Chapter 1

Introduction to the World of Retailing

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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The World of Retailing

Introduction to Retailing

Types of Retailers

Multi-Channel Retailing

Customer Buying Behavior

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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?

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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.

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Examples of Retailers

 Retailers:
KFC, New Yaohan,
shops inside Venetian,
Four Seasons, City of
Dreams, Landmark

 Firms that are retailers and wholesalers - sell to

other business as well as consumers:
Office Depot, The Home Depot, United Airlines, Bank of
America, Cosco
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Manufacturer’s Perspective

The Four P’s of Marketing

Retailers
Retailersare
are part of the
part of the
distribution channel
distribution channel
Product

Distribution Price

Promotion

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Distribution Channel

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Wholesaler

 Wholesalers engage in buying, taking title to,

storing, handling goods in large quantities, resell
goods in small quantities to retailers or industrial
or business users.

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Typical Supply Chain Network

Customers

Suppliers Plants

retailers
Distribution
Centers

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A 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.

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Manufacturing, Wholesaling and Retailing

Vertical Integration – firm performs more than one set of activities in

the channel
Ex: retailer invests in wholesaling or manufacturing, e.g. Nike

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
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Advantages of vertical integration

Retailers undertake the wholesaling and retailing

activities
1. Develop/ manufacture unique merchandise
only sold in your stores, private-label products
2. Better coordination between manufacturing and
retailing

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Disadvantages of Vertical Integration

 1. Higher costs because retailer might not be an

efficient manufacturer

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Do Retailers Add Value to the final
product?

a box of crackers at a grocery store

Example  costs $1 to manufacturer
 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?

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Why Not Get Rid of the Middlemen?

Price to Price to Price to

Distributor Retailer Consumer
$1.00 $1.20 $2.00

$.85 $.20 $.80

Manufacturer Distributor Retailer Consumer

Vendor Wholesaler
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Why Not Get Rid of the Middlemen?

Better services to
customers
More efficient

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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

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Offer Assortments

 Allow consumers to choose from a wide

selection of brands, designs, colors, and prices
in a one-stop location.
 Retailers specialize in particular assortments
 E.g. supermarkets -> food, personal-care and
household products
 E.g. department stores -> clothing, electronics,
designer brands

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Services offered by retailers

 Credit
 Merchandise alteration
 Merchandise display, gift wrapping
 Check cashing
 Child care facilities
 Home delivery
 Offer professional advice
 parking

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 How Retailers Add Value

The value of the product and service

ncreases as the retailer performs functions.
Bicycle can be
bought on credit or
put on layaway

Bicycle is featured
on floor display

Bicycle is offered in
convenient locations
in quantities of one
Bicycle is
developed in
several styles
Bicycle is developed
at manufacturer
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Examples: How Retailers Add Values

 BagBorrowerSteal.com
 jewelry and bag rental; Get (not buy, but borrow) exactly what you
want
 Home Depot
 DIYer (Do-it-yourselfer); Learn how to do it yourself with in-store
clinics and online workshops

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Social and Economic Significance of Retailing

 Retail Sales:
 1.9 million retail firms, 95% -
one store (small) business
 Over $4.1 trillion in annual

U.S. sales in 2005 (exclude

catalog and internet sales)
 Employment:
 Employs over 24 million

people in 2005
 One of the largest sectors

for job growth in US

 Social responsibility
 Global player

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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

 Examples: Edun - a fair-trade fashion

brand by the U2 lead singer Bono
 Starbucks: pays its farmers 42%
more than the commodity price of
Arabica coffee beans
 Target: community giving programs
(5% of income, $3 million a week)

 Retail companies give away 1.7%

of their profits, compared with about
0.9% for companies in other
industries
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World’s 20 Largest Retailers in 2005

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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.

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Comparison of Distribution Channels
around the World

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What have created these differences
in distribution systems?

Social &  China, India: To reduce unemployment by

Political protecting small businesses
Objectives  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)

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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

■ Financially rewarding
 5-year salary of buyers: $50,000 - $60,000

 5-year salary of store managers: $120,000 - $160,000

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 Nature of Retail Industry is Changing

To Today’s Retailer

Mom and Pop Store

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Retailing is a High Tech Industry

 Selling Merchandise through the Internet

 Using Internet to manage supply chains

 Analyze POS (points of sales) data to tailor

assortments to stores

 Computer systems for merchandise planning and

tracking
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Opportunities in Retailing:
Entrepreneurial opportunities
Wal-Mart: Sam Walton
■ Retailing provides opportunities for
people who want to start their own
business
■ Some of the world’s richest people
are retailing entrepreneurs

■ Examples of retailing IKEA: Ingvar Kamprad

entrepreneurs
Sam Walton (Wal-Mart)
Jeff Bezos (Amazon.com)
Ingvar Kamprad (IKEA)
Anita Roddick (the Body Shop)

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 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)

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Retail Management Decision Process

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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

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Retail Strategy

■ Need to identify the competition

 intratype competition
(Circle K vs. 7-11)
 intertype competition
(Circle K vs. Park n shop)
Variety, scrambled
merchandise

■ Identifying customers
 What are the significant
demographic and life-style
trends
 Who are your target
customers

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Retail Strategy

■ A retail strategy should identify

 the target market

 the product and service mix

 a long-term comparative advantage

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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?

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Checklist for Making Ethical Decisions

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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!

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Careers in Retailing

 Career Opportunities
 Store Management
 Merchandise Management
 Corporate Staff

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Misconceptions About Careers in Retailing

■ College not needed

■ Low pay
■ Long hours
■ Boring
■ Dead-end job
■ No benefits
■ Everyone is part-time
The McGraw-Hill Companies, Inc./Andrew Resek, photographer

■ Unstable environment
■ No opportunity for women and minorities
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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
■ Management for people-people

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Types of Jobs in Retailing

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 1-44
 1a. Who is your favorite retailer? Try to describe the
location, the layout of the store (if any), products,
services, prices, channel of distribution etc. What are
the things that you like the most from this retailer?
 1b. On the other hand, try to criticize a retailer that you
dislike the most. Please elaborate the things that you
do not like from this retailer and why?
2. a. Choose an international retailer that wants to open a
new store in Macao for the first time. Which retailer
would you choose? Why?
3. 3. Try to name at least five qualities that in your opinion
a successful entrepreneur must possess. Do you think
you have these qualities Why?

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Favorite Retailer

 Zara
 7-eleven
 360buy.com
 Ikea
 Mannings
 Apple store
 Family Mart (Taiwan)

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Unfavorite store

 Royal supermarket
 Hot spot near McDonalds
 KFC
 Be-1
 Burger King

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Internation store open in Macao

 H&M
 Burger King
 Ajisen Ramen
 Wal-mart
 H&M

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Five Qualities in an entrepreneur

 Creative innovative
 Decisive have vision
 Ambitious social responsible
 Leadership rich
 Observe
 Honesty
 Hardworking
 Innovative
 Have vision
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Retailers are a Business Like
Manufacturers

Real Estate Finance

Store Design
Promotion/Advertising

MIS
Loss Prevention

Operations
Human Resources

The McGraw-Hill Companies,

Inc./Andrew Resek, photographer

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