store’s shelves, properly
displayed, and fresh
Reverse Logistics

• The process of moving returned goods from their

customer destination for the purpose of capturing
value or proper disposal.

• Retailers recover loss through on-line auctions

• Reverse-logistics systems are challenging

• Items may be damaged or require special handling
• Transportation costs are high

1-306
Supply Chain for
Fulfilling Catalog and Internet orders
• When fulfilling orders
from individual
consumers, retailers ship
small packages with one
or two items to a large
number of different
places
• Distribution centers for
picking and packing orders
for consumers
Drop Shipping
• Drop-shipping, or consumer direct fulfillment, is a system in
which retailers receive orders from customers and relay
these orders to vendors and then the vendors ship the
merchandise ordered directly to the customer.

• Drop-shipping has been used for years by companies that

sell bulky products such as lumber, iron, and petroleum, as
well as catalog and mail-order companies.

1-308
Collaboration between Retailers and
Vendors in Supply Chain Management
• Bullwhip Effect - The built up inventory in an
uncoordinated channel where retailers and
vendors do not coordinate their supply chain
activities

1-309
What Causes a Bullwhip Effect?
• Delays in transmitting orders and receiving
merchandise
• Over-reacting to shortages
• Ordering in batches rather than generating a
number of small orders

1-310
 Collaboration between Retailers and Vendors in
Supply Chain Management
Four approaches for coordinating
supply chain activities to reduce the
level of inventory in the chain and
reduce the number of stock-outs
(in order of the level of collaboration)

PhotoDisc/Getty Images
• Use EDI
• Share information to reduce need for backup inventory, improve
sales forecasts and production efficiency
• Vendor manage inventory (VMI)
• Collaborative planning, forecasting and replacement (CPFR)
Vendor Managed Inventory (VMI)

• Manufacturer access to POS information

• Replenishment automatically triggered

• Enables demand-based view of replenishment &

production planning – reduce bull whip effect

1-312
CPFR (Collaborative Planning,
Forecasting, and Replenishment)
• Developed by VICS and adopted by ECR Europe

• The sharing of forecast and related business information

and collaborative planning between retailers and vendors
to improve supply chain efficiency and product
replenishment.

• The most advanced form of retailer-vendor collaboration

that involves sharing proprietary information, such as
business strategies, promotion plans, new product
developments and introductions, production schedules,
and lead time information.
1-313
CPFR (Collaborative Planning,
Forecasting, and Replenishment)
• Common goals
• A single demand forecast developed collaboratively
• Collaborative promotional planning & execution
• A single, shared data source
• Improved inventory management across Supply Chain
• Optimized replenishment strategies with joint ownership
• Process simplicity creates optimal framework for success

1-314
Radio Frequency Identification (RFID)
• Radio Frequency Identification (RFID) allows an
object or a person to be identified at a distance
using radio waves.
• Reduces warehouse and distribution labor costs
• Reduces point of sale labor costs
• Inventory savings by reducing inventory errors
• Reduces theft – products can be tracked
• Reduces out of stock conditions
Impediments to the Adoption of RFID

• RFID is expensive – the return on

investment is low
• It still only makes sense to put tags
on pallets, cartons, expensive
merchandise or high theft items
• RFID generates more data than
what can be currently processed
• Consumers worry about privacy
invasion
 CHAPTER 1

Managing the
Merchandise
Planning Process
CHAPTER 12
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Merchandise Management

Managing the Merchandise Planning

Process

Buying Merchandise

Retail Pricing

Retail Communication Mix

1-318
Questions
• What is the merchandise management process?
• How are merchandise management processes different for
staple and fashion merchandise?
• How do retailers forecast sales for merchandise categories?
• What trade-offs do buyers consider in developing
merchandise assortments?
• How do retailers plan their assortments and determine the
appropriate inventory levels?
• How do multistore retailers allocate merchandise to stores?
• How do retailers evaluate the performance of their
merchandise management process?

1-319
Merchandise Management
• Process by which a retailer attempts to offer the appropriate
quantity of the right merchandise, in the right place and at the
right time, so that it can meet the company’s financial goals.

• Sense market trends

• Analyze sales data

• Make appropriate adjustments

in prices and inventory levels

1-320
Merchandise Management and
Investment Portfolio Management
• Dollars to invest in inventory
• Invest in “hot” merchandise
• Save a little for opportunities
(open to buy)
• Monitor portfolio of
merchandise (stocks)
• Sell losers (markdowns)

Traders on the stock exchange floor

manage a portfolio of stocks, and retail
buyers manage a portfolio of merchandise inventory. Both
continuously assess the risks associated with their purchase
decisions.
Merchandise Classifications and Organization
Buying Organization
The highest classification level. Each merchandise
Merchandise Group
group is managed by a general merchandise manager
(GMM),senior VP
Departments are managed by a divisional merchandise
Department
manager (DMM)

A group of items targeting the same customer type, such

Classification
as girls’ sizes 4-6

Each buyer manages several merchandise categories

Category (e.g., sportswear, dresses, swimwear, outerwear
categories for girls’ sizes 4-6

The smallest unit available for inventory control

SKU
Size, color, style

1-323
Merchandise Category –
The Planning Unit
• A merchandise category is an assortment of items that
customers see as substitutes for each other.

• Vendors might assign products to different categories

based on differences in product attributes

• Retailers might assign two products to the same category

based upon common consumers and buying behavior

1-324
Category Management
• The process of managing a retail business with the
objective of maximizing the sales and profits of a category
• Objective is to maximize the sales and profits of the entire
category, not just a particular brand

Breakfast cereal category vs. Kellogg Corn Flakes

Men’s knitted shirts vs. Polo shirts
Diary product category vs. Carnation milk products

1-325
Category Captain
Selected vendor responsible for managing a category

• Vendors frequently have more information and analytical skills about

the category in which they compete than retailers
• Helps retailer understand consumer behavior
• Creates assortments that satisfy the customer
• Improves profitability of category

Problems
• Vendor category captain may have different goals than retailer

1-326
Evaluating Merchandise Management Performance
GMROI
• Merchandise managers have control over
• The merchandise they buy
• The price at which the merchandise is sold
• The cost of the merchandise
• Merchandise managers do not have control over
• Operating expenses
• Human resources
• Real estate
• Supply chain management
• Information systems
• SO HOW ARE MERCHANTS EVALUATED?

1-327
GMROI- Gross Margin Return on Investment
GMROI = Gross Margin Percent x sales-to-stock ratio

= gross margin x net sales

net sales avg inventory at cost

= gross margin
avg inventory at cost
Sales-to-stock ratio is used because GMROI is a type of ROI
measure, so the investment in inventory is expressed at cost.
Inventory Turnover
= (1 – Gross Margin Percent) x sales-to-stock ratio
Illustration of GMROI
Measuring Sales-to-Stock Ratio
• Net Sales/Average Inventory at Cost
• Retailers report on an annual basis
• If the sales-to-stock ratio for a three-month season is 2.3, the
annual sales-to-stock ratio will be 9.2
• Estimation of average inventory
• Use information system: averaging the inventory in stores and
distribution centers at the end of each day
• Divide the sum of the end-of-month (EOM) inventories for several
months by the number of months

1-330
Managing Inventory Turnover
• Inventory Turnover helps assess the buyer’s performance in managing
asset (merchandise inventory)
• But focusing on increasing inventory turnover can actually decrease
GMROI
• Buyers need to consider the trade-offs associated with managing
Inventory Turnover
• Inventory turnover = Net Sales
Average inventory at retail
• Inventory turnover = Cost of goods sold
Average inventory at cost

• Average inventory = Month1 + Month2 + Month 3 +…

Number of months

1-331
Merchandise Planning Process

1-332
Types of Merchandise Management
Two distinct types of merchandise management systems for managing
•Staple (Basic) Merchandise Categories
• Continuous demand over an extended time period
• Limited number of new product introductions
• Hosiery, basic casual apparel
• Easy to forecast demand
• Continuous replenishment
•Fashion Merchandise Categories
• In demand for a relatively short period of time
• Continuous introductions of new products, making existing
products obsolete
• Athletic shoes, laptop computers, women’s apparel

1-333
Merchandise Management Process
1. Forecasting sales
2. Developing an assortment plan
3. Determining the appropriate inventory level

1-334
Developing a Sales Forecast
• Understanding the nature of the product life cycle
• Collecting data on sales of product and comparable
products
• Using statistical techniques to project sales
• Work with vendors to coordinate manufacturing and
merchandise delivery with forecasted demand (CPFR)

1-335
Factors Affecting Sales Projections

Controllable Uncontrollable

• Promotions • Seasonality
• Store locations • Weather
• Merchandise placement • Competitive activity
• Cannibalization • Product availability
• Economic conditions
Forecasting Fashion Merchandise Categories

Retailers develop
fashion forecasts by
relying on:

• Previous sales data

• Market research
• Fashion and trend
services
• Vendors
Forecasting for Service Retailers
• Due to the perishable nature of services, service retailers
face more challenges than fashion retailers.

• Offerings perish at the end of the day, not at the end of

the season.

• Must devise approaches for managing demand so that it

meets, but does not exceed capacity.

1-338
Developing an Assortment Plan
• Assortment plan is a list of the SKUs that a retailer will offer
in a merchandise category and reflects the variety and
assortment that the retailer plans to offer in a merchandise
category.
• Variety (breadth) is the number of different merchandising
categories within a store or department.
• Assortment (depth) is the number of SKUs within a category.
• Product availability defines the percentage of demand for a
particular SKU that is satisfied.

1-339
Determining Variety and Assortment
Buyers consider:
•Retail strategy
• The number of SKUs to offer in a merchandise category is a strategic
decision
•Assortments GMROI of the merchandise mix
•Trade-off between too much versus too little assortment
• Increasing sales by offering more breadth and depth can potentially
reduce inventory turnover and GMROI by stocking more SKUs
•Physical characteristics of the store

PhotoLink/Getty Images
•Complementary merchandise
•Effects of assortment size on buying behavior

1-340
 Model Stock Plan
Model Stock Plan- is the number of each SKU in the assortment plan that the
buyer wants to have available for purchase in each store.

1-341
Product Availability
• The percentage of demand for a particular SKU that is
satisfied.
• Level of support or service level

• The backup (buffer) stock in the model stock plan determine

product availability.

• The higher product availability, the higher the amount of

backup stock necessary to ensure that the retailer won’t be
out of stock on a particular SKU when consumers demand it.

1-342
Importance of Backup (Buffer) Stock
Choosing an appropriate amount of
backup stock is critical to successful
assortment planning
• If the backup stock is too low 
loose sales and customers
• If the backup stock is too high 
scare financial resources will be
wasted on needless inventory that
could be more profitably invested in
more variety or assortment

1-343
Product Availability
Factors considered to determine the appropriate level of
buffer stock and thus the product availability for each SKU
• ABC Classification of merchandise (inventory)
• A – higher product availability
• B – medium product availability
• C – lower product availability is acceptable
• Fluctuations in demand
• Lead time for deliver from the vendor
• Frequency of store deliveries

1-344
Staple Merchandise Planning
• Buyer Determines:
• Basic stock or assortment plan
• Level of backup inventory

• System:
• Monitors Inventory levels
• Automatically reorders when inventory gets below a specified level

1-345
Inventory Levels for Staple Merchandise

• Cycle (base) stock:

• Inventory that goes up
and down due to the
replenishment process

• Backup (buffer,
safety) stock
• Inventory needed to
avoid stockout
Basic Stock
• Indicates the desired inventory level for each SKU

Lost Sale Due

to Stockout

Cost of Carrying
Inventory

1-347
Determining the Level of Backup Stock
• Higher product availability (service
More level) retailer wishes to provide to
Backup customers
• Greater fluctuations in demand
Stocks
• Longer lead time from the vendor
Needed
• More fluctuations in lead time
with • Lower vendor’s fill rate (% of
complete orders received from a
vendor)
Inventory Management Report
for Rubbermaid Merchandise
Order Point
The point at which inventory available should not go below
or else we will run out of stock before the next order
arrives

Order point = sales/day (lead time + review time) + buffer stock

• Assume Lead time = 3 weeks, review time = 1 week, demand = 100

units per week

Order point = 100 (3+1) = 400

• Assume Buffer stock = 50 units, then

Order point = 100 (3+1) + 50 = 450

We will order something when order point gets below 450 units.

1-350
Fashion Merchandise
Management Systems
• The system for managing fashion merchandise categories
is typically called a Merchandise Budget Plan.

• Plan for the financial aspects of a merchandise category.

• Specifies how much money can be spent each month to

achieve the sales, margin, inventory turnover, and GMROI
objectives.

• Not a complete buying plan--doesn’t indicate what specific

SKUs to buy or in what quantities.

1-351
Six Month Merchandise Plan
for Men’s Casual Slacks

1-352
Evaluating the Merchandise Budget Plan
• Inventory turnover GMROI, sales forecast are used for both
planning and control
• After the selling season, the actual performance is compared
with the plan
• Why did performance exceed or fall short of the plan?
• Was the deviation from the plan due to something under the buyer’s
control?
• Did the buyer react quickly to changes in demand by either purchasing
more or having a sale?

1-353
Open-to-Buy System
The OTB system is used after the merchandise
is purchased
Monitors Merchandise Flow
Determines How Much Was Spent and How Much is
Left to Spend

PhotoLink/Getty Images PhotoLink/Getty Images

Allocating Merchandise to Stores
Allocating merchandise to stores involves three decisions:

• how much merchandise to allocate to each store

• what type of merchandise to allocate

• when to allocate the merchandise to different stores

1-355
Type of Merchandise Allocated
Retailers classify stores according to the characteristics of
the stores’ trading area

The assortment offered in a ready-to-eat cereal aisle should match

the demands of the demographics of shoppers in a local area

1-356
Timing of Merchandise Allocation to Stores
Seasonality differences and consumer demand differences
Analyzing Merchandise Management Performance

Three types of analyses related to the

monitoring and adjustment step are:

• Sell through analysis

• ABC analysis of assortments
• Multiattribute analysis of vendors

1-358
Sell Through Analysis
Evaluating Merchandise Plan
• A sell-through analysis compares actual and planned
sales to determine whether more merchandise is needed
to satisfy demand or whether price reductions are
required.

1-359
ABC Analysis
• An ABC analysis identifies the performance of individual
SKUs in the assortment plan.
• Rank - orders merchandise by some performance measure
determine which items:
• should never be out of stock
• should be allowed to be out of stock occasionally
• should be deleted from the stock selection.
• A items: 5% of SKUs, represent 70% of sales
• B items: 10% of SKUs, represent 20% of sales
• C items: 65% of SKUs, represent 10% of sales
• D items: 20% of SKUs, represent 10% of sales

1-360
Multiattribute Method
for Evaluating Vendors
The multiattribute method
for evaluating vendors
uses a weighted average
score for each vendor. The
score is based on the
importance of various
issues and the vendor’s
performance on those
issues.

C Squared Studios/Getty Images

Multiattribute Method
for Evaluating Vendors

1-362
Evaluating Vendors
• A buyer can evaluate vendors by using the following five
steps:
1. Develop a list of issues to consider in the evaluation (column 1)
2. Importance weights for each issue in column 1 are determined by
the buyer/planner in conjunction with the GMM (column 2)
3. Make judgments about each individual brand’s performance on
each issue (the remaining columns)
4. Develop an overall score by multiplying the importance of each
issue by the performance of each brand or its vendor
5. Determine a vendor’s overall rating, add the products for each
brand for all issues

1-363
 CHAPTER 14 CHAPTER 1

Retail
Pricing
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What factors do retailers consider when pricing
merchandise?
• What are the legal restrictions on retail pricing?
• How do retailers set retail prices?
• How do retailers make adjustments to prices over
time and for different market segments?
• Why do some retailers have frequent sales while
others attempt to maintain an everyday-low-price
strategy?
• What pricing tactics do retailers use to influence
consumer purchases?
1-365
Why is Pricing Important?
• Pricing decision is important
because customers have
alternatives to choose from and
are more informed than ever
before.
• Customers are in a position to
seek good value.
Value = perceived benefits
price
• So, retailers can increase value
and stimulate sales by increasing
benefits or reducing price.
Pricing Strategies: High/Low Pricing

• Discount the initial prices through

frequent sales promotions
• Advantages
• Increases profits through price
discrimination
• Sales create excitement
• Sells merchandise
• Disadvantages
• Train people to buy on deal and wait
• Have an adverse effect on profits
Pricing Strategies: Everyday Low Pricing
• Emphasizes the continuity of retail prices at a level
somewhere between the regular non-sale price and the deep-
discount sale price of high/low retailers.
• Doesn’t mean lowest price

• Retailers have adopted a low price guarantee policy to

reinforce their EDLP strategy.
• Advantages:

• Assures customers of low prices

• Reduces advertising and operating expenses

• Reduces stockouts and improves inventory management

1-368
Pricing Strategies
EDLP Hi-Lo
• Assures customers low • Higher profits
prices • More excitement
• Reduces advertising • Build short-term sales and
and operating generates traffic
expenses
• Better supply chain
management
• Fewer stockouts
• Higher inventory turns
Considerations in Setting Retail Prices
Customer Price Sensitivity and Cost

1-371
Price sensitivity of customers
(demand curve)

Quantity Sold at Different Prices

If customers are very price sensitive,
sales decrease significantly
with price increases

1-372
Profit at Different Prices

1-373
Price Elasticity

A commonly used measure of price sensitivity:

Elasticity = percent change in quantity sold

percent change in price

1-374
How Can Retailers Reduce Price Competition?

• Develop lines of private label merchandise.

• Negotiate with national brands manufacturers for
exclusive distribution rights.
• Have vendors make unique products for the
retailer.

1-375
Pricing Services
Challenges due to :
• The need to match supply and demand.
• The difficulties customers have in determining service quality.

1-376
Determining Service Quality
Customers are likely to use price as an indicator of both service costs
and service quality This can depend on several factors:

Other information available to the customer

(Cues > Price)
•When service cues to quality are readily
accessible
•When brand names provide evidence of a
company’s reputation
•When the level of advertising
communicates the company’s belief in the
brand
The risk associated with the service purchase
(Price as a surrogate for quality)
Royalty-Free/CORBIS

1-377
Setting Retail Prices
How Do Retailers Set Retail Prices?

Theoretically, retailers maximize their profits by setting prices

on the basis of the price sensitivity of customers and the cost
of merchandise.
In reality, retailers need to set price for over 50,000 SKUs many
times during year.
• Set prices based on pre-determined markup and merchandise
cost
• Make adjustments to markup price based on customer price
sensitivity and competition

1-378
Retail Price and Markup (MU)

Retail Price
$125
Margin
$50
Cost of
Markup as a Percent
Merchandise
of Retail Price
$75
40% = $50/$125
Retail Price = cost + markup
MU% = retail price – cost
retail price

1-379
Retail Price
• Retail price = Cost of merchandise + Markup

• Retail price = Cost of merchandise + Retail price x

Markup %

• Retail price = Cost of merchandise

1 – Markup %

1-380
Markups
• Initial markup:
• retail selling price initially
set for the merchandise
minus the cost of the
merchandise.
• Maintained markup:
• the actual sales realized
for the merchandise minus
its costs

Rob Melnychuk/Getty Images

Initial and Maintained Markup

Initial Retail
Reductions Price $1.00
$.10
Maintained
Markup Cost of
$.30 Merchandise
$.60
Maintained Markup as a
Percent of Actual Sales
33% = $.30/$.90

1-382
Initial Markup

Maintained markup % Reductions %

(as a percent of planned + (as a percent of planned
actual sales) actual sales)
Initial markup % =
100% + Reductions %
(as a percent of planned
actual sales)

1-383
Reductions

• Markdowns (Sales)

• Discounts to employees

• Inventory shrinkage due

to shoplifting and
employee theft
Initial Markup and Initial Retail Price

Merchandise costs $.60. If the buyer planned on reductions of 10% of sales

and wanted a maintained markup of 33% for the merchandise ,

Initial markup % 33% + ($0.10/$0.90 = 11.11%) 40%

= =
100% + 11.11%

Initial retail price = Cost = $0.60 = $1.00

1 – Initial markup % 1 – 0.40

1-385
Example of Setting the Initial Retail Price
Retail Price = $100
Planned Initial Markup = 40% (of retail)
$100 = Cost + (40% x Retail Price)
Cost = $60

1-386
Example of Setting the Initial Retail Price

Cost = $100
Planned Initial Markup = 40% (of cost)
Retail Price = $100 + (40% x Cost)
Retail Price = $140

Retailers NEVER do it this way!

They think of markup as a percentage of the retail price.

1-387
Example of Setting the Initial Retail Price

Cost = $100 Planned Initial Markup = 56.85%

Retail Price = $100 + (56.85% x Retail Price)
Solve for Retail Price
.4315 x retail price = 100
Retail Price = $100/.4315 = 231.75

Initial Retail Price = Cost of Merchandise

(1-markup percentage)

1-388
Price Optimization Software
• Setting prices by simply marking up merchandise cost
neglect other factors (e.g., price sensitivity, competition,
the sales of complementary products)
• Merchandising Optimization Software:
• Utilizes a set of algorithms that analyzes past and
current merchandise sales prices.
• Estimates the relationship between prices and sales
generated.
• Determines the optimal (most profitable) initial price for
the merchandise and size and timing for markdowns.

1-389
Profit Impact of Setting a Retail Price:
The Use of Break-Even Analysis
• A retailer might want to know
• Break-even sales to generate a target profit.
• Break-even volume and dollars to justify introducing a new
product, product line, or department.
• Break-even sales change needed to cover a price change.

1-390
Profit Impact of Setting a Retail Price:
The Use of Break-Even Analysis
• Break-even analysis:
• Determines, on the basis of a consideration of fixed and variable
costs, how much merchandise needs to be sold to achieve a break-
even (zero) profit

• Fixed costs: don’t change with the quantity of product produced

and sold.

• Variable costs: vary directly with the quantity of product produced

and sold (e.g., direct labor and materials used in producing a
product)

1-391
Breakeven Analysis
Understanding the Implication of Fixed and Variable Cost

Contribution/Unit
Breakeven
point
Fixed Costs

Unit Sales

Fixed cost
Break-even =
quantity Actual unit sales price - Unit variable cost

The quantity at which total revenue equals total cost, and then profit
Occurs for additional sales
1-392
Price Adjustments
Retailers adjust prices over time (markdowns) and for different
customer segments (variable pricing)

• Why do retailers take markdowns?

• How do they optimize markdown decisions?
• How do they reduce the amount of markdowns by working
with vendors?
• How do they liquidate markdown merchandise?
• What are the mechanics of taking markdowns?

1-393
Reasons for Taking Markdowns
• Clearance Markdowns to
get rid of slow-moving,
obsolete merchandise

• Promotional Markdowns
• To increase sales and promote
merchandise
• To increase traffic flow and
sale of complementary
products generate excitement
through a sale

• To generate cash to buy

additional merchandise
Optimizing Markdown Decisions

• Traditional Approach- Use a set of arbitrary rules

• Sell-Through: Identifies markdown items when its

weekly sell-through percentages fall below a certain
level.
• Rule-based: Cuts prices on the basis of how long the
merchandise has been in the store.

1-395
Optimizing Markdown Decisions
• Markdown Optimization
• Software is used to determine when and how much
markdowns should be taken to produce the best results
by continually updating pricing forecasts on the basis of
actual sales and factoring in differences in price
sensitivities

1-396
Liquidating Markdown Merchandise
• Sell the merchandise to another retailer
• Consolidate the unsold merchandise
• Place merchandise on Internet auction site
• Donate merchandise to charity
• Carry the merchandise over to the next season

PhotoLink/Getty Images
1-397
Variable Pricing
and Price Discrimination
• Retailers use a variety of techniques to maximize
profits by charging different prices to different
customers
• Individualized Variable Pricing (First Degree of Price
Discrimination)
• Set unique price for each customer equal to customer’s
willingness to pay
• Auctions, Personalized Internet Prices

1-398
Variable Pricing
and Price Discrimination
• Self-Selected Variable Pricing (Second Degree of
Price Discrimination) – Offer the same price
schedule to all customers
• Quantity Discounts
• Early Bird Special
• Over Weekend Travel Discount

1-399
Variable Pricing
and Price Discrimination
• Clearance markdowns for fashion merchandise
• Coupons
• Price bundling
• McDonald’s Value Meal
• Multiple-unit pricing or quantity discount
• Variable pricing by market segments (Third degree of
price discrimination) – Charge different groups different
prices
• Seniors discounts
• Kids menu
• Zone Pricing (Third Degree of Price Discrimination) –
Charge different prices in different stores, markets,
regions 1-400
Solution to Problems in
Implementing Price Discrimination
• Set prices based on customer characteristics
related to willingness to pay
• Fashion sensitive customers will pay more so
charge higher prices when fashion first
introduced – reduce price later in season
• Price sensitive customers will expend effort to
get lower prices – coupons
• Elderly customers eat earlier and
are more price sensitive so offer
early bird specials
C. Borland/PhotoLink/Getty Images
Pricing Techniques for Increasing Sales

• Leader Pricing

• Price Lining

• Odd Pricing
Leader Pricing
• Certain items are priced lower than normal to increase
customers traffic flow and/or boost sales of complementary
products
• Best items: purchased frequently, primarily by price-sensitive
shoppers
• Examples: bread, eggs, milk, disposable diapers
• Might attract cherry pickers

Dennis Gray/Cole Group/Getty Images Allan Rosenberg/Cole Group/Getty Images Ryan McVay/Getty Images

1-403
Price Lining
• A limited number of predetermined price points.
• Ex: $59.99 (good), $89.99 (better), and $129.99
(best)
• Benefits:
• Eliminates confusion of many prices
• Merchandising task is simplified
• Gives buyers flexibility
• Can get customers to “trade up”

1-404
Odd Pricing
• A price that ends in an odd number (.9)
• $2.99
• Assumption:
• Consumers perceive as $2 without noticing the digits
• 9 endings signal low prices
• Retailers believe the practice increases sales, but probably
doesn’t
• Does delineate:
• Type of store (downscale store might use it.)
• Sale

1-405
Internet and Price Competition
• The Internet offers unlimited shopping experience.
• Seeking lowest price? Use shopping bots or search engines.
• These programs search for and provide lists of sites selling
what interests the consumer.
• Retailers using the electronic channel can reduce customer
emphasis on price by providing services and better
information.

(c) image100/PunchStock

1-406
Legal and Ethical Pricing Issues

• Price Discrimination
• Predatory Pricing
• Resale Price Maintenance
• Horizontal KeywordsPrice
fixing
• Bait Keywords and Switch
tactics
• Scanned vs. Posted Prices
PhotoDisc/Getty Images
 CHAPTER 15 CHAPTER 1

Retail
Communication
Mix
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What is an integrated marketing communication program?
• What are the traditional types of media? What are the
advantages and disadvantages of each?
• What are sales promotions? Explain the various types of
sales promotions and why retailers engage in these
activities?
• Describe new media elements. How are these media
changing the way retailers interact with customers?
• What are brands? Why is brand image so valuable to
retailers?
• What are different ways that retailers can budget for
communication efforts?

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Integrated Marketing Communications
• Integrate a variety of communication elements to deliver a
comprehensive, consistent message to all customers over
time, across all elements of a retail mix and across all delivery
channels.
• Providing a consistent image can be challenging for
multichannel retailers – Need to consider the needs of all
channels early in the planning of its communication program

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Integrated Marketing Communication

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Methods of Communicating with Customers
Advertising

• Entailsthe placement of announcements and

persuasive messages purchased by retailers and
other organizations that seek to inform and/or
persuade members of a particular target market or
audience about their products, services,
organizations, or ideas.

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Advertising

Newspapers

Co-op
Magazines
Programs

Radio Television

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Sales Promotions
Sales Promotion Opportunity
• Many sales promotion opportunities undertaken by
retailers are initiated by vendors
• To evaluate a trade promotion, the retailer considers:
• Realized margin from the promotion
• Cost of the additional inventory carried
• Potential increase in sales
• Potential loss
• Additional sales

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Personal Selling
• A communication process in which sales associates
help customers satisfy their needs through face-to-
face exchanges of information.

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Public Relations (PR)
• Managing communications and relationships to
achieve various objectives
• Building and maintaining a positive image of the retailer
• Handling or heading off unfavorable stories or events
• Maintaining positive relationships with the media
• In many cases, public relations activities support
other promotional efforts by generating “free” media
attention and general goodwill.

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Online Marketing

Web Sites

Blogs

Mobile
Communication
Direct Marketing
• Mobile marketing is
marketing through
wireless handheld
devices, such as cellular
telephones, and m-
commerce or mobile
commerce involves
completing a transaction
via the cell phone.
Direct Marketing
Any brochure, Can be
catalog, personalized to
advertisement, the specific
or other printed consumer and

E-mail
Direct mail
marketing thus is similar to
material communications
delivered delivered by
directly to the salespeople.
consumer
through the mail
or a private
delivery
company.

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Social Media
Brands
Distinguishing name, term, or symbol, such as a
logo, that identifies the products or services offered
by a seller and differentiates those products and
services from those offered by competitors.

The McGraw-Hill Companies, Inc./John Flournoy, photographer The McGraw-Hill Companies, Inc./Bob Coyle, photographer

1-423
Value of Brand Image

Value to Retailers (Brand Value to Customers

Equity) • Promises consistent quality
• Attract customers • Simplifies buying process
• Build loyalty • Reduces time and effort
• Higher prices leading to searching for information about a
higher gross margin product/retailer
• Reduced promotional expenses
• Facilitates entry into new markets
Gap  GapKids
Building Brand Equity
Create a High
Level of Brand
Awareness

Consistent Brand Develop

Favorable
Reinforcement
Equity Associations

Create
Emotional
Connections

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Benefits of High Brand Awareness

Aided Recall Stimulates

Top of Mind Visits to
Awareness Retailer

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Creating Brand Awareness

Memorable Repeated
Best Buy Exposure
Name

Top-of-mind
Home Depot Starbuck’s
Brand Awareness

Event
Symbols Macy’s Sponsorship
Planning the
Retail Communication Program
Establish Objectives
• Communication objectives:
• Specific goals related to the retail communication mix’s effect on the
customer’s decision-making process
• Long-term: ex. creating or altering a retailer’s brand image
• Short-term: ex. increasing store traffic

1-429
Determine the Communication Budget

• Marginal Analysis Method

• Based on the economic principle that firms should

increase communication expenditures as long as each
additional dollar spent generates more than a dollar of
additional contribution.
• Very hard to use because managers don’t know the
relationship between communication expenses and
sales.

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Marginal Analysis for Setting Diane
West’s Communication Budget
Objective-and-Task Method
• Determines the budget required to undertake specific
tasks to accomplish communication objectives

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Financial Implications of Increasing the
Communication Budget
Rule of Thumb Methods
• Affordable Budgeting Method – sets
communication budget by determining what
money is available after operating costs and
profits are budgeted.

• Drawback: The affordable method assumes

that the communication expenses don’t stimulate
sales and profits.

1-434
Rule of Thumb Methods
• Percentage of Sales Method – communication
budget is set as a fixed percentage of forecasted
sales.

• Drawback: This method assumes the same

percentage used in the past, or by competitors, is
still appropriate for the retailer.

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Rule of Thumb Methods
• Competitive Parity Method – this communication
budget is set so that the retailer’s share of
communication expenses equals its share of the
market.

• Drawback: This method (like the others) does not

allow the retailer to exploit the unique opportunities
or problems they confront in a market.

1-436
Allocate the Promotional Budget
• The retailer decides how much of its budget to
allocate to specific communication elements,
merchandise categories, geographic regions, or
long- and short-term objectives
• Budget allocation decision is more important
budget amount decision
High-assay principle: The retailer allocates the
budget to areas that will yield the greatest return.

1-437
CHAPTER 16 CHAPTER 1

Managing
the Store

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Questions
• What are the responsibilities of store managers?
• How do store managers recruit, select, motivate, train, and
evaluate their employees?
• How do store managers compensate their salespeople?
• What legal and ethical issues must store managers consider
in managing their employees?
• What can store managers do to increase productivity and
reduce costs?
• How can store managers reduce inventory losses due to
employee theft and shoplifting?
• What are retailers doing to reduce energy costs?

1-439
Store Management
• Store managers are responsible for managing two of the
retailer’s most important assets: employees and real estate.
Steps in Employment Management Process
Recruiting, Socializing, and Training
Employees
Locate
Prepare Job
Prospective
Description
Employees
Activities to be Use
performed and employees as
performance talent scouts
expectations in
quantitative terms

Select Screen
Employees Candidates

Application forms
references, testing,
realistic job preview, social
media
Questions for Undertaking Job Description
Interviewing Questions
Education
• What were your most and least favorite subjects in college?
Why?
• What types of extracurricular activities did you participate in?
Why did you select those activities?
• If you had the opportunity to attend school all over again,
what, if anything, would you do differently? Why?
• How did you spend the summers during college?
• Did you have any part-time jobs? Which of your part-time jobs
did you find most interesting? What did you find most difficult
about working and attending college at the same time? What
advice would you give to someone who wanted to work and
attend college at the same time?
• What accomplishments are you most proud of? 1-444
Interviewing Questions
Previous Experience
• What’s your description of the ideal manager? Subordinate? Coworker?
• What did you like most/least about your last job?
• What kind of people do you find it difficult/easy to work with? Why?
• What has been your greatest accomplishment during your career to date?
• Describe a situation at your last job involving pressure. How did you
handle it?
• What were some duties on your last job that you found difficult?
• Of all the jobs you’ve had, which did you find the most/least rewarding?
• What is the most frustrating situation you’ve encountered in your career?
• Why do you want to leave your present job?
• What would you do if . . . ?
• How would you handle . . . ?
• What would you like to avoid in future jobs?
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Interviewing Questions
Questions that should not be asked per equal employment
opportunity guidelines
• Do you have plans for having children/a family?
• What are your marriage plans?
• What does your husband/wife do?
• What happens if your husband/wife gets transferred or needs to
relocate?
• Who will take care of your children while you’re at work?
• (Asked of men) How would you feel about working for a woman?
• How old are you?
• What is your date of birth?
• How would you feel working for a person younger than you?
• Where were you born?
• Where were your parents born?
• Do you have any handicaps?

1-446
Suggestions for Questioning Applicant
• Avoid asking questions that have multiple parts
• Avoid asking leading questions like “Are you prepared to
provide good customer service?”
• Be an active listener. Evaluate the information being
presented and sort out the important comments from the
unimportant.
• repeat or rephrase information
• summarize the conversation
• tolerate silence

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Legal Considerations in Hiring
and Selecting Employees

• Equal Employment Opportunity Commission (EEOC)

• Age Discrimination and Employment Act
• Disparate Treatment
• Disparate Impact
• Americans with Disabilities Act

1-448
Socialization of New Store Employees

• Orientation Program
• Training Store Employees
• Structured program
• On-the-job learning
experiences
• E-training
• Blended approach
• Analyzing successes and
failures
Motivating, Evaluating, Rewarding and
Compensating Store Employees
Motivating employees to perform up to their potential
may be store managers’ most important but also
frustrating task
Why Set Goals?

• Employee performance
improves when employees
feel:
• That their efforts will enable
them to achieve the goals set
for them by their managers.
• That they’ll receive rewards
they value if they achieve
their goals.
Royalty-Free/CORBIS
Evaluating and
Providing Feedback to Employees
• Evaluation
• Who, when, how often?

• Feedback
• Performance outcome vs. process

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Evaluation
• Who Should Do the Evaluation?
• System is designed by the human resource department
• Evaluation is done by immediate supervisors

• How Often Should Evaluations Be Made?

• Annually or semiannually
• Feedback from evaluations is the most effective method for
improving employee skills

1-453
Factors Used to Evaluate Sales
Associates at a Specialty Store

25%
Operations
50%
Sales/
Customer
Relations
25%
Compliance

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Compensating
and Rewarding Store Employees
• Extrinsic Rewards are rewards provided by either the
employee’s manager or the firm such as compensation,
promotion and recognition
• A la carte plans: give effective employees a choice of
rewards for their good performance.

• Intrinsic Rewards are rewards employees get personally

from doing their job well like doing their job well because
they think it is challenging and fun.
• Job enrichment: the redesign of a job to include a
greater range of tasks and responsibilities.

1-455
Compensation Programs
• A compensation plan is effective for motivating and
retaining employees when the employees feel the
plan is fair and that compensation is related to their
efforts.
• Types
• Straight salary compensation
• Incentive compensation plans
• Straight commission
• Quota bonus plan
• Group incentives
Royalty-Free/CORBIS

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Designing the Compensation Program

• Two elements:
• The amount of compensation
• The percentage of compensation based on incentives

• Incentivecompensation is most effective when

performance can be measured easily and precisely
• Difficult to measure teamwork, non-selling activities,
customer service, merchandising performance

1-457
Individualized Motivation Programs
• Impact of Goals
Differs Across People
• Different People Seek
Different Rewards
• A La Carte Reward
Programs
• Selection of
Compensation
Plans
Steve Cole/Getty Images
Maintaining Morale
• Meetings before store opening to talk
about new merchandise and hear
employee opinions.
• Educate employees about the firm’s
finances, set achievable goals and
have a pizza party when goals are met.
• Divide charity budget and ask
employees how their share should be
used.
• Give every employee a business card
with the company mission statement
Pando Hall / Getty Images
printed on the back.
Sexual Harassment
• Sexual harassment is
unwelcomed sexual
advances, requests
for sexual favors, and
other verbal and
physical contact.
Controlling Costs

Energy
Labor Heating
Scheduling Lighting

Costs Controlled by
Store Managers

Inventory
Maintenance Shrinkage
 Reducing Inventory Shrinkage
Total shrinkage in the U.S. is estimated at $40.5 billion annually
Shrinkage is the difference between the recorded value of inventory (at
retail prices) and the value of the actual inventory (at retail prices) in stores
and distribution centers divided by retail sales during the period

Accounting Record – Actual Inventory

Shrinkage =
Sales

$1,500,000 - $1,236,00 = 6.2%

$4,225,000
Sources of Inventory Shrinkage
Organized and High Tech Retail Theft
• Concentrate in over-the-counter
medications, infant formula, health
and beauty aids, electronics and
specialty clothing
• Items that are easy to sell through
Internet like eBay auctions
• Technology based scams
• Counterfeit bar codes at lower prices

• Gift cards

• Receipt frauds
PhotoLink/Getty Images
Detecting and Preventing Shoplifting

• Store design
• Merchandise Policies
• Security measures
• Dye capsules, CTV cameras
EAS tag
• Electronic Article Surveillance
(EAS)
• Personnel Policies
• Employee training
• Prosecution
Spotting Shoplifters
• Don’t assume that all shoplifters are poorly dressed
• Spot loiterers
• Look for groups
• Look for people with loose clothing
• Watch the eyes, hands, and body

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Reducing Employee Theft
• Trusting, supportive work atmosphere
• Employee screening
• Honesty test, extensive reference checks, drug testing
• Security policies and control systems
• Employee theft is an HR problem

Total inventory shrinkage attributed to employee theft is

approximately $19 billion annually in the U.S.

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