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SINGAPORE INSTITUTE OF MANAGEMENT
BACHELOR OF BUSINESS (BUSINESS
ADMINISTRATION
Distribution Channels (MKTG 1058)
LECTURE NOTES
Outline Chapter Summaries
Solutions to Computational Exercises
(Selected Chapters)
Power Point Slides
JANUARY 2011
Please Note: the accompanying chapter summaries are based on the
required text for this course. You are reminded that reading the
assigned chapters are absolutely essential and that the notes
provided are meant to supplement the text chapters. Please ensure
that you complete your reading of the text chapters for the
respective lectures.
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Week Topic Chapter
1. Perspectives on Retailing 1 & 5
Managing the Supply Chain
2. Market Selection & Location Analysis 7
3. Strategic Planning & Operation Management 2 & 4
Evaluating the Competition
4. Retail Customers 3 & 6
Legal & Ethical Behaviour
5. Store Layout & Design 13
6. Managing a Retailer’s Finances 8
7. Merchandise Buying & Handling 9
8. Merchandise Pricing 10
9. Advertising & Promotion 11
10 Customer Service & Retail Selling 12
11. Managing People 14
12. Course Review (& Catch up lecture)
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Lecture One
Topics:
Perspectives on Retailing
Managing the Supply Chain
Dunne: Chapters 1 and 5
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Chapter 1
Perspectives on Retailing
Overview:
In this chapter, we acquaint you with the nature and scope of retailing. We present retailing as a
major economic force in the United States and as a significant area for career opportunities.
Finally, we introduce the approach to be used throughout this text as you study and learn about
the operation of retail firms.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain what retailing is.
2. Explain why retailing is undergoing so much change today.
3. Describe five methods used to categorize retailers.
4. Understand what is involved in a retail career and be able to list the prerequisites
necessary for success in retailing.
5. Be able to explain the different methods for the study and practice of retailing.
Outline:
I. What Is Retailing?
A. Retailing - consists of the final activities and steps needed to place a product in
the hands of the consumer or to provide services to the consumer.
B. Can be performed by any firm that sells a product or provides a service to the
final consumer.
II. The Nature of Change In Retailing – Retailing, which accounts for 20 percent of the
worldwide labor force and includes every living individual as a customer, is the largest
single industry in most nations and is currently undergoing many exciting changes.
A. E-tailing – The great unknown for retail managers is what the ultimate role of the
Internet will be.
1. It is still unclear if online shopping will reach its projections for ―every
day‖ needs.
2. A dramatic change created by e-tailing is a shift in power between
retailers and consumers. The information dissemination capabilities of
the Internet are making consumers better informed and thus increasing
their power when transacting and negotiating with retailers.
B. Price Competition - Americans are price conscious, whether shopping at brick &
mortar stores or on-line, and retailers that are able to cut costs in order to provide
lower prices will be the winners.
C. Demographic Shifts - Other significant changes in retailing over the past decade
have resulted from changing demographic factors, such as: the fluctuating birth
rate, the increasing number of immigrants, the growing importance of the 70
million Generation Y consumers, and the fact that Generation Xers are now
middle-aged and baby boomers are now reaching retirement.
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1. Profit growth must come by either increasing same store sales at the
expense of the competition's market share (Same store sales is a retailing
term that compares an individual store's sales to its sales for the same
month in the previous year. Market share refers to a retailer's sales as a
percentage of total market sales for the product line or service category
under consideration.) or by reducing expenses without reducing services
to the point of losing customers.
2. As a result, today's retail firms are run by professionals who can look at
the changing environment and see opportunities, exert enormous buying
power over manufacturers, and anticipate future changes before they
impact the market, rather than just react to these changes after they occur.
D. Store Size - The size of retail stores has increased in recent years because of:
1. The phenomenon referred to as scrambled merchandising, whereby
stores handle many different unrelated items, and;
2. The growth of category killer stores. These retailers got their name from
their marketing strategy: carry such a large amount of merchandise in a
single category at such good prices that it makes it impossible for the
customer to walk-out without purchasing what they needed; thus "killing"
the competition.
III. Categorizing Retailers - There are five popular schemes for categorizing retailers.
A. Census Bureau Classification
1. North American Industry Classification System (NAICS) codes -
Reflects the type of merchandise a retailer sells. The major portion of a
retailer's competition comes from other retailers in its NAICS category.
2. Three-digit codes are very broad; four-digit codes provide much more
information on the structure of retail competition and are easier to work
with.
B. Number of Outlets
1. Another method of classifying retailers is by the number of outlets each
firm operates. Generally, retailers with several units are a stronger
competitive threat because they can spread many fixed costs, such as
advertising and top management salaries, over a large number of stores
and can achieve economies in purchasing.
2. Chain Stores - account 41% of all retail sales.
a. Size categories - Broken down by the Census Bureau into "2 to 10
stores," and "11 or more stores" categories.
b. Large chains take advantage of their economies of scale and
centralized buying by using:
(1) Standard Stock List - Method whereby all stores in a
chain stock the same merchandise.
(2) Optional Stock List - Method which gives each store in a
retail chain flexibility to adjust its merchandise mix to
local tastes and demands.
(3) Providing Supply Chain Leadership - by directing the
channel and having other channel members do what they
might not otherwise do, the retailer by serving as the
channel advisor can make it more effective.
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(4) Private Label Branding - Chains use their own brand
name instead of a manufacturer's brand name; results in
lower costs for consumers.
3. A shortcoming of using the number of outlets scheme for classifying
retailers is that it addresses only traditional brick & mortar retailers, or
those operating in a physical building.
C. Margin vs. Turnover
1. Gross Margin Percentage - Indicates how much gross margin the
retailer makes as a percentage of sales; gross margin is used to pay the
retailer's operating expenses.
a. Gross Margin - Net sales minus the cost of goods sold.
b. Operating Expenses - Expenses the retailer incurs while running
the business other than the cost of merchandise [i.e., rent, wages,
utilities, depreciation, insurance].
2. Inventory Turnover - Number of times per year, on average, that a
retailer sells its inventory.
3. Classifying Retailers by Margin/Turnover
a. Low-margin/Low-turnover - These retailers will not be able to
generate sufficient profits to remain competitive and survive.
There are no good examples of successful retailers using this
approach.
b. Low-margin/High-turnover - Common in the United States.
Examples include the discount department stores, the warehouse
clubs, and the category killers. Amazon.com is probably the best
known example of low-margin/high-turnover e-tailers.
c. High-margin/Low-turnover - The types of retailers in this
category include brick & mortar retailers such as furniture stores,
high-end women’s specialty stores and furriers, jewelry stores,
gift shops, funeral homes and most of the mom-and-pop stores
located in small towns across the country. Some click & mortar
retailers using this approach include Coach and Sharper Image.
d. High-margin/High-turnover - Convenience store retailers fall into
this category. Best able to withstand and counter competitive
attacks. Because in the early stages of Internet commerce most
retailers are trying to achieve a high turnover rate, there are not
any examples of e-tailers using this strategy.
4. While the Margin/Turnover scheme provides an encompassing
classification, it fails to capture the complete array of retailers operating
in today's marketplace. For example, service retailers, and even some e-
tailers, such as Priceline.com, carry no inventory. Thus, while this scheme
is a good way of analyzing retail competition, it neglects an important
type of retailing.
D. Location - Retailers can improve financial performance results not only by
improving the sales per square foot of traditional sites but by operating in new
nontraditional retail areas or over the Internet.
E. Size - Retailers are often classified by sales volume or by number of employees.
1. Operating performance tends to vary according to size; larger firms
usually have lower operating costs per sales dollar.
2. While size has been useful in the past, it is unclear whether the changes
brought about by technology will not make this obsolete. For example,
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imagine a fully automated retailer, where as a consumer places an order
on-line, an automated stock picking warehouse packages the selected
merchandize and forwards it to the shipping area to be sent by UPS to the
customer.
IV. A Retailing Career
A. Exposure to All Business Disciplines - Retailing provides professionals with the
opportunity to gain knowledge on all facets of the business world. A retailer's role
may include a combination of the following positions and responsibilities:
1. Economist - Forecasting sales growth
2. Fashion Expert - Predicting consumer behavior and how it will affect
future fashion trends.
3. Marketing Manager - Determining how to promote, price, and display
your merchandise.
4. Financial Analyst - Reducing store expenses.
5. Personnel Manager – Hiring the right people, training them to perform
their duties in an efficient manner, and developing their work schedules.
6. Logistics Manager - Arranging delivery of a ―hot item.‖
7. Information System Manager - Analyzing sales and other data to
determine opportunities for improved management practices.
8. Accountant – Arriving at a profitable bottom line.
B. There are two major career paths in Retailing:
1. Store Management – Involves responsibility for selecting, training, and
evaluating personnel, as well as in-store promotions, displays, customer
service, building maintenance, and security.
2. Buying – Involves the use of quantitative tools to develop appropriate
buying plans for the store’s merchandise lines.
C. Common Questions About a Retailing Career
1. Salary – Starting salaries in executive training programs will be around
$38,000 to $50,000 per year. That, however, is only the short-run
perspective. In the long run, the retail manager or buyer is directly
rewarded on individual performance. Entry-level retail managers or
buyers who do exceptionally well can double or triple their incomes in
three to five years and often can have incomes twice those of classmates
who chose other career fields.
2. Career Progression - The speed of a retail professional's progression is
dependent upon an individual's capabilities and the growth of the
organization. There is no "standard" career progression for a retailer.
3. Geographic Mobility - The willingness and ability to make geographic
moves often increases a retail professional's opportunities for
advancement.
4. Women in Retailing - Retailing has always been viewed as a good career
for women. Today females constitute over 50 percent of all department
store executives, making it the profession where women have attained the
highest level of achievement.
5. Societal Perspective - Leading retail executives are well-rounded
individuals with a high social consciousness. Professionals entering the
retail field must develop a sound set of ethical principles by which they
may guide their actions.
D. Prerequisites for Success
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1. Hard Work - A willingness to work extra hours, evenings and weekends
often pays off through career advancements.
2. Analytical Skills - An ability to interpret the facts and data that are related
to the past and present performance of a store, merchandise lines and
departments.
3. Creativity - An ability to develop and capitalize on unique ideas and
opportunities.
4. Decisiveness - The ability to make rapid decisions, render judgments,
take action and commit oneself to a course of action until completion.
5. Flexibility - A willingness to and enthusiasm for accommodating change;
ability to thrive in an "expect the unexpected" environment.
6. Initiative - The ability to originate action.
7. Leadership - The ability to inspire others to trust and respect your
judgment and an aptitude for delegating, guiding and persuading others.
8. Organization - The ability to establish priorities and courses of action and
to plan and follow up to achieve results.
9. Risk Taking - The willingness to take calculated risks and to accept
responsibility for the results.
10. Stress Tolerance - Retailing is a fast-paced and demanding career in a
changing environment. The retailing leaders of the 21st century must be
able to perform consistently under pressure and to thrive on constant
change and challenge.
11. Perseverance - Successful retailers must have perseverance. All too often
retailers may become frustrated due to the many things occurring that
they can't control. Individuals that have the ability to persevere and take
marketplace changes in stride will find an increasing number of career
advancement opportunities.
12. Enthusiasm - Successful retailers must have a strong warmth of feeling
for their job, otherwise they will convey the wrong image to their
customers and associates in their department. Retailers today are training
their sales force to smile even when talking to customers on the telephone
because it shows through in your voice.
V. The Study and Practice of Retailing
A. Analytical Method – The analytical retail manager is a finder and investigator of
facts. The use of models and theories of retailing as a means of making
systematic decisions about all aspects of the business; concentrate on facts.
B. Creative Method – The creative retail manager is an idea person. The use of
insight and intuition in the process of handling retail difficulties; emphasis is on
ideas
C. Two-Pronged Approach - The combination of creativity and analysis when
responding to problems.
D. A Proposed Orientation - The approach to the study and practice of retailing that
is reflected in this book is an outgrowth of the previous discussion. This approach
has four major orientations:
1. Environmental Orientation - Allows retailers to continuously adapt to
external forces in the environment.
2. Management Planning Orientation - Allows retailers to adapt
systematically to a changing environment.
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3. Profit Orientation - Allows retailers to focus on the fundamental
management of assets, revenues and expenses.
4. Decision Making Orientation - Allows retailers to focus efforts on the
need to collect and analyze data for making intelligent retail decisions.
VI. Book Outline
A. Introduction to Retailing (Chapters 1-2)
B. The Retailing Environment (Chapters 3-6)
C. Market Selection and Location Analysis (Chapter 7)
D. Managing Retail Operations (Chapters 8-14)
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Chapter 5
Channel Behavior
Overview:
At the outset of this text, we pointed out that retailing is the final movement in the progression
of merchandise from producer to consumer. Many other movements occur through time and
geographical space, and all of them need to be executed properly for the retailer to achieve
optimum performance. Therefore, in this chapter, we examine the retailer's need to analyze
and understand the supply chain in which it operates. After looking at the activities in the
supply chain, the chapter then reviews the various types of supply chains and the benefits
each one offers the retailer. The chapter concludes with some practical suggestions to
improve supply chain relationships, especially the use of a category manager.
Learning Objectives:
After reading this chapter, you should be able to:
1. Discuss the retailer's role as one of the institutions involved in the larger supply chain.
2. Describe the types of supply chains by length, width, and control.
3. Explain the terms dependency, power, and conflict and their impact on supply chain
relations.
4. Understand the importance of having a collaborative supply chain relationship.
Outline:
VII. The Supply Chain – It is important to understand the retailer’s role in the larger supply
chain.
A. A supply chain, which is often used interchangeably with the term channel, is
a set of institutions that moves goods from the point of production to the point
of consumption.
B. The supply chain, or channel, is affected by five external forces:
1. Consumer behavior,
2. Competitor behavior,
3. The socioeconomic environment,
4. The technological environment, and
5. The legal and ethical environment.
These external forces cannot be completely controlled by the retailer or any
other institution in the supply chain, but they need to be taken into account
when retailers make decisions.
C. Eight marketing functions must be performed by a supply chain or channel:
1. Buying,
2. Selling,
3. Storing,
4. Transporting,
5. Sorting,
6. Financing,
7. Information gathering, and
8. Risk taking.
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- Whether the economic system is capitalistic, socialistic, or communistic,
these eight marketing functions will exist.
- These functions cannot be eliminated. They can, however, be shifted or
divided among the different institutions and the consumer in the supply chain.
- No member of the supply chain would want, or be able, to perform all eight
marketing functions. Thus, the retailer must view itself as being dependent on
others in the supply chain.
D. Marketing Institutions
1. Primary marketing institutions are supply chain members
that take title to the goods. These include manufacturers, wholesalers,
and retailers.
2. Facilitating marketing institutions are those that do not actually take
title but assist in the marketing process by specializing in the
performance of certain functions. These include agents/brokers,
financial institutions, market researchers, transporters, advertising
agencies, warehouses, and insurers.
VIII. Types of Supply Chains- There are three strategy decisions to be made when
designing an efficient and competitive supply chain: supply chain length, width, and
control.
A. Supply Chain Length refers to the number of institutions between the
manufacturer and consumer.
1. Supply chains can be direct or indirect.
a. A direct supply chain occurs when manufacturer sell their
goods directly to the final consumer or end user.
b. An indirect supply chain occurs once independent channel
members (wholesalers and retailers) are added between the
manufacturer and the consumer.
2. The desired supply chain length is determined by many customer-based
factors, such as the size of the customer base, geographical dispersion,
behavior patterns, and the particular needs of customers.
B. Supply Chain Width - pertains to the number of retailers used to cover a given
trading area.
1. Intensive distribution means that all possible retailers are used in a
trade area.
2. Selective distribution means that a moderate number of retailers are
used in a trade area.
3. Exclusive distribution means only one retailer is used to cover a
trading area.
C. Control of the Supply Chain- A pressing issue for all supply chains is "who
should control the supply chain." In seeking to control or manage a supply
chain, there are two basic supply chain patterns: the conventional marketing
channel and the vertical marketing system.
1. A Conventional Marketing Channel is one in which each member of
the channel is loosely aligned with the others and takes a short-term
orientation.
2. Vertical Marketing Channels are capital-intensive networks of
several levels that are professionally managed and centrally
programmed systems to realize the technological, managerial, and
promotional economies of long-term relationships.
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a. The basic premise of working as a system is to operate as close
as possible to that elusive 100 percent efficiency level.
b. Since vertical channel members now realize that it is impossible
to offer consumers "value" without being a low-cost, high
efficiency supply chain, they have developed either quick
response (QR) systems or ECR (Efficient Consumer Response)
Systems and make use of category management techniques.
c. There are three types of vertical marketing channels:
(1) Corporate vertical marketing channels typically
consist of either a manufacturer that has integrated
vertically forward to reach the customer, or a retailer
that has integrated vertically backward to create a self-
supply network.
(2) Contractual vertical marketing channels are supply
chains that use a contract to govern the working
relationship between the members. They include the
following types:
(a) Wholesaler-sponsored voluntary groups are
created when a wholesaler brings together a
group of independently owned retailers and
offers them a coordinated merchandising and
buying program that will provide these smaller
retailers with economies similar to those
obtained by their chain store rivals.
(b) Retailer-owned cooperatives are wholesale
operations organized and owned by retailers and
are most common in hardware retailing.
(c) Franchising is a form of licensing by which the
owner of a trademark, service mark, trade name,
advertising symbol or method obtains
distribution through affiliated dealers.
(3) Administered vertical marketing channels are similar
to conventional marketing channels, but one of the
members takes the initiative to lead the channel by
applying the principles of effective interorganizational
management, which is the management of relationships
between the various organizations in the supply chain.
III. Managing Retailer-Supplier Relations If retailers want to improve their
performance in these channels, they must understand the principal concepts of
interorganizational management. .
A. Dependency – None of the respective institutions can isolate itself; each
depends on others to do an effective job.
B. Power is the ability of one member to influence the decisions of the other
channel members.
1. There are six types of power:
a. Reward power is based on the ability of A to provide rewards
for B.
b. Expertise power is based on B's perception that A has some
special knowledge.
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c. Referent power is based on the identification of B with A. B
wants to be associated or identified with A.
d. Coercive power is based on B's belief that A has the capacity to
punish or harm B if B doesn't do what A wants.
e. Legitimate power is based on A's right to influence B, or B's
belief that B should accept A's influence.
f. Informational power is based on A’s ability to provide B with
factual data.
2. Retailers and suppliers that use reward, expertise, referent and
informational power can foster a healthy working relationship.
3. Coercive and legitimate power tend to elicit conflict and destroy
cooperation in the channel.
C. Conflict – It is inevitable in every channel relationship because retailers and
suppliers are interdependent; that is, every channel member is dependent on
every other member to perform some specific task. There are three major
sources of conflict between retailers and their suppliers:
1. Perceptual incongruity occurs when the retailer and supplier have
different perceptions of reality.
2. Goal incompatibility occurs when achieving the goals of either the
supplier or the retailer would hamper the performance of the other.
3. Domain disagreements occur when there is disagreement about which
member of the marketing channel should make decisions. Examples
include:
a. A diverter is an unauthorized member of a channel who buys
and sells excess merchandise to and from authorized channel
members.
b. Gray marketing is when branded merchandise flows through
unauthorized channels.
c. Free-riding is when a consumer seeks product information,
usage instructions, and sometimes even warranty work from a
full-service store but then, armed with the brand’s model
number, purchases the product from a limited service discounter
or over the Internet.
IV. Collaboration in the Channel – Although all channels experience some degree of
conflict,
the dominant behavior in successful channels is collaboration.
A. However, the management of collaborative relations is facilitated by three
important types of behaviors and attitudes. These are:
1. Mutual trust, which occurs when both the retailer and its supplier have
faith that each will be truthful and fair in their dealings with the other.
2. Two-way communication, which occurs when both the retailer and the
supplier openly communicate their ideas, concerns, and plans.
3. Solidarity exists when a high value is placed on the relationship
between a supplier and retailer.
B. Category management – involves the simultaneous management of price, shelf
space, merchandising strategy, promotional efforts, and other elements of the
retail mix within the category based on the firm’s goals, the changing
environment, and consumer behavior.
1. Retailers designate a category manager from among their employees
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for each category sold in their store. The retailer defines specific
business goals for each category. Subsequently, the category manager
leverages detailed knowledge of the consumer and consumer trends,
detailed POS information, and specific analysis provided by each
supplier to the category.
2. In some cases a supplier may serve as the retailer’s category manager.
Termed category captains and/or category advisors, these suppliers
work closely with the retail buyer ensuring that the retailer has the best
assortment and the greatest possible sales.
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Lecture Two
Topic:
Market Selection and Location Analysis
Dunne: Chapter7
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Chapter 7
Market Selection and Retail Location Analysis
Overview:
In this chapter, we will review how retailers select and reach their target markets through the
choice of location. The two broad options for reaching a target market are store-based and
nonstore-based locations. The chapter's major focus is on the decision process used to select
store-based locations. We describe the various demand and supply factors that must be evaluated
within each geographic market area under consideration. We conclude with a discussion of
alternative locations that retailers may consider as they select a specific site.
Learning objectives:
After reading this chapter, you should be able to:
1. Explain the criteria used when selecting a target market
2. Identify the different options, both store-based and nonstore-based, for effectively
reaching a target market and discuss the advantages and disadvantages of business
districts, shopping centers, and free-standing units as potential sites for retail location
3. Define geographic information systems (GIS) and discuss their potential uses in a retail
enterprise
4. Describe the factors to consider in identifying the most attractive geographic market for a
new store
5. Discuss the attributes to consider in evaluating retail sites within a retail market
6. Explain how to select the best geographic site for a store
Outline:
IX. Selecting a Target Market - To be successful, a retailer must select a target market and
identify the best way to reach this target market.
D. Geographic space and cyberspace must be considered.
4. Traditionally, reaching the target market has been associated with
selecting the best physical location for a store.
2. The Internet is becoming a viable alternative for reaching one’s
customers.
d. The equivalence of a store on the Internet is a retailer's World
Wide Web (www) site.
e. The retailer's home page is the introductory or first material
viewers see when they access a retailer's Internet site. It is
equivalent to a retailer's storefront in the physical world.
f. Virtual store is the total collection of all the pages of information
on the retailer's Internet site.
g. The counterpart to location on the Internet is the "ease of
access." This refers to the consumer’s ability to find a Web site in
cyberspace easily and quickly.
E. Market segmentation - a method retailers use to segment, or break down,
heterogeneous consumer populations into smaller, more homogeneous groups
based on their characteristics.
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1. No single retailer can serve all potential customers; it is important that it
segment the market and select a target market(s).
2. A target market is the segment of the market that the retailer decides to
pursue through its marketing efforts.
3. The topics of target market selection and location analysis are combined
because a retailer must identify its target market(s) before it decides how
best to reach that market(s).
F. Identifying a target market - requires meeting three criteria.
1. Measurability – a retailer should be able to describe the selected market
segment using objective measures for which data is available, such as
age, gender, income, education, ethnic group and religion.
2. Accessibility – the degree to which the retailer can target its promotional
or distribution efforts to a particular market segment.
3. Substantialness - the segment must be substantial enough to be
profitable for the retailer.
X. Reaching Your Target Market - once a retailer identifies its target market, it must
determine the most effective way to reach this market.
A. Location of Store-Based Retailers - operate from a fixed store location that
requires customers to travel to the store in order to view and select merchandise
and/or services.
1. Business Districts. The central business district (CBD) usually consists
of an unplanned shopping area around the geographic point at which all
public transportation systems converge; it is usually located in the center
of the city where the city originated historically.
a. Strengths of the CBD include: easy access to public
transportation; wide product assortment; variety in images, prices,
and services; and proximity to commercial activities.
b. Weaknesses of the CBD include: inadequate (and usually
expensive) parking, older stores, high rents and taxes, traffic and
delivery congestion, potentially high crime rate, and the often-
decaying conditions of many inner cities.
c. In larger cities, secondary business districts (SBD) and
neighborhood business districts (NBD) have developed. A
secondary business district is a shopping area that is smaller
than the CBD and revolves around at least one department or
variety store at a major street intersection. A neighborhood
business district is a shopping area that evolves to satisfy the
convenience-oriented shopping needs of a neighborhood and
generally contains several small stores (with the major retailer
being either a supermarket, super drugstore, or a variety store) and
is located on a major artery of a residential area.
2. Shopping centers/malls - are centrally owned or managed shopping
districts that are planned, have balanced tenancy (the stores complement
each other in merchandise offerings), and are surrounded by parking
facilities.
a. A shopping center location can offer a retailer several major
advantages over CBD location. These include:
(1) heavy traffic resulting from the wide range of product
offerings
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(2) cooperative planning and sharing of common costs
(3) access to highways and availability of parking
(4) lower crime rate
(5) clean, neat environment
b. The disadvantages of locating in a shopping center include:
(1) inflexible store hours
(2) high rents
(3) restrictions on merchandise the retailer may sell
(4) required membership in the center's merchant organization
(5) possibility of too much competition and the fact that much
of the traffic is not interested in a particular product
offering
(6) dominance of the smaller stores by the anchor tenant.
3. Free-standing retailer - generally locates along major traffic arteries,
without any adjacent retailers selling competing products.
a. This location alternative has the following advantages:
(1) lack of direct competition
(2) generally lower rents
(3) freedom in operations and hours
(4) facilities that can be adapted to individual needs
(5) inexpensive parking
b. Free-standing locations also have multiple disadvantages:
(1) lack of drawing power of from complementary stores
(2) difficulties in attracting customers for the initial visit
(3) higher advertising and promotional costs
(4) operating costs cannot be shared with others
(5) stores may have to be built rather than rented
(6) zoning laws may restrict some activities
4. Nontraditional locations - offer more place utility or locational
convenience. Examples include stores at military bases, college
campuses, airports, hospitals, and cruise ships.
5. Nonstore-Based Retailers - include street peddlers, direct sellers, catalog
retailers, automated merchandising systems (ATMs), and e-tailers. Since
retailing is expected to remain predominantly store-based, we will focus
our attention on location analysis for these retailers. However, it should
be noted that some innovative retailers are using multiple retail formats to
reach their target markets.
XI. Geographic Information Systems (GIS) - computerized system that combines physical
geography with cultural geography.
A. Thematic maps - use visual techniques such as colors, shading, and lines to
display cultural characteristics of the physical space.
B. GIS can be used for many important retail decisions:
1. market selection
2. site analysis
3. trade area definition
4. estimating new store cannibalization
5. advertising management
6. merchandise management
7. evaluation of store managers
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XII. Market Identification - involves three sequential steps. First, the retailer must identify the
most attractive markets in which to operate. Second, one must evaluate the density of
demand and supply within each market and identify the most attractive sites that are
available within each market. Third, select the best site or sites available.
A. Retail Location Theories
1. Retail gravity theory suggests that there are underlying consistencies in
shopping behavior that yield to mathematical analysis and prediction that
are based on the notion or concept of gravity.
a. Reilly's law of retail gravitation is based on Newtonian
gravitational principles and explains how large urbanized areas
attract customers from smaller rural communities.
b. In effect, Reilly's law states that two cities attract trade from an
intermediate place approximately in direct proportion to the
population of the two cities and in inverse proportion to the square
of the distance from these two cities to the intermediate point.
c. Reilly's law was later revised to determine the boundaries of a
city's trading area or to establish a point of indifference between
two cities.
(1) This point of indifference is the breaking point at which
customers would be indifferent to shopping in either city.
(2) Recent research on outshopping (i.e., leaving your
community to shop) from rural areas suggests that factors
other than those considered by retail gravity theory are
also important.
2. Saturation theory examines how the demand for goods and services in a
potential trading area is being served by current retail establishments in
comparison with other potential markets.
a. Retail store saturation is a condition where there are just enough
store facilities, for a given type of store, to efficiently and
satisfactorily serve the population and yield a fair profit to the
owners.
b. When a market has too few stores to satisfactorily meet the needs
of the customer, it is understored.
c. When a market has too many stores to yield a fair return on
investment, it is overstored.
d. The index of retail saturation is the ratio of demand for a
product divided by available supply. The higher the IRS, the
higher the potential for new retail space.
3. Buying Power Index - Sales & Marketing Management magazine
annually publishes its Survey of Buyer Power.
a. This data is available for metropolitan areas, cities, and states.
b. The buying power index (BPI) is an indicator of a market’s
overall retail potential and is comprised of weighted measures of
effective buying income (personal income, including all non-tax
payments such as social security, minus all taxes), retail sales, and
population.
c. The BPI is weighted in the following manner:
20
BPI = 0.5 (the area's percentage of U.S. effective buying income)
+ 0.3 (the area's percentage of U.S. retail sales) + 0.2 (the area's
percentage of U.S. population).
B. Other Demand and Supply Factors.
1. Market demand potential-some of the more important components of
market demand potential are:
a. population characteristics
b. buyer behavior characteristics
c. household income
d. household age profile
e. household composition
f. community life cycle
g. population density
h. mobility
2. Market supply factors-some of the more important factors include:
a. square feet per store
b. square feet per employee
c. growth in stores
d. quality of competition
XIII. Site Analysis - is an evaluation of the density of demand and supply within each market
with the goal of identifying the best retail site(s) available.
A. Size of trading area - the trading area of specific sites will need to be estimated.
1. Applebaum developed a technique for estimating the trade area of a
current store. It involved interviewing a customer for each $100 in weekly
sales. The customers were randomly selected and their home addresses
obtained. After the home addresses of the shoppers were plotted on a map
one could make inferences about the trading area size and the
competition.
2. For a new store the task is more difficult; however, there are some general
rules that apply.
a. Stores that sell convenience will have a smaller trading area than
stores that sell so-called specialty products.
b. As consumer mobility increases, the size of the store's trading area
increases.
c. As the size of the store increases, its trading area increases
because it can stock a broader and deeper assortment of
merchandise, which will attract customers from greater distances.
d. As the distance between competing stores increases, their trading
areas will increase.
e. Natural and manmade obstacles such as rivers, mountains,
railroads, and freeways can abruptly stop the boundaries of a
trading area.
B. Description of Trading Area - retailers can access, at relatively low cost,
information concerning the trading area for various retail locations and the buyer
behavior of the trading area.
C. Demand Density - needs to be evaluated for various sites.
1. Demand density is the extent to which the potential demand for the
retailer's goods and services is concentrated in certain census tracts, ZIP
code areas, or parts of the community.
21
2. To determine the extent of demand density, retailers need to identify what
they believe to be the major variables influencing their potential demand
D. Supply density - is the extent to which retailers are concentrated in different
geographic areas of a community.
E. Site availability - one needs to determine which sites are available.
XIV. Site Selection - once the best available sites within each market have been identified, the
retailer needs to make the final location decision and select the best site(s). After all, all
retailers should attempt to find a 100 percent location for their stores. A 100 percent
location is a location where there is no better use for the site then the retail store that is
being planned. Retailers should remember that what may be a 100 percent site for one
store may not be for another. The best location for a supermarket may not be the best
location for a discount department store. When reviewing a site, a retailer must consider
A. Nature of Site – This entails determining whether or not the site is currently a
vacant store, a vacant parcel of land, or the site of a planned shopping center.
1. Traffic Characteristics – The traffic that passes a site, whether it is
vehicular or pedestrian, can be an important determinant of the potential
sales at that site.
2. Types of Neighbors – A good neighboring business will be one that is
compatible with the retailer’s line of trade. Store compatibility exists
when two similar retail businesses locate next to one another and realize a
greater sales volume than they would have achieved had they located
apart from each other.
B. Terms of Purchase or Lease – The retailer should review the length of the lease,
the exclusivity clause, the guaranteed traffic rate, and an anchor clause.
C. Expected Profitability – The final step in site selection analysis is the construction
of a pro forma return on asset model for each possible site. This includes:
1. Net profit margin
2. Asset turnover
3. Return on assets
22
Solutions to computational questions from Chapter 7: Location Analysis
10. Calculate the buying power indexes for the following three cities:
Percent of Effective Percent of U.S. Percent of
U.S. City Buying Income Retail Sales U.S. Population
Mansfield 0.006 0.004 0.006
Springfield 0.009 0.007 0.009
Carlyle 0.007 0.005 0.007
SOLUTION: (227)
Tyler (BPI) = .5(.006) + .3(.004) + .2(.006)
= .0054
Little Rock (BPI) = .5(.009) + .3(.007) + .2(.009)
= .0084
Cheyenne (BPI) = .5(.007) + .3(.005) + .2(.007)
= .0064
11. Compute the index of retail saturation for the following three markets. The data for
department stores are as follows:
MARKET A B C
Retail expenditures per household $789 $875 $943
Square feet of retail space 600,000 488,000 808,000
Number of households 121,000 102,000 157,000
Based on these data, which market is most attractive? What additional data would you find
helpful in determining the attractiveness of the three markets?
SOLUTION (226-227):
IRS (Market A) = (121,000 x $789) / 600,000
= 159.12
IRS (Market B) = (102,000 x $875) / 488,000
= 182.89
IRS (Market C) = (157,000 x $943) / 808,000
= 183.23
The most attractive market is Market-C with an IRS of 183.23 or $183.23 in expected sales per
square foot. It would be helpful if additional information on various factors that influence
market demand potential such as population characteristics, buyer behavior characteristics,
household income, household age profile, household composition, community life cycle,
population density and mobility. In addition supply factors such as square feet per store, square
feet of space per employee, store growth, and the quality of competition should be analyzed.
Planning Your Own Retail Business:
The retail store that you are planning has an estimated circular trade radius of four miles. Within
this four-mile radius, there is an average of 1,145 households per square mile. In a normal year,
you expect that 47 percent of these households would visit your store (referred to as penetration)
23
an average of 4.3 times (referred to as frequency). Based on these figures, what would you
expect to be the traffic (i.e., number of visitors to your store per year)? (Hint: Traffic can be
viewed as the square miles of the trade area multiplied by the household density multiplied by
penetration, which is in turn multiplied by frequency.)
Once you answer this question, do some sensitivity analysis, which is an assessment of
how sensitive store traffic is to changes in your assumptions about penetration and frequency.
What happens if penetration drops to 45 percent or rises to 50 percent? What happens if
frequency drops to 4.0 times annually or rises to 4.5 times annually? In this analysis, only change
one thing at a time and hold all other assumptions constant.
Suggested Answer:
One needs to first compute the following.
1. square miles of trade area = r2
= (22/7)(4)2
= 50.286
2. traffic = (square miles in trade area)
x (household density)
x (penetration)
x (frequency)
traffic = (50.286) x (1,145) X (47%) X (4.3)
traffic = 116,364
Next do some sensitivity analysis.
Consider the following possible parameter values
SQUARE HOUSEHOLD
MILES IN (x) DENSITY (x) PENETRATION (x) FREQUENCY = TRAFFIC
TRADE AREA
1 50.286 x 1145 x 47% x 4.3 = 116,364
2 50.286 x 1145 x 45% x 4.3 = 111,412
3 50.286 x 1145 x 50% x 4.3 = 123,792
4 50.286 x 1145 x 47% x 4.0 = 108,246
5 50.286 x 1145 x 47% x 4.5 = 121,776
24
Lecture Three
Topics:
Strategic Planning and Operations
Management
Evaluating the Competition
Dunne: Chapters 2 and 4
25
Chapter 2
Retail Strategic Planning and Operations Management
Overview:
In this chapter, we will explain the importance of planning in successful retail organizations.
To facilitate the discussion, we introduce a retail planning and operations management model,
which will serve as a frame of reference for the remainder of the text. This simple model
illustrates the importance of strategic planning and operations management. These two
activities, if properly conducted, will enable a retail firm to achieve results exceeding those of
the competition.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain why strategic planning is so important and be able to describe the components
of strategic planning: statement of mission; goals and objectives; an analysis of
strengths, weaknesses, opportunities, and threats; and strategy.
2. Describe the text's retail planning and operation management model which explains
the two tasks that a retailer must perform and how they lead to higher profit.
Outline:
I. Components of Strategic Planning
A. Planning - The anticipation and organization of what needs to be done to reach
an objective.
B. One form of planning is strategic planning. This type of planning involves
adapting the resources of the firm to the opportunities and threats of an
ever-changing retail environment. The strategic planning process consists of four
components:
1. Mission Statement - Basic description of the fundamental nature,
rationale, and direction of the firm. While mission statements vary from
retailer to retailer, good ones usually include three elements:
a. How the retailer uses or intends to use its resources
b. How it expects to relate to the ever-changing environment
c. The kinds of values it intends to provide in order to serve the
needs and wants of the consumer
2. Statement of Goals and Objectives - Performance results intended to be
brought about through the execution of a strategy. These goals and
objectives should be derived from, and give precision and direction to, the
retailer’s mission statement. A retailer's objectives are usually
categorized into four dimensions:
a. Market Performance – establish the amount of dominance the
retailer has in the marketplace.
(1) Sales volume
(2) Market share – the retailer’s total sales divided by total
market sales.
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b. Financial - A retailer analyzes its ability to provide an adequate
profit level to continue in business.
(1) Profitability - deal directly with the monetary return a
retailer desires from its business. The most frequently
encountered profit objectives in a retail enterprise are:
(a) Net profit margin - the ratio of net profit (after
taxes) to sales and shows how much profit a
retailer makes on each dollar of sales after
expenses and taxes have been met.
(b) Asset turnover – total sales divided by total
assets. This measure shows how many dollars of
sales a retailer can generate on an annual basis
with each dollar invested in assets.
(c) Return on assets (ROA) - net profit (after taxes)
divided by total assets.
(d) Financial leverage - total assets divided by net
worth or owners' equity. This measure shows how
aggressive the retailer is in its use of debt.
(e) Return on net worth (RONW) - net profit (after
taxes) divided by owners’ equity.
(2) Productivity - Objectives that state how much output the
retailer desires for each unit of resource input. The major
resources at the retailer's disposal are:
(a) Space productivity - net sales divided by the total
square feet of retail floor space. A space
productivity objective states how many dollars in
sales the retailer wants to generate for each square
foot of store space.
(b) Labor productivity - net sales divided by the
number of full-time-equivalent employees. A
labor productivity objective reflects how many
dollars in sales the retailer desires to generate for
each full-time-equivalent employee.
(c) Merchandise productivity - net sales divided by
the average dollar investment in inventory. This
objective (also known as sales-to-stock ratio)
states the dollar sales the retailer desires to
generate for each dollar invested in inventory.
c. Societal - reflect the retailers' desire to help society fulfill some of
its needs.
(1) Employment - relate to the provision of employment
opportunities for the members of the retailer's community.
(2) Payment of taxes - recognizes the retailer's role in
helping finance societal needs that the government deems
appropriate.
(3) Consumer choice – the goal to compete in such a way
that the consumer will be given real alternatives.
(4) Equity - reflects the retailer's desire to treat the consumer
and suppliers fairly.
27
(5) Benefactor - reflects the retailer's desire to underwrite
certain community activities.
d. Personal - reflect the retailers’ desire to help individuals employed
in retailing fulfill some of their needs. Generally retailers tend to
pursue three types of personal objectives.
(1) Self gratification - focused on the needs and desires of
the owners, managers, or employees of the firm to pursue
what they truly want out of life.
(2) Status and respect - focus on the owners', managers', or
employees' need for status and respect in their community
or within their circle of friends.
(3) Power and authority - reflect the need of managers and
other employees to be in positions of influence.
3. Strategies - Carefully designed plans for achieving the retailer's goals and
objectives. It is a course of action that when executed will produce the
desired levels of performance.
a. Some experts believe retailers can operate with three basic
strategies:
(1) Get shoppers into your store. Many retailers think this is
one of the most difficult tasks in retailing - getting people
to visit your website or to come into your store.
(2) Convert these shoppers into customers by having them
purchase merchandise. This means having the right
merchandise, using the right layout and display, and
having the right sales force.
(3) Do this at the lowest operating cost possible that is
consistent with the level of service that your customers
expect.
b. Many retailers go further and use strategies that enable them to
differentiate themselves from the competition in order to
accomplish these three tasks. They do this by means of
differentiation -- that is, what sets them apart from their
competition:
(1) Physical differentiation of the product
(2) The selling process by offering outstanding service
(3) After-purchase satisfaction by taking care of the customer
after the sale has been made
(4) Location or the ease with which the customer can get to
the retailer
(5) Never being out-of-stock on sizes, colors, and styles that
the retailer's target market expects the retailer to carry
4. Identification and analysis of the retailer's strengths and weaknesses as
well as the threats and opportunities that exist in the environment.
a. Before developing differentiation strategies, however, the retailer
must also be aware of its current market position. It can do this
with a SWOT Analysis:
(1) Strengths -
(a) What major competitive advantage(s) do we have?
(b) What are we good at?
(c) What do customers perceive as our strong points?
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(2) Weaknesses -
(a) What major competitive advantage(s) do
competitors have over us?
(b) What are competitors better at than we are?
(c) What are our major internal weaknesses?
(3) Opportunities -
(a) What favorable environmental trends may benefit
our firm?
(b) What is the competition doing in our market?
(c) What areas of business that are closely related to
ours are undeveloped?
(4) Threats -
(a) What unfortunate environmental trends exist that
may hurt our future performance?
(b) What technology is on the horizon that may soon
have an impact on our firm?
b. After performing the SWOT Analysis, the retailer should generate
strategies for achieving its goals. The retailer should have a fully
developed marketing strategy that should include:
(1) The specific target market or group(s) of customers that
the retailer is seeking to serve.
(2) The location(s) that is consistent with the needs and wants
of the desired target market.
(3) The specific retail mix that the retailer intends to use to
appeal to its target market, and thereby meet its financial
objectives. The retail mix is the combination of
merchandise, price, advertising and promotion, location,
customer services and selling, and store layout and design,
that the retailer intends to use to appeal to its target market
to meets its financial objectives.
II. The Retail Strategic Planning and Operations Management Model - A retailer must take
part in the following types of planning and management tasks:
A. Strategic Planning - The process concerned with how the retailer responds to the
environment in an effort to establish a long-term course of action. The strategic
plan reflects the line(s) of trade in which the retailer will operate, the market(s) it
will pursue, and the retail mix it will use. Strategic planning calls for the long-
term commitment of resources. The strategic planning process requires a retailer
to:
1. Define the mission; establish goals and objectives; perform a SWOT
analysis.
2. After assessing the external environment in order to uncover
opportunities to gain a differential advantage over competitors, the
retailer should develop a strong marketing plan with both market and
financial performance objectives. Major environmental factors that need
to be considered include:
a. Consumer Behavior - Understand the determinants of
consumers' shopping behavior.
b. Competitor Behavior - Develop a competitive strategy that is not
easily imitated.
29
c. Supply Chain Behavior - Keep abreast of supply chain members'
behavior and the possible effects it may have on one's strategy.
d. Socioeconomic Environment - Understand how economic and
demographic trends will influence future sales.
e. Technological Environment - Gather knowledge in regard to
opportunities for improving operating efficiency.
f. Legal and Ethical Environment - Be familiar with local, state
and federal regulations; stay current with evolving legal patterns
that may effect the industry while operating at the highest ethical
standards.
3. In addition, the retailer must consider the location of each retail
establishment; often an uncontrollable factor.
B. Operations Management – deals with activities directed at maximizing the
efficiency of the retailer’s use of resources. It is frequently referred to as day-to-
day management.
C. High Performance Results - Achieved through the development and
implementation of well-designed strategic, operational, and administrative plans.
High performance results are indicative of industry leaders. Retailers must set
high financial performance objectives so that they can at least maintain average
operating results if planned results are not achieved.
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CHAPTER 4
Evaluating the Competition in Retailing
Overview:
The behavior of competitors is an important component of the retail planning and management
model. Effective planning and execution in any retail setting cannot be accomplished without the
proper analysis of competitors. In this chapter, we begin by reviewing the various models of
retail competition. The types of competition in retailing are described next. We then discuss the
evolution of retail competition. Finally, we examine the upcoming retail revolution in nonstore
retailing, developing retail formats, global and technological changes, and the use of private
labels as a strategic weapon.
Learning Objectives:
After reading this chapter you should be able to:
1. Explain the various models of retail competition
2. Distinguish between various types of retail competition
3. Describe the four theories used to explain the evolution of retail competition
4. Describe the changes that could effect retail competition
Outline:
I. Models of Retail Competition – This chapter examines the effects of competition on a
retailer’s performance. Today’s slower population growth rates have turned retailing into
a business where successful regional and national retailers can grow only by taking sales
away from competitors. Thus, a retailer must always be on the offensive by studying the
changing competitive environment, especially its local competition, and differentiating
itself from that competition.
A. The Competitive Marketplace - Competition can be waged on many fronts, and a
retailer must be clear about what advantages it will emphasize and where its
resources will have the greatest effect in attracting and satisfying customers.
B. Market Structure
1. Economists use four different economic terms to describe the competitive
environment in the retailing industry:
a. Pure Competition – occurs when a market has homogeneous
products and many buyers and sellers, all having perfect
knowledge of the market, and ease of entry for both buyers and
sellers.
b. Pure Monopoly – occurs when there is only one seller for a
product or service.
c. Monopolistic Competition – occurs when the products offered
are different, yet viewed as substitutable for each other and the
sellers recognize that they compete with sellers of these different
products.
d. Oligopolistic Competition – occurs when relatively few sellers,
or many small firms who follow the lead of a few larger firms,
31
offer essentially homogeneous products and any action by one
seller is expected to be noticed and reacted to by the other sellers.
2. Retailing can be characterized as monopolistic or, in rare cases,
oligopolistic competition. The distinction between monopolistic
competition and oligopolistic competition lies in the number of sellers.
a. Conventional economic thought suggests that for oligopoly to
occur, the top four firms have to account for over 60 to 80 percent
of the market. While some national retailers do have large market
shares; oligopolistic competition does not actually occur on a
national level. However, it is not uncommon at a local level.
b. However, if local prices become too high, merchandise selection
too limited, or services too poor, residents of these communities
will travel to larger communities to shop. This is known as
outshopping.
C. Demand Side of Retailing - Most retailers face monopolistic competition where
they are confronted with a negatively sloping demand curve caused by "the law
of diminishing returns."
D. Nonprice Decisions – Many customers place a value on attributes
other than price when selecting a place to shop. Therefore, the retailer
has to make decisions about the other elements (merchandise mix,
advertising and promotion, customer services and selling, and store layout
and design) of the retail mix in order to influence the quantity of
merchandise it sells and the profit level it achieves. Here are some ways a
retailer could make use of nonprice competition:
1. The retailer could position itself as different from the
competition by altering its merchandise mix to offer higher-
quality goods, greater personal service, special-orders handling, or
a better selection of large sizes.
2. The retailer can offer private label merchandise that has
unique features or offers better value than competitors.
3. The retailer could provide other benefits for the customer.
For example, the retailer could effectively lower transportation
costs for customers by providing free parking and/or gas.
4. The retailer could master stockkeeping with its basic
merchandise assortment.
E. Competitive Actions - With so many retail establishments competing against
each other, the profitability of all the retailers suffers.
1. Market Equilibrium - When the return on investment is high enough to
justify keeping capital invested in retailing, but not so high to invite more
competition.
2. Measure of competitive activity - The number of retail establishments per
household in a market.
a. Overstored Market – a condition in a community when the
number of stores in relation to households is so large that to
engage in retailing is usally unprofitable or marginally profitable.
b. Understored Market – a condition in a community when the
number of stores in relation to households is relatively low so that
engaging in retailing is an attractive economic endeavor.
F. Suppliers As Partners And Competitors – A retailer’s suppliers should be
considered both partners and competitors for the customer’s dollars.
32
1. Suppliers as competitors – Suppliers compete for gross margins
throughout
the supply chain. The retailer must develop a loyal group of patrons that
encourages the supplier to accommodate the needs of its retail partner.
2. Suppliers as partners – Suppliers can be a critical competitive advantage
to
retailers when they provide a unique product or promotion.
II. Types of Competition - Competition is quite intense in retailing and various classification
schemes are used to describe this intensity.
A. Intratype and Intertype Competition
1. Intratype Competition – occurs when two or more retailers, of the same
type, compete with each other for the same household; the most common
type of retail competition.
2. Intertype Competition – occurs when two or more retailers, of different
types, compete directly by attempting to sell the same merchandise lines
to the same households.
B. Divertive Competition - When retailers intercept or divert customers from
competing retailers.
1. This type of behavior can be either a form of intratype or intertype
competition.
2. It is significant because many retailers operate close to their break-even
point, thus making them susceptible to any downturn in sales.
III. Theories of the Evolution of Retail Competition - Several theories have been developed
to explain and describe the evolution of competition in retailing.
A. Wheel of Retailing Hypothesis - New retailers enter the market as low-status,
low-margin, low-price operators. However, as they meet with success, these new
retailers gradually acquire more sophisticated and elaborate facilities making
them vulnerable to new types of low-margin retail competitors who progress
through the same pattern. The three stages are:
1. Entry Phase - New retailers enter the market as low-status, low-margin,
low-profit operators.
2. Trading-Up Phase - The new retailers experience success and acquire
more sophisticated and elaborate facilities.
3. Vulnerability Phase - Retailers find it necessary to raise prices and
margins and therefore become susceptible to new types of low-margin
competition.
B. The Retail Accordion - Retail institutions evolve from outlets that offer wide
assortments to specialty stores that offer narrow assortments and then return to
the wide assortment stores and continue through the pattern again and again.
C. The Retail Life Cycle - Some believe that retailing institutions pass through an
identifiable cycle:
1. Introduction - This stage is initiated by an aggressive, bold entrepreneur
who is willing and able to develop an approach to retailing that departs
from conventional approaches. Sales will grow if consumers perceive the
new advantage being offered as particularly significant.
2. Growth - Many new competitors enter the market to take part in the
success of the new form of retailing; sales and profit growth are
explosive. Market share and profits will approach their maximum levels.
33
3. Maturity - Market share stabilizes and severe profit declines occur due to
inadaptable managerial capabilities, over expansion, and competitive
assaults by new forms of retailing.
4. Decline - Retailers experience major losses of market share, marginal
profits
and an inability to compete. Decline may be postponed by attempts to
reposition, modify, or adapt the firm.
D. Resource-Advantage Theory – Firms seek superior financial performance in an
ever-changing environment. Retail demand is dynamic because consumer tastes
are always changing, and supply is dynamic because, as firms search for a
superior performance, they are forced to change the elements of their retail mix to
match changing consumer preference and improve firm performance.
1. Superior performance – The result of achieving a competitive advantage
in the marketplace as a result of some tangible or intangible entity.
2. All retailers cannot achieve superior results at the same time.
IV. Future Changes in Retail Competition - Retailers in today's ever-changing marketplace
can expect dynamic changes in retail competition. A few of the trends shaping the retail
landscape include:
A. Nonstore Retailing - Analysts contend that nonstore retailing (especially those
that utilize the Internet) will experience significant growth during the next
decade.
1. Some of the forces contributing to this growth are:
a. Consumers’ need to save time.
b. Consumers’ desire to ―time-shift.‖
c. The erosion of enjoyment in the shopping experience.
d. The lack of qualified sales help in stores to provide information.
e. The explosive development of the telephone, computer, and
telecommunications equipment that facilitates nonstore shopping.
f. The consumers' preference for lower prices, which often
eliminates the middleman's profit.
2. Nonstore retailers include:
a. Direct Selling Establishments – Engage in the sale of a consumer
product or service on a person-to-person basis away from a fixed
retail location.
b. Direct Marketers – Those who sell products by catalog, mail
order, and the Internet.
c. E-Tailing – The general belief by retail experts is that electronic,
interactive, at-home shopping is definitely the place to be. Every
major player in the retail industry, computer industry,
telecommunications industry, and the transaction processing
industry is committed to this growth. However, there are six
reasons, why Internet sales will fail to reach 50 percent of total
retail sales:
(1) 26 percent of all retail sales involve automobile dealers.
The taxes paid by new car dealers to their state
governments will ensure that states will continue to ban
Internet sales and protect the current system.
34
(2) Discounters, who account for a third of all general
merchandise sales, will have a particularly difficult
problem selling via the Internet.
(3) Half of all food and beverage slaes, are sold by on-
premise restaurants.
(4) The U.S. is currently overstored. Thus, many consumers
will purchase at a bricks & mortar retailer instead of
waiting for an overnight delivery.
(5) Some items, especially fashion clothing, must be tried on
or seen in person before buying.
(6) A final factor limiting e-commerce is the ―security issue.‖
B. New Retailing Formats - Retailing is continually evolving. Innovation in retailing
is the result of constant pressure to improve efficiency and effectiveness in
serving the consumer. The pressure to better serve has also resulted in a shortened
life cycle for retail formats. As a result, new formats are born and old ones die.
1. Supercenters – combine a discount store and grocery store and carry
80,000 to 100,000 products in order to offer one-stop shopping.
a. These stores offer the customer one-stop shopping (and as a result
are capable of drawing customers from up to a 60 - 80 mile radius
in some rural areas) and lower the customer's total cost of
purchasing in terms of time and miles traveled without sacrificing
service and variety.
b. Recently, the supercenter concept has even branched out into the
automobile market.
2. Recycled Merchandise Retailers – establishments that sell used and
reconditioned products.
3. Liquidators - With over 15,000 retailers seeking the protection of the
bankruptcy courts annually, liquidators are needed to come in and
liquidate leftover merchandise so that the troubled retailer can shut down
or down-size.
C. Heightened Global Competition - The rate of change in retailing appears to be
directly related to the stage and speed of economic development in the countries
concerned.
1. Even the least-developed countries are experiencing dramatic changes in
retailing activities as newer formats are introduced.
2. Retailing in other countries exhibits even greater diversity in its structure
than retailing in the United States.
3. Tthe introduction of new retailing formats in one part of the country will
impact retailers in other parts of the country. This is true regardless of
whether the change occurs domestically or internationally.
4. Still, it is amazing that retailers from larger countries often do not have
the level of success when entering a new country as compared to retailers
from smaller countries. Retail experts attribute this failure by large
country retailers to two factors.
a. a lack of understanding of the new country's culture.
b. retailers from smaller countries have always had to deal with
international issues if they were to expand.
D. Integration of Technology - Technology is having and will continue to have a
dramatic influence on retailing.
1. Technological innovations can be viewed under three main areas:
35
a. Supply chain management
b. Customer management
c. Customer satisfaction
2. Retailers on the forefront of technology who seek to understand their
consumers will achieve higher levels of effectiveness in their efforts.
E. Increasing Use of Private Labels – As retailing continues to change, the increased
use of private labels has emerged as a key business asset in developing a
differential advantage for retailers. Private labels can set the retailer apart from
the competition, get customers into their store, and bring them back. Current
strategies being used by retailers include:
1. Develop a partnership with well-known celebrities, noted experts, and
institutional authorities.
2. Develop a partnership with traditionally higher-end suppliers to bring an
exclusive variation on their highly regarded brand name to market.
3. Reintroduce products with strong name recognition that have fallen from
the retail scene.
4. Brand an entire department or business; not just a product line.
36
Lecture Four
Topics:
Retail Customers
Legal and Ethical Behavior
Dunne: Chapters 3 and 6
37
Chapter 3
Retail Customers
Overview:
In this chapter, we examine the effects of the external environment on retailing. We will
discuss the effects of recent changes in the population, social, and economic trends on the way
the consumer behaves, and the implications of these changes for retailers. We conclude with
the development of a consumer shopping/purchasing model incorporating all of these factors
to describe the overall shopping and buying practices.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain the importance of population trends to the retail manager
2. List the social trends that retail managers should regularly monitor and describe their
impact on retailing
3. Describe the changing economic trends and their effect on retailing
4. Discuss the consumer shopping/purchasing model, including the key stages
in the shopping/purchasing process
Outline:
I. Introduction - To manage effectively and gain a differential advantage over the
competition, retailers must first understand their customers. The easiest way for retailers
to differentiate themselves is to satisfy the customer’s needs and wants better than the
competition.
A. Customer satisfaction occurs when the total shopping experience of the
customer has been met or exceeded. This is important because it costs five times
as much to get a new customer into your store as it does to retain a current
customer.
B. Customer services include the activities the retailer performs that influence:
1. Pre-transaction – the ease with which a potential customer can shop or
learn about the store’s offering.
2. Transaction – the ease with which a transaction can be completed once
the customer attempts to make a purchase.
3. Post-transaction – the customer’s satisfaction with the purchase.
B. Research has shown that most customers’ shopping experiences within not only
the United States, but also internationally, fail to meet their prior expectations
which results in an unsatisfying experience, and lower customer satisfaction
overall.
1. If the customer is dissatisfied with either the product offered or the
services provided, then the customer is less likely to choose that retailer in
the future, thus decreasing future sales. Knowing what products to carry,
as well as determining which customer services to offer, is a challenging
exercise for retailers as they seek ways to improve the shopping
experience.
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2. Some retailers claim that the declining level of satisfaction may not be a
bad sign. They view the decline as a function of rising expectations from
the customer. They claim that their merchandise/service is much better
today than it was a decade ago, yet customer expectations have increased
at a faster rate.
C. Given that retailers experince great difficulty in choosing which products and
services to offer, retailers use market segmentation techniques to break down
America's heterogeneous consumer population into smaller, more homogeneous
groups based on their characteristics.
II. Population Trends - Retailers often find it useful to group consumers according to
population variables. This is useful for two reasons: First, such data are often linked to
marketplace needs. Second, the data are readily available and can easily be applied in
analyzing markets.
A. Population Growth - With population growth generally slowing, the key to retail
performance is shifting from opening new stores or expanding to strategies built
upon increasing the productivity of existing stores, stealing market share from
competitors, and managing gross margin through selling price and cost control.
Some key trends that the retailer should be aware of:
1. Families are having fewer children.
2. The U.S. population is expected to increase only 1 percent a year, from
295 million in 2005 to 336 million in 2020.
3. The majority of the US population growth will be the result of
immigration.
B. Age Distribution - The age distribution of the U.S. population is changing
significantly.
1. The "graying of America" will have enormous consequences for retailing
since seniors are not homogeneous.
a. The baby boomers are moving into their late fifties. This
group today accounts for almost 28 percent of the population.
b. Currently, there are over 70,000 centenarians. By 2010 the
number of centenarians is expected to grow by over 50 percent.
c. A useful way to categorize seniors is in terms of their health
(good/poor) and wealth (inadequate/adequate). Thus there are four
types of seniors:
(1) good health/adequate wealth
(2) good health/inadequate wealth
(3) poor health/adequate wealth
(4) poor health/inadequate wealth
d. Seniors in general have more wealth than several generations ago
due to improved social security benefits, Medicare, and retirement
savings and these seniors are relatively more healthily. The largest
market growth has been with "active" seniors who have both the
health and wealth to enjoy themselves.
2. Also, since different retailers tend to serve different age groups, the
changing distribution of the U.S. population poses many challenges and
opportunities.
a. "Baby busters," or "Generation-Xers," - those born between 1965
and 1977 - are another often overlooked age group. Unlike the
39
baby boomers, this age group is a declining percentage of the
population. Today there are 46 million of these consumers.
b. ―Generation-Y", echo boomers or the millennium generation, are
those born between 1978 and 1994 and number over 75 million
strong. This group is emerging as a major buying and consuming
force in the economy.
C. Geographic Trends - The location of consumers in relation to the retailer's
location affects consumer behavior.
1. Shifting Geographic Centers - The U.S. population has been and will
continue to move toward the South and the West; growth opportunities in
retailing should be the greatest in these areas.
a. This changing geographic shift means northeastern and
midwestern retailers are experiencing slower growth, and national
retailers are adding stores and distribution centers (warehouses) in
the South and West.
b. Retailers must realize that consumers in different geographic
areas have different purchasing habits.
c. Therefore, retailers have developed "micromarketing"
merchandising strategies that tailor merchandise in each store to
match the preferences of its neighborhood.
2. Urban Centers - Metropolitan Statistical Areas (MSAs) - Metropolitan
areas with population greater than 50,000; nearly 80% of the U.S.
population lives in these areas.
3. Mobility - The population of the U.S., at present, is very geographically
mobile and changes residence about a dozen times in a lifetime.
a. This mobility presents a problem because retailers tend to serve
local markets and tend to cater to well-defined demographic
groups.
b. As the population moves, retailers may find themselves needing
to cater to new members of its target market.
D. Social Trends - Several social trends affect a retailer's performance.
1. Education - The education level of the average American is increasing; in
2003, 27% of Americans older than 25 had at least a bachelor's degree.
Retailers will have to face consumers who are more sophisticated,
discriminating and more independent in making purchases.
2. State of Marriage - Married couples are one of the slowest growing
household types in the U.S. (In 2003, 33 percent of the U.S. male
population between the ages of 30 and 34 had never married and 23
percent of the female population had never married), as well as
worldwide. Retail opportunities exist in that a larger number of homes --
for single person households -- will need to be completely furnished.
Store hours may need to be changed to meet the needs of this market.
3. Divorce - The U.S. has seen a rapid increase in the divorce rate. (Since
1960, the divorce rate has increased by 250 percent.) Divorce often
stimulates retail purchases because a second household must be
furnished.
4. Makeup of American Households - Because households are the basic
consumer unit for most products, household growth and consumer
demand go together. Yet, because of the differing sizes and habits of
various generations, the change in the makeup of households is
40
notoriously hard to predict. However, the high performance retailer
should be aware of these trends:
a. Between 1980 and 2003 the number of people living alone
("home-aloners") increased by 45 percent. This trend, which
represented nearly one-fourth of all households, represents an
increased desire for privacy, an increase in young adults delaying
marriage, the growth in divorces, an increase in never-marrieds,
and a large increase in the number of people who live alone after
the death of a spouse.
b. The number of unmarried couples ("mingles") increased by 167
percent since 1980. This trend, although it represents only 7
percent of all couple-households, is significant to the retailer
because it represents a purchasing unit that is hard to understand
by conventional household or family norms.
c. The "boomerang effect" - so called because the parents think the
children have left for good, but they just keep coming back. It is
estimated that over the next decade 40 percent of children will
return to live with the parent(s) they have previously left.
5. Changing Nature of Work - Whether because of deterioration in
institutional confidence or perhaps because of the overall prosperity of
our economy and way of life as Americans, we are identifying less with
our work. In fact, work has become less central to life.
a. Americans are less loyal to their employers. Nearly 30% of
workers have held their job for less than 12 months and the
median length of service in a job is 3.7 years.
b. This is particularly a problem in retailing. For example, with entry
level personnel, turnover approaches 75% or more per year.
Consequently retailers need to find ways to enrich job experiences
and lower turnover. One recent study found that turnover in the
supermarket industry cost $5.8 billion annually.
III. Economic Trends - Changes in income growth, the declining rate of personal savings, the
increase in the number of working women, and the wide-spread use of credit in our
economy will impact retailers.
A. Income Growth - The median household income is up less than 4 percent since
1980. As incomes rise, families tend to have higher disposable incomes. But all
groups have not shared this income increase equally. African-American,
Hispanic, and Caucasian family households experienced a rise in annual income
of 4 percent to $33,500, $34,100, and $54,600 respectively from 1980 to 2002.
Economists tend to view income from two different perspectives:
1. Disposable income - All personal income less personal taxes ("take-
home" pay).
2. Discretionary income - Disposable income minus the money needed for
necessities to sustain life.
B. Personal Savings - A major criticism of the U.S. economic system is that it does
not reward personal savings, but encourages spending. The percentage of
after-tax income that U.S. citizens saved, which dwindled from 8.8 percent in
1981 to 4.46 percent in 1995, fell to a dismal 1.7% in 2001. In 2003, the rate was
2.1 percent.
41
1. It is important to note that during the last decade, the economy and stock
market have experienced exceptionally strong growth. As a result people
have quit saving and begun to invest in the stock market, which some
consider a form of savings despite its additional elements of risk.
2. It is also important to remember that the government's rate tends to under
measure savings because it fails to consider the wealth effect. The wealth
effect claims that for every hundred dollars of additional wealth generated
in an individual's stock market holdings, the individual will spend $4
(4%). Such spending will lower the nation's savings rate because as the
stock market goes up, spending will increase without wages and salaries
increasing.
C. Women in the Labor Force - The percent of women in the labor force, from all
age groups, has increased significantly. (Currently, 60 percent of women over the
age of 16 are in the labor force versus 43 percent three decades ago.)
1. This significant rise in the number of working women has protected many
households from inflation and recession. In fact, many economists
suggest that the working woman has been the nation's secret weapon
against economic hardships.
2. Another reason for the huge increase in household income for dual wage-
earner families is that where once a professional man would marry a
secretary or school teacher (all admirable occupations, but not the highest
paid), today many professional men are marrying professional women.
As a result, the household incomes for these couples are increasing above
the norm.
D. Widespread Use of Credit - Retailers have long offered their own credit to
customers. However, today the trend is away from the retailer's store-brand credit
cards towards third party credit cards. Consumers in 2006 were under an
estimated $2.2 trillion in consumer debt and over two thirds of households have a
credit card. Among households with over $50,000 in annual income, over 90%
have at least two credit cards. The benefits of credit cards use are:
1. For the customer - the offering of "free" airline miles or a rebate on a
future purchase.
2. For the retailer - increased sales and profits.
IV. Consumer Behavior Model - The consumer behavior model serves as a representation of
a typical buying process with a series of stages or steps occurring against a backdrop of
individual, social, and situational factors.
A. Stages in the Buying Process
1. Stimulus – The individual is always involved in passive information
gathering, which consists of receiving and processing information
regarding the existence and quality of merchandise, services, stores,
shopping convenience, parking, advertising, and any other factors that a
consumer might consider in making a decision of where to shop and what
to purchase. Retailers are competing with virtually all other organizations
and individuals for the attention of the consumer. To compete for this
attention, retailers may employ various types of stimuli. A stimulus
involves a cue (external to the individual) or drive (internal to the
individual). A cue is any object or phenomenon in the environment that
is capable of eliciting a response. A drive is a motivating force that
directs behavior. Individuals can be exposed to both of these stimuli.
42
2. Problem Recognition - A critical factor triggering shopping behavior,
although it is not the beginning of the process. This model also suggests
that need recognition itself is not enough to trigger shopping behavior;
rather, recognized need must be balanced against the perceived costs
associated with resolving these needs. Retailers must understand this
"need versus barrier quotient" which triggers shopping activity.
3. Active Information Gathering (Search) - Once consumers reach the shop
trigger event, they move from need recognition into active information
gathering. In this phase, consumers gather and evaluate information that
will eventually lead to a purchase decision. Active information gathering
typically involves three steps:
a. Development of an initial consideration set, the set of possibilities
that should be considered, as well as the key attributes on which
the purchase decision will be based.
b. In the second stage, consumers narrow the consideration set to a
more manageable number of possibilities.
c. In the final stage, consumers directly compare key attributes of
alternatives remaining on the "short list." Here consumers are
very active in their search for specific information and often begin
ascertaining actual prices through store visits or preliminary
negotiating where appropriate. One of the most important
variables related to active information gathering is the information
resources used by consumers. As such, retailers can plan their
marketing programs to communicate via the appropriate
resources.
4. Problem-Solving Stages - Based on information gathered in the previous
phase, consumers make a purchase decision, such as which product and
store they intend to choose. At this stage, consumers may decide not to
buy, or may reach the buy trigger event, at which point they make a firm
decision to purchase or negotiate for the purchase of an item. We stress
that these are "intent" decisions, because other factors can intervene
before the transaction is completed.
5. Purchase - The consumer now enters into the transaction stage, in which
the actual purchase is made. The transaction may include final
negotiation, application for credit if necessary, and determination of the
terms of purchase (cash, credit card, etc.).
6. Post-purchase Evaluation - Since the dynamic retail patronage model is
cyclical and never ends, successful retailers must concern themselves not
only with the activities leading to the transaction, but also with what
happens after the transaction, i.e. during the use and evaluation stage.
Retailers must understand and either avoid or quickly neutralize
post-purchase resentment. One method for doing this is customer
satisfaction programs.
B. Since the dynamic retail patronage model is both dynamic and interactive,
consumers can jump to and from the central stage of passive information
gathering from virtually every other stage in the process. The instructor can stress
that retailers must therefore be constantly vigilant to customer service, because
there is not a beginning and end to shopping behavior.
43
Chapter 6
Legal and Ethical Behavior
Overview:
In this chapter, we will discuss how the legal and ethical environment influences the retailer
in making decisions. The discussion covers the legal aspects of decisions made on pricing,
promotion (including the use of credit), products or merchandise, and marketing supply
chains and concludes with a discussion of the major ethical decisions facing the retailer today.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain how legislation constrains a retailer's pricing policies
2. Differentiate between legal and illegal promotional activities
3. Explain the retailer's responsibilities regarding the products sold
4. Discuss the impact of government regulation on a retailer's behavior with other supply
chain members
5. Describe how various state and local laws, in addition to federal regulations, must also
be considered when developing retail policies
6. Explain how a retailer's code of ethics will influence its behavior.
Outline:
Introduction
A. In addition to the uncontrollable external forces described in the previous three
chapters, the dynamic nature of retailing requires that retailers monitor the
legal environment.
B. To avoid costly blunders, the retailer needs to understand the potential legal
and ethical constraints within the city, state, and country in which it does
business.
I. Pricing Constraints. Retailers continuously establish prices for the many items they
sell. In making these decisions, retailers have considerable, but not total, flexibility.
A. Horizontal price fixing occurs when a group of competing retailers (or other
channel members operating at a given level of distribution) establishes a fixed
price at which to sell certain brands of products.
1. This form of price fixing violates Section 1 of the Sherman
Antitrust Act (1890), which states, "Every contract, combination in the
form of trust or otherwise, or conspiracy, in restraint of trade on
commerce among the several states, or with foreign nations is declared
to be illegal."
2. Another means of horizontal price fixing occurs when retailers attempt
to reach agreements with one another regarding the use of double (or
triple) coupons, rebates, or any other means of reducing price
competition in the marketplace.
3. Retailers have argued that the Sherman Act does not apply to them,
since they operate locally, not "among the several states"- the definition
44
of interstate commerce. However, because the merchandise retailer's
purchase typically originates in another state, the courts view retailers
as involved in interstate commerce.
B. Vertical price fixing occurs when a retailer collaborates with the manufacturer
or wholesaler to resell an item at an agreed price. This is often referred to as
resale price maintenance, or ―fair trade.‖ Such actions are in violation of
Section 1 of the Sherman Antitrust Act.
C. Price discrimination occurs when two retailers buy an identical amount of
―like grade and quality‖ merchandise from the same supplier but pay different
prices. However, not all forms of price discrimination are illegal.
1. The legal definition of price discrimination is addressed by the Clayton
Act, and was amended and strengthened with the passage of the
Robinson-Patman Act (1936), which has two primary objectives:
a. To prevent suppliers from gaining an unfair advantage over
their competitors by discriminating among buyers either in the
setting of prices or in providing allowances or services.
b. To prevent buyers from using their economic power to get
discriminatory prices from suppliers, to gain an advantage over
their own competitors.
2. In order for price discrimination to be considered illegal, it must fit the
following conditions:
a. The transaction must occur in interstate commerce.
b. The potential for a substantial lessening of competition must
exist.
c. Any buyer who knowingly receives the benefit of
discrimination is just as culpable as the supplier granting the
discrimination.
3. "Commodities of like grade and quality" implies that the Robinson-
Patman Act applies to "goods" or physical products and not to services.
Also, the courts have held this to mean goods of identical physical and
chemical properties. This implies that different prices cannot be
justified merely because the labels on the product are different. Thus,
private labeling of merchandise does not make it different from
identical goods carrying a manufacturer's national brand. However, if
the seller can establish that an actual physical difference in grade and
quality exists, then a price differential can be justified.
4. Defenses of Price Discrimination.
a. Cost justification - attempts to show that a differential in price
could be accounted for on the basis of differences in cost to the
seller in the manufacture, sale, and/or delivery arising from
differences in the method or quantities involved.
b. Changing market conditions - attempts to justify a price
differential based on the danger of imminent deterioration of
perishable goods or on the obsolescence of seasonal goods.
c. Meeting competition in good faith - attempts to show that its
lower price to a purchaser was made in good faith in order to
meet an equally low price of a competitor, provided that this
matched price actually existed and was lawful in itself.
D. Deceptive Pricing occurs when a misleading price is used to lure customers
into the stores; usually there are hidden charges or the item advertised may be
45
unavailable. Such behavior is prohibited by the Wheeler-Lea Amendment
(1938) of the Federal Trade Commission Act (1914).
E. Predatory Pricing exists when a retail chain charges different prices in
different geographical areas in order to eliminate competition in selected
geographic areas.
II. Promotion Constraints. The ability of the retailer to make any promotion decision is
constrained by two major pieces of federal legislation: The Federal Trade Commission
(FTC) Act of 1914 and The Wheeler-Lea Amendment (1938) of the FTC Act. There
are three promotional areas that are potentially covered by the FTC Act and Wheeler-
Lea Amendment which retailers should be aware of:
A. Deceitful Diversion of Patronage occurs when a retailer publishes or
verbalizes falsehoods about a competitor in an attempt to divert patrons from
that competitor. Palming off occurs when a retailer represents that
merchandise is made by a firm other than the true manufacturer.
B. Deceptive Advertising occurs when a retailer makes false or misleading
advertising claims about the physical makeup of a product, the benefits to be
gained by its use, or the appropriate uses for the product. It is difficult to
distinguish what is false or misleading and what is simply ―puffery‖ or
―laudatory language.‖ Nonetheless, the concern of the FTC is whether or not
the consumer was misled by the advertising. Some types of deceptive
advertising:
1. Bait-and-Switch advertising involves promoting a product at an
unrealistically low price to serve as "bait" and then trying to "switch"
the customer to a higher-priced product.
2. Other illegal activities covered here include:
a. Refusing "to show, demonstrate, or sell the product offered."
b. Disparaging, by word or deed, the advertised product or the
"guarantee, credit terms, availability of service, repairs or parts,
or in any other respect, in connection with it"
c. Failing to have sufficient quantities of the advertised product to
meet "reasonable anticipated demands" at all outlets listed in the
advertisement, unless the ad clearly discloses that supply is
limited or available only at certain locations
d. ―The refusal to take orders for the advertised merchandise to be
delivered within a reasonable period of time."
e. The "use of a sales plan or method of compensation for
salesmen...designed to prevent or discourage them from selling
the advertised product."
C. Deceptive Sales Practices include failure to be honest or to omit key facts in
either the ad or sales presentation, or using deceptive credit contracts.
III. Product Constraints. A retailer's major goal is to sell merchandise. In order to
accomplish this goal, the retailer must assure customers that the products they
purchase will not be harmful to their well-being and will meet expected performance
criteria. Three areas of the law have a major effect on the products a retailer handles:
A. Product Safety – the retailer has specific responsibilities to monitor the safety
of consumer products. Retailers are required by law to report any possible
"substantial product hazard" to the Consumer Product Safety Commission
46
B. Product liability laws invoke the "foreseeability" doctrine, which states that a
seller of a product must attempt to foresee how a product may be misused and
warn the consumer against the hazards of misuse.
C. Retailers are also responsible for product safety and performance under
conventional warranty doctrines, which include:
1. Expressed warranties are the result of the interaction between the
retailer and the customer (either written or verbalized).
2. Implied warranties include those that are not expressly made by the
retailer but are based on custom, norms, or reasonable expectations.
The two types of implied warranties are:
a. Implied warranty of merchantability is made by every
retailer when the retailer sells goods and implies that the
merchandise sold is fit for the ordinary purpose for which such
goods are typically used.
b. Implied warranty of fitness implies that the merchandise is fit
for a particular purpose and arises when the customer relies on
the retailer to assist or make the selection of goods to serve a
particular purpose.
3. Since consumer product warranties have frequently been confusing,
misleading, and frustrating to consumers, the Magnuson-Moss
Warranty Act was passed which requires anyone selling products
costing over $15 to give the consumer a written warranty.
IV. Supply Chain Constraints. Retailers are restricted in the relationships and agreements
they may develop with supply chain, or channel, partners. These can be categorized
into four areas:
A. Territorial restrictions are attempts by a supplier, usually a manufacturer, to
limit the geographical area in which a retailer may resell its merchandise. The
courts view these restrictions as potential violations of the Sherman Antitrust
Act. The law does not, however, prevent manufacturers and retailers from
establishing territorial responsibilities as long as they do not exclude all other
retailers and restrict the sale of the manufacturer's products.
B. Dual Distribution occurs when a manufacturer sells to independent retailers
and through its own retail outlets. Although retailers tend to become upset
about dual distribution, the courts have not viewed these arrangements as
violations. In fact, the courts reason that dual distribution can actually foster
competition.
C. Exclusive Dealing arrangements can be of two types:
1. One-way exclusive dealing occurs when the supplier agrees to give the
retailer the exclusive right to merchandise the supplier's product in a
particular trade area. However, the retailer does not agree to do
anything in return for the supplier.
2. Two-way exclusive dealing occurs when the supplier offers the retailer
the exclusive distribution of a merchandise line or product if in return
the retailer will agree to do something for the manufacturer, such as
heavily promote the supplier's products or not handle competing
brands.
D. Tying Agreements exist when a seller with a strong product or service
requires a buyer (the retailer) to purchase a weak product or service as a
condition for buying the strong product or service.
47
V. Other Federal, State, and Local Laws. Several other federal laws also affect retailers,
but their impact is beyond the scope of this text. Other regulations, such legal form of
organization and workplace requirements will be discussed in later chapters. In
addition to federal regulations, many state and local municipalities have passed
legislation regulating retail activities.
A. These include:
1. Zoning laws which prohibit retailers from operating at certain locations
and may require that specific building and sign specifications are met;
2. Unfair trade practices which seek to prevent one retailer from gaining
an unfair advantage over another retailer;
3. Building safety laws, (construction, fire, elevator, smoking, parking and
other codes);
4. Blue laws;
5. Franchise laws which seek to protect franchisees in their states;
6. Taxing laws
B. Consumers may consult their local Better Business Bureau, the National Retail
Federation, state and local retail trade associations, or state and local regulatory
agencies.
VI. Ethics in Retailing. Ethics is a set of rules for moral human behavior. These rules or
standards of moral responsibility often take the form of "do's" and "don'ts."
A. Some retailers have an explicit code of ethics – a written policy that states
what is ethical and unethical behavior.
B. Most often an implicit code of ethics, which is an unwritten but well
understood set of rules or standards of moral responsibility, exists. This
implicit code becomes learned as employees become socialized into the
organization and the corporate culture of the retailer.
C. There are three decision areas where ethical considerations are especially
needed in retailing:
1. Buying Merchandise - When buying merchandise the retailer can face
at least four ethical dilemmas:
a. Product Quality - Should a retailer inspect merchandise for
product quality or leave that to the customer?
b. Sourcing - Should a retailer verify the source of merchandise?
c. Slotting Fees - Should a retailer accept money, commonly
called slotting fees, from a manufacturer for agreeing to add a
new product to its inventory?
d. Bribery - Should a retailer, or its employees, be allowed to
accept a bribe?
2. Selling Merchandise - Ethics can also influence the retailer's selling
process in two ways:
a. Products Sold - Should a retailer be allowed to sell any product,
as long as it is not illegal?
b. Selling Process Practices - Should a salesperson, while not
saying anything wrong, be allowed not tell the customer all the
facts?
3. Retailer-Employee Relationship - Ethical standards can also influence
the retailer-employee relationship in three ways:
48
a. Misuse of Company Assets - Is an employee allowed to use
company assets, such as taking an extra break or using the
phone, for personal use, even if such actions may not be illegal?
b. Job-Switching - Does an employee have the right to work for
whom they want? What responsibilities do they have to their
previous employer, who provided them with training and access
to confidential information, such as vendor costs, customer lists,
and future plans? At the same time, the retailer should not seek
to replace an older employee with a lower paid younger
employee.
c. Employee theft - Just as employers have a
responsibility to be fair to their employees, employees must do
likewise. However, many workers admit to "stealing" from their
employers. Employee theft is most prevalent in food stores,
department stores, and discount stores, all stores which are large
in size, sales volume, and number of employees.
49
Lecture Five
Topic:
Store Layout and Design
Dunne: Chapter 13
50
Chapter 13
Store Layout and Design
Overview:
In this chapter we discuss the place where all retailing activities come together — the retail store.
The store can be the most meaningful form of communication between the retailer and its
customers. Most important, the store is where sales happen or fail to happen. We will see that
despite its hundreds of elements, the store has two primary roles: creating the proper store image
and increasing the productivity of the sales space. We identify the most critical elements in
creating a successful retail store and describe the art and science of store planning, merchandise
presentation, and design.
Learning Objectives:
After reading this chapter, you should be able to:
1. List the elements of a store's environment, and define its two primary objectives
2. Discuss the steps involved in planning the store
3. Describe how various types of fixtures, merchandise presentation methods and
techniques, and the psychology of merchandise presentation are used to increase the
productivity of the sales floor
4. Describe why store design is so important to a store's success
5. Explain the role of visual communications in a retail store
Outline:
VII. Introduction to Store Layout Management. Retailers can use the retail store itself to
initiate and continue their relationship with customers.
D. The store itself (e.g., its layout) has the potential to overcome many of the
negative attitudes/emotions customers may carry as they enter a retailer’s store.
4. In fact, no other variable in the retailing mix influences the consumer's
initial perception as much as the retailer's store itself.
5. The two primary objectives around which all activities, functions, and
goals in the store revolve are store image and sales productivity.
a. Store image is the overall perception the consumer has of the
store’s environment.
b. Space productivity represents how effectively the retailer utilizes
its space and is usually measured by sales per square foot of
selling space or gross margin dollars per square foot of selling
space.
3. In cyberspace, retailers must be concerned with the format of the entire
website. In order to drive repeat visits and encourage consumer
purchasing on one’s web site, the e-tailer should:
a. Keep content current.
b. Make the site easy and enjoyable to use.
c. Structure an online community where consumers can
interact with one another or contribute to the site’s content.
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E. Elements of the Store Environment – The successful retailer will place a heavy
emphasis on designing their physical facilities so as to enhance the retailer’s
overall image and increase its productivity. The elements that should be
considered are:
a. Visual Communications – Retail identity,
graphics, and POS signage.
b. Store Planning – Space allocation, layout, and
circulation.
c. Store Design – Exterior design, ambiance, and
lighting.
d. Merchandising – Fixture selection, merchandise
presentation, and visual merchandising.
F. The two primary objectives of creating the desired store image and increasing
space productivity correspond to the general mission of all retailers, which is to
get consumers into the store (traffic) and influence them to buy merchandise once
inside (conversion rate) while operating in the most efficient manner possible
(operating efficiency). The store planner must constantly balance these
objectives, as they are sometimes at odds.
1. Developing a Store Image - the ability to create and change image
through the store environment becomes more important every day as
consumers’ time poverty increases.
2. Increasing Space Productivity - a goal summarized in a simple but
powerful truism of retailing: ―The more merchandise customers are
exposed to, the more they tend to buy.‖ To enhance space productivity,
retailers must incorporate planning, merchandising, and design strategies
that minimize shrinkage (the loss of merchandise through theft, loss, and
damage).
VIII. Store Planning. Store planning is the development of floor plans, which indicate where
merchandise and customer service departments are located, how customers circulate
through the store, and how much space is dedicated to each department.
A. Allocating Space - the starting point of store planning is determining how the
available store space will be allocated to various departments, based on
mathematical calculations of the returns generated by different types of
merchandise.
1. Types of Space Needed - there are five basic types of space in a store:
d. The back room includes the receiving area to process arriving
inventories and the stockroom to store surplus merchandise.
e. Offices and other functional spaces include a break room for
associates, a training room, offices for the store manager and
assistant managers, a cash office, bathroom facilities for both
customers and employees, and perhaps other areas.
f. The amount of space dedicated to aisles, service areas, and other
nonselling areas can be significant, perhaps 15 percent or more
of the entire space. While the store planner always attempts to
minimize the amount of nonselling space, customer service is an
equally important part of a store and should not be short-changed.
g. The floor merchandise space holds many types of fixtures used
to display merchandise.
52
h. The walls are one of the most important elements of a retail store.
They serve as fixtures holding tremendous amounts of
merchandise, as well as serving as a visual backdrop for the
merchandise on the floor.
2. Space Allocation Planning - to determine the most productive allocation
of space, the store planner must analyze the productivity and profitability
of various categories of merchandise. There are two situations where this
is evident: planning a new store and revising the space allocation of an
existing store.
a. Improving Space Productivity in Existing Stores - When a retailer
has been in business for some time, it can develop a sales history
on which to evaluate merchandise performance, refine space
allocations, and enhance space productivity. Various quantitative
measures, such as the space productivity index, can be used to
develop a more productive space allocation.
b. Space Allocation for a New Store - When a retailer is creating a
new store format, it bases space allocation on industry standards,
previous experience with similar formats, or more frequently, the
space required to carry the number of items specified by the
buyers.
B. Circulation - there are four basic types of circulation patterns in use today.
Shoppers have been trained to associate certain circulation patterns with different
types of stores.
1. Free Flow, the simplest type of store layout, is a type of store layout in
which fixtures and merchandise are grouped into free-flowing patterns on
the sales floor.
2. Grid Layout is another type of store layout in which counters and
fixtures are placed in long rows or ―runs,‖ usually at right angles,
throughout the store.
3. Loop Layout is a type of store layout in which a major customer aisle
begins at the entrance, loops through the store – usually in the shape of a
circle, square, or rectangle – and then returns the customer to the front of
the store.
4. Spine Layout is a type of store layout in which a single main aisle runs
from the front to the back of the store, transporting customers in both
directions, and where on either side of this spine, merchandise
departments using either a free-flow or grid pattern branch off toward the
back and side walls.
C. Shrinkage Prevention. When planning stores, the prevention of shrinkage due to
theft, damage, and loss must be considered. Some layouts will minimize
vulnerability to shoplifters by increasing the visibility of the merchandise.
IX. Planning Fixtures and Merchandise Presentation. In the "theater" of retailing, there are
two basic types of merchandise presentation: visual merchandising displays which are
analogous to the props which set scenes and serve as backdrops; and on-shelf
merchandising which represents ―the stars of the performance‖.
A. Fixture Types fall into three basic categories:
1. Hardline Fixtures. The workhorse fixture in most hardline departments is
the gondola. The gondola can hold a wide variety of merchandise -- in
fact, virtually all hardlines -- by means of hardware hung from the vertical
53
spine. Tables, large bins, and flat-base decks are used to display bulk
quantities of merchandise when the retailer wants to make a high-value
statement.
2. Softline Fixtures. A large array of fixtures have been developed to
accommodate the special needs of softlines, which often are hung on
hangers. The four-way feature rack and the round rack are two of the
fixtures most heavily used today. The round rack is known as a bulk or
capacity fixture, and the four-way rack is considered a feature fixture,
because it presents merchandise in a manner, which features certain
characteristics of the merchandise (such as color, shape, or style).
3. Wall Fixtures. The last type of fixture are those designed to be hung on
the wall. To make a plain wall merchandisable, it is usually covered with
a vertical skin that is fitted with vertical columns of notches similar to that
on the gondola, into which a variety of hardware can be inserted. Shelves,
peghooks, bins, baskets, and even hanger bars can be fitted into wall
systems.
B. Merchandise Presentation Planning - With all the various types of fixtures
available, there is an endless variety of ways to merchandise product.
1. The methods of merchandise presentation include the following:
a. Shelving - The majority of merchandise is placed on shelves that
are inserted into gondolas or wall systems. Shelving is a flexible,
easy-to-maintain merchandising method.
b. Hanging - Apparel on hangers can be hung from softlines fixtures
such as round racks and four-way racks, or from bars installed on
gondolas or wall systems.
c. Pegging - Small merchandise can be hung from peghooks, which
are small rods inserted into gondolas or wall systems. Used in
both softlines and hardlines, pegging gives a neat, orderly
appearance, but can be labor intensive to display and maintain.
d. Folding - Higher-margin or large, unwieldy softlines merchandise
can be folded and then stacked onto shelves or placed on tables.
This can create a high-fashion image, such as when bath towels
are taken off peghooks and neatly folded and stacked high up the
wall.
e. Stacking - Large hardline merchandise can be stacked on shelves,
the base decks of gondolas, or "flats," which are platforms placed
directly on the floor. Stacking is easily maintained and gives an
image of high volume and low price.
f. Dumping - Large quantities of small merchandise can be dumped
in bins or baskets inserted into gondolas or wall systems. This
method can be used in softlines (socks, wash cloths) or hardlines
(batteries, candy), and creates a high-volume, low-cost image.
2. Different merchandising methods can strongly influence our buying
habits and cause us to purchase more. There is a certain psychology of
merchandise presentation.
a. Value/Fashion Image - One of merchandising's most important
psychological effects is its ability to foster an image in the
customer's mind of how trendy, exclusive, pricey, or value
oriented the merchandise is.
54
b. Angles and Sightlines - Research has shown that as customers
move through a retail store, they view the store at approximately
45 degree angles from the path of travel, so merchandise placed at
45 degree angles to the aisle has better visibility.
c. Vertical Color Blocking - To be most effective, merchandise
should be displayed in vertical bands of color wherever possible,
so that customers are exposed to a greater number of SKUs.
C. Selecting the Proper Fixture and Merchandise Presentation Methods - In selecting
which fixtures and merchandising methods to use, a good guideline is to match
the fixture to the merchandise, not the merchandise to the fixture. This means you
should only use fixtures that are sensitive to the nature of the merchandise, but all
too often, retailers are forced to put merchandise on the wrong fixture.
D. Visual Merchandising is the artistic display of merchandise and theatrical props
used as scene-setting decoration in the store. Visuals don't always include
merchandise - they may just be interesting displays of items somehow related to
the merchandise offering or to a mood the retailer wishes to create.
X. Store Design - encompasses both the exterior and the interior of the store. There are
literally hundreds of details in a store's design, and all must work together to create the
desired store ambiance, which is the overall feeling or mood projected by a store through
its aesthetic appeal to the human senses.
A. Storefront Design. If the retail store can be compared to a book, then the
storefront or store exterior is like the book cover. It must be noticeable, easily
identified by passing motorists or mall shoppers, memorable, clearly identify the
name and general market positioning of the store, and give some hint as to the
merchandise inside.
B. Interior Design can be broken into architectural elements and design finishes, and
encompasses floorcoverings, walls, and ceilings.
C. Lighting is one of the most important, though often overlooked, elements in a
successful store design. Retailers learned that different types and levels of
lighting can have a significant impact on sales.
D. Sounds and Smells: Total Sensory Marketing. Research has shown that senses
other than sight can be very important. Many retailers are beginning to engineer
the sounds and smells in their stores.
XI. Visual Communications. Visual communications includes in-store signage and graphics.
When carefully balanced with personal service, visual communications, with its
reliability and low cost, can create an effective selling environment and is therefore an
important tool in the store designer's toolbox.
A. Name, Logo, and Retail Identity. The first and most visible element in a
comprehensive visual communications program is the retailer's identity,
composed of the store name, logo mark, and supporting visual elements. The
name and logo must be catchy, memorable, and most of all, reflective of the
retailer's merchandising mission.
B. Institutional Signage. Once inside the store, the first level of visual
communications is known as institutional signage, or signage that describes the
merchandising mission, customer service policies, and other messages on behalf
of the retail institution.
55
C. Directional, Departmental, and Category Signage serve as the next level of
organizational signage. These signs help guide the shopper through the shopping
trip and assist in locating specific departments of interest.
D. Point-of-Sale (POS) Signage. The next level of signage is even smaller, placed
closer to the merchandise, and known as point-of-sale signage, or POS signage.
POS signage is intended to give details about specific merchandise items and is
usually affixed directly to fixtures.
E. Lifestyle Graphics. Many stores incorporate large graphic panels showing
so-called lifestyle images in important departments. These photo images portray
either the merchandise, often as it is being used, or images of related items or
models that convey an image conducive to buying the product.
56
Lecture Six
Topic:
Managing a Retailer’s Finances
Dunne: Chapter 8
57
Chapter 8
Managing a Retailer's Finances
Overview:
In this chapter, we begin by looking at how a merchandise budget is prepared, and how it is
used in planning for an upcoming merchandise season. Next, we describe the basic
differences between an income statement, balance sheet, and statement of cash flow, as well
as how a retailer uses these accounting statements in controlling its merchandising activities.
Finally, we discuss the accounting inventory systems and pricing methods available to value
inventory.
Learning Objectives:
After reading this chapter, you should be able to:
1. Describe the importance of a merchandise budget, and know how to prepare a six-
month merchandise budget
2. Explain the differences among, and the uses of, these three accounting statements:
income statement, balance sheet, and statement of cash flow
3. Explain how the retailer is able to value inventory
Outline:
I. The Merchandise Budget
A. Retailing includes all the business activities that are necessary to sell goods
and services to the final consumer, and differs from merchandising, which is
concerned with the planning and control involved in the buying and selling of
goods and services to help the retailer realize its objectives. Hence,
merchandising is only one of the many retailing activities.
B. A merchandise budget is a plan of projected sales for an upcoming season,
when and how much merchandise is to be purchased, and what markups and
reductions will likely occur. It forces the retailer to prepare a formal outline of
merchandising objectives and answer the following five questions:
1. What will be the anticipated sales for the department, division, or store?
2. How much stock-on-hand will be needed to achieve this sales plan,
given the level of inventory turnover expected?
3. What reductions, if any, from the original retail price must be made in
order to dispose of all the merchandise brought into the store?
4. What additional purchases must be made during the season?
5. What gross margin (the difference between net sales and cost of goods
sold) should the department, division, or store contribute to the overall
profitability of the company?
C. The merchandise budget should be developed in accordance with the following
rules:
1. A merchandise budget should always be prepared in advance of the
selling season.
2. The language of a merchandise budget must be easy to understand.
58
3. The budget should be planned for a relatively short period (six months
is typical) of time given the economy is continuously changing.
4. The budget should be flexible enough so that changes are not
impossible.
D. Determining Planned Sales - The initial step in developing a six-month
merchandise budget is to estimate planned sales for the entire season and for
each individual month. It is important to use recent trends when forecasting
future sales in order to account for the influences of inflation and competition.
A simple equation used in planning is:
Total Sales = Average Sale x Total Transactions
E. Determining Planned BOM and EOM Inventories - Once the buyer has
estimated the sales for the upcoming season, plans can be made for inventory
requirements, which are called BOM and EOM inventories. A common
method of estimating the amount of stock to be carried is the stock-to-sales
ratio. This ratio depicts the amount of stock to have on hand at the beginning
of each month to support the forecasted sales for that month. Planned BOM
stock/sales ratios can be calculated directly from planned turnover goals
where:
Number of months/ Turnover rate = (average) BOM stock-to-sales
ratio F. Determining Planned Retail Reductions - All merchandise brought into the
store for sale to consumers is not actually sold at the planned initial markup
price. Retailers must make allowances for reductions in the levels of stock,
which generally fall into three types:
1. Markdowns
2. Employee discounts
3. Stock shortages
G. Determining Planned Purchases at Retail Cost - Now the retailer must
determine the amount of additional purchases needed during the season.
1. Planned purchases at retail is calculated as follows:
a. Planned sales
b. Plus planned retail reductions
c. Plus planned EOM inventory
d. Minus planned BOM (beginning-of-month) inventory
e. Equals planned purchases at retail.
2. Once planned purchases at retail are determined, planned purchases at
cost can be calculated, using the complement of the retail mark-up
percentage (i.e., the cost compliment).
H. Determining the Buyer’s Planned Gross Margin - The last step in developing
the merchandise budget is determining the buyer's planned gross margin for
the period. The buyer's planned gross margin in a six-month merchandise
budget reflects the amount of gross margin that the buyer's actions will
contribute to the firm when the merchandise is sold; consequently, it need not
match the retailer’s overall gross margin for the season/year.
II. Retail Accounting Statements. Successful retailing requires sound accounting
practices.
A. Properly prepared financial records provide measurements of profitability and
retail performance, and a record of all transactions occurring within a given
time period. For example:
59
1. Is one merchandise line outperforming or underperforming the rest of
the store?
2. Is the inventory level adequate for the current sales level?
3. Is the firm's level of debt too high?
4. Are reductions, including markdowns, too high as a percentage of
sales?
5. Is gross margin adequate for the firm’s profit objectives?
B. The income statement - provides a summary of the sales and expenses for a
given time period. Some items included in this statement are:
1. Gross sales represent the total of all cash and credit sales.
2. Returns and allowances represent reductions from gross sales.
3. Net sales (gross sales less returns and allowances) represent the amount
of merchandise the retailer actually sold during the time period.
4. Cost of goods sold is the cost of merchandise that has been sold during
the period.
5. Gross margin is the difference between net sales and cost of goods
sold or the amount available to cover operating expenses and produce a
profit.
6. Operating expenses are all the expenses that a retailer incurs during
the normal course of operating the business other than the cost of the
merchandise sold (i.e., payroll, rent, utilities, advertising, depreciation,
supplies, taxes, interest paid, repairs, and insurance).
7. Operating profit is the difference between gross margin and operating
expenses.
8. Other income or expenses is income or expense items that the firm
incurs, though not in the course of its normal retail operations (e.g., sale
of a retail store, stock, etc.).
9. Net profit is operating profit plus or minus other income or expenses.
Net profit is the figure upon which the retailer pays taxes and thus is
usually referred to as net profit before taxes. It is important to point out
that Generally Accepted Accounting Principles (GAAP) allow for
variations in how retailers report certain expenses. Thus, when
comparing the financial statements of different retailers, it is important
to know how each retailer treated these and other expenses.
C. The balance sheet is the second statement used in financial reporting and
shows the financial condition of a retailer's business at a particular point in
time. The basic balance sheet equation is:
Assets = Liabilities + New Worth
Some components of the statement include:
1. Assets are anything of value that is owned by the retail firm. Assets are
broken down into two categories: current and noncurrent.
a. Current assets include cash and all other items (marketable
securities, accounts receivables, notes receivable, inventory,
supplies, and prepaid expenses) that the retailer can easily
convert into cash within a relatively short period of time
(usually one year).
b. Noncurrent assets are long-term assets including buildings,
parking lots, fixtures (e.g., display racks), and equipment (e.g.,
air conditioning systems).
60
c. Total assets equal current assets plus non-current assets plus
goodwill. Goodwill is an intangible asset, usually based on
customer loyalty, which a retailer pays for when buying an
existing business.
2. Liabilities are any legitimate claim against the retailer's assets.
Liabilities are classified as either current or long-term.
a. Current liabilities are short-term indebtedness, which are
payable within a year, including accounts payable, notes
payable, payroll payable, and taxes payable.
b. Long-term liabilities include notes payable and mortgages not
due within the year.
c. Total liabilities equal current liabilities plus long-term
liabilities.
3. Net worth is the difference between the firm's total assets and total
liabilities and represents the owner's equity in the business. Net worth
reflects the owner's original investment, plus any profits reinvested in
the business, less any losses incurred by the business or any funds that
the owners have taken out of the business.
D. The statement of cash flow is another financial statement used by retailers. It
depicts the changes in cash and cash equivalents from one accounting period to
the next by showing all cash inflows and all cash outflows from the operating,
investing, and financing activities of the company for the given time period.
1. When cash inflows exceed cash outflows, the retailer is said to have a
positive cash flow.
2. When cash outflows exceed cash inflows, the retailer is said to be
experiencing a negative cash flow.
3. A statement of cash flow is different than an income statement. In a
statement of cash flow, the retailer is only concerned with the
movement of cash into or out of the firm, whereas an income statement
pertains to the profitability of the retailer after all revenue and expenses
are considered.
III. Inventory Valuation. Most inventory accounting systems are complex; yet they
provide the retailer with information such as sales, additional purchases, reductions,
gross margin, etc.
A. Two inventory accounting systems are available for the retailer:
1. The cost method provides a book valuation of inventory based solely
on cost including freight.
a. This method looks only at the cost of each item as it is recorded
in the accounting records when purchased. When a physical
inventory is taken, all the items are counted; the cost of each
item is taken from the records or the price tags; and the total
inventory value at cost is calculated. One of the easiest methods
of coding the cost of merchandise on the price tag is to use the
first 10 letters of the alphabet to represent the price.
b. The cost method is generally used by retailers with big-ticket
items and a limited number of sales per day; that sell only a few
lines; that have a limited seasonality; experience infrequent
price changes; or experience low turnover rates. The limitations
of the cost method include:
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(1) It is difficult to do daily inventories (or even monthly
inventories)
(2) It is difficult to cost out each sale
(3) It is difficult to allocate freight charges to each item’s
cost of goods sold
2. The retail method overcomes the disadvantages of the cost method by
keeping detailed records of inventory based on the retail value of the
merchandise. To use this method, the retailer must perform three basic
steps in order to compute an ending inventory value:
a. Calculate the cost complement, where:
Cost complement = Total cost valuation / Total retail valuation
b. Calculate the reductions from retail value, which includes
markdowns, discounts, and stock shortages. A physical count of
inventory is required in order to determine all these factors.
c. Convert adjusted retail book inventory to cost, which is
approximated using the following formula:
Closing inventory at cost = Adjusted retail book inventory x
Cost complement
d. The retail method has several advantages over the cost method
of inventory valuation including:
(1) Accounting statements can be drawn up at any
time. Inventories need not be taken for preparation of
these statements.
(2) Physical inventories using retail prices are less
subject to error and can be completed in a shorter
amount of time.
(3) The retail method provides an automatic,
conservative valuation of ending inventory as well as
inventories throughout the season.
e. Among the limitations of the retail method is:
(1) It is a "method of averages." This is due to the
fact that the closing inventory is valued at the average
relationship between cost and retail, and large retailers
offer many different classifications and lines with
different margins.
(2) There is a heavy burden placed on bookkeeping
activities. The true ending book inventory value can be
correctly calculated only if there are no errors found in
the other entries.
B. Inventory Pricing Systems – Two methods of costing inventory are FIFO (first
in-first out) and LIFO (last in-first out).
1. The FIFO method assumes that the oldest merchandise is sold before
the more recently-purchased merchandise. During inflationary periods,
this method allows the retailer to realize "inventory profits" (by selling
the less expensive, earlier inventory, not the more expensive, newer
inventory).
2. The LIFO method is designed to cushion the impact of inflationary
pressures by matching current costs against current revenues. Cost of
goods sold is based on the cost of the most recently purchased
inventory, while the older inventory is regarded as the unsold
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inventory. In times of inflation most retailers use the LIFO method
which results in not only lower profits on the income statement, but
also lower income taxes. Most retailers also prefer to use LIFO for
planning purposes, since it accurately reflects replacement costs.
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Solutions to selected questions and exercises from Chapter 8:
Managing a Retailer Finances
Case:
Dolly's Place
After years of teaching retailing and marketing at the University of Southern Mississippi,
Dolly Loyd decided to retire and return to her first love -- running an apparel store on the
Gulf Coast. Because she used to run such a department for a major retail chain before
teaching, she kept up with the current trends in the industry. Dolly gained the support of an
ex-high school classmate who, after making millions with an Internet startup, financed her
new endeavor.
Today Dolly is beginning to make plans for the upcoming three-month spring
season. Dolly anticipates planned sales of $250,000 for the season based on a planned initial
markup of 45 percent. Within the season, planned monthly sales are projected to be as
follows: 33 percent in February, 40 percent in April (Easter is April 12th), and 27 percent in
May. To ensure a profitable season, trade association records were consulted. The records
indicated: (1) The stock-to-sales ratios need to be 3. for February, 5.0 for March, and 6.0 for
April; (2) reductions can be planned at 5 percent for February, 10 percent for March, and in
an attempt to clear the store of old merchandise before her tourist season apparel arrives, a
20 percent reduction is planned for April; and (3) with the tourist season approaching, an
inventory of $400,000 will be necessary to begin the summer season. Complete a three-
month merchandise budget for Dolly.
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To start off, try to understand the workings to get the „first
month‟ of February: Dolly's Place
Three-Month Merchandise Budget
Date: January 7, 2009
Season: Spring 2009
Seasonal
Spring February March April Total
1.Planned BOM Stock
247500
(82500x3)
500000
2.Planned Sales
82500 100000 67500 2500000
3.Planned Retail
Reductions
4125
(82500x0.05)
4.Planned EOM Stock
500000
5.Planned Purchases
@ Retail
82500+4125+500
000-247500=
339125
6.Planned Purchases
@ Cost
339125 x (1-0.45)
339125x 0.55=
186519
7.Planned Initial Markup 339125 x 0.45=
152606
8.Planned Gross Margin 152606 - 4125
=148481
9.Planned BOM Stock/Sales
Ratio
3.0x 5.0x 6.0x _________
10.Planned Sales Percentage 33% 40% 27% 100%
11.Planned Retail Reduction 5% 10% 20% 11.05%
Planned Total Sales for the Period $250,000
Planned Total Retail Reduction Percentage For the Period 11.05%
Planned Initial Markup Percentage For the Period 45%
Planned BOM Stock for May $400,000
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Suggested Answer: (this is the fully completed table)
Dolly's Place
Three-Month Merchandise Budget
Date: January 7, 2009
Season: Spring 2009
Seasonal
Spring February March April Total
1.Planned BOM Stock
247500
(82500x3)
$500,000 $405,000
2.Planned Sales
82500 $100,000 $ 67,500 $250,000
3.Planned Retail
Reductions 4125
(82500x0.05)
$ 10,000 $ 13,500 $ 27,625
4.Planned EOM Stock
500000 $405,000 $400,000
5.Planned Purchases
@ Retail
82500+4125+500
000-247500=
339125
$ 15,000 $ 76,000 $430,125
6.Planned Purchases
@ Cost 339125 x (1-0.45)
339125x 0.55=
186519
$ 8,250 $ 41,800 $236,569
7.Planned Initial Markup 339125 x 0.45=
152606
$ 6,750 $ 34,200 $193,556
8.Planned Gross Margin 152606 - 4125
=148481
($ 3,250) $ 20,700 $165,931
9.Planned BOM Stock/Sales
Ratio 3.0x 5.0x 6.0x _________
10.Planned Sales Percentage 33% 40% 27% 100%
11.Planned Retail Reduction 5% 10% 20% 11.05%
Planned Total Sales for the Period $250,000
Planned Total Retail Reduction Percentage For the Period 11.05%
Planned Initial Markup Percentage For the Period 45%
Planned BOM Stock for May $400,000
66
Planning Your Own Small Business:
You are unsure of what level of sales to forecast for your new drugstore, which
you plan to open on New Year's Day. Consequently, you have decided to make some
assumptions. You believe that it is reasonable to assume that your trade area will
encompass about 25 square miles. The city planning department has told you that within
this area the population density is 1,157 people per square mile. You conservatively
estimate that 40 percent of these individuals will visit your store an average of 4 times
annually and that 85 percent will purchase something on a typical visit. You expect them
to purchase an average of $25 per visit. Information from industry sources suggests that
drugstores do more business in the fall and winter. In fact, you expect sales during each
of months of November, December, January, and February to be 10 percent of your
annual volume. The remaining eight months will share equally the 60 percent of
remaining sales. You believe that for your business to be profitable you need to have a
beginning of month inventory to sales ratio of 3.0 for October through November and 2.5
for the remaining months. You want to plan your beginning of month inventory for each
of the next 12 months. You also want to begin the first month of your second year of
business with $250,000 in inventory at retail prices. Please, compute the beginning of the
month inventory for each of the next 12 months.
Suggested Answer: Let's look at the few simple equations we will need to determine the
new drugstore's total sales.
Total Number of consumers in the trading area:
(trading area)*(population/sq. mile)
(25)*(1,157) = 28,925
Total Number of Transactions at the Store:
(# of consumers in trading area)*(penetration level)*(# of visits/year)*(closure rate)
(28,925)*(.40)*(4)*(.85) = 39,338
Total Sales:
(# of transactions)*(average sale)
(39,338)*($25) = $983,450
Now let's look at monthly sales and the BOM inventory requirements:
J F M A M J J A S O N D
% Sales
10 10 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 10 10
Inv/sales
ratio
2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 3 3 2.5
67
January
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862,50
February
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862,50
March
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
April
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
May
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
June
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
July
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
68
August
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
September
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(2.5x) = $184,396.88
October
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(.075) = $73,758.75
($73,758.75)*(3.0x) = $221,276.25
November
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(3.0x) = $295,035
December
Monthly sales = (total sales)*(planned percentage for the month)
BOM inventory = (planned sales)*(inventory-to-sales ratio)
($983,450)*(10%) = $98,345
($98,345)*(2.5x) = $245,862.50
69
Notes on the “Retail Method” of Inventory Valuation
The retail method of inventory is a method by which the retailer can calculate its
closing inventory at retail prices and convert this valuation to a cost equivalent.
The retailer, therefore, can determine at any time, the value of the inventory on
hand, the cost of merchandise sold, the gross margin or gross profit, and net
operating profit without taking a physical inventory.
The following is a step-by-step outline for calculating the cost of the
ending inventory using the retail inventory method:
a. Calculation of the cost-to-retail ratio, or percentage relationship, of the
cost of merchandise to the selling price. First, determine merchandise
available for sale both at cost and retail. The former is equal to the cost of
inventory on hand at the beginning of the period plus purchases, including
transportation charges, of merchandise during the period. The latter is
equal to inventory at retail on hand at the beginning of the period, plus
purchases at retail and any additional markups. Next, divide merchandise
available for sale at cost by merchandise available for sale at retail. The
percentage calculated is an average relating to all the items in the store
rather than any single item.
b. Now, using only retail information, subtract sales for the period and any
markdowns from the merchandise available for sale at retail. The result
will be the ending inventory at retail prices. In other words, whatever we
had available to sell minus what we sold is equal to what we have left in
inventory.
c. To obtain an estimate of the cost of that ending inventory, simply multiply
the ending inventory at retail prices (from step c) by the percentage
calculated in step b. An illustration of the above process follows:
Cost Retail
Inventory at Beginning of Period $14,000
$25,000
Purchases During the Period 30,000
45,000
Transportation Costs 1,000
Additional Markups
5,000
Merchandise Available for Sale 45,000
75,000
Cost to Retail Ratio and Percentage 45,000/75,000 = 60%
Net Sales 45,000
Markdowns 5,000
Total Reductions 50,000
Ending Inventory at Retail $25,000
Ending Inventory at Cost ($25,000 X .60) $15,000
70
EXERCISES ON THE MERCHANDISE BUDGET:
To provide more practice, see the two additional exercises below – one on a six month budget
and the next on a three month budget.
Practice makes Perfect !!!
71
SIX-MONTH PROBLEM
Six-Month
Merchandise
Budget
Date: December 1
Season: Summer
Spring/Summer Feb March April May June July Seasonal
Total
1.Planned BOM
Stock
2.Planned Sales
3.Planned
Retail
Reductions
4.Planned EOM
Stock
5.Planned
Purchases @ Retail
6.Planned
Purchases @ Cost
7.Planned
Initial Markup
8.Planned Gross
Margin
9.Planned BOM
Stock/Sales Ratio
4X 4X 4X 5X 5X 5X ______
10.Planned Sales
Percentage
10% 10% 20% 20% 20% 20% 100%
11.Planned
Retail
Reduction
10% 10% 10% 10% 10% 10% 10%
Planned Total Sales for the Period $100,000
Planned Total Retail Reduction
Percentage For the Period 10%
Planned Initial Markup Percentage
For the Period 60%
Planned BOM Stock for August $200,000
72
SIX-MONTH PROBLEM SOLUTION
Six-Month
Merchandise
Budget
Date: December 1
Season: Summer
Spring/Summer Feb March April May June July Seasonal
Total
1.Planned
BOM Stock
40,000 40,000 80,000 100,000 100,000 100,000 ________
2.Planned
Sales
10,000 10,000 20,000 20,000 20,000 20,000 100,000
3.Planned
Retail Reductions
1,000 1,000 2,000 2,000 2,000 2,000 10,000
4.Planned
EOM Stock
40,000 80,000 100,000 100,000 100,000 200,000 ________
5.Planned
Purchases @
Retail
11,000 51,000 42,000 22,000 22,000 122,000 270,000
6.Planned
Purchases @
Cost
4,400 20,400 16,800 8,800 8,800 48,800 108,000
7.Planned
Initial Markup
6,600 30,600 25,200 13,200 13,200 73,200 162,000
8.Planned
Gross Margin
5,600 29,600 23,200 11,200 11,200 71,200 152,000
9.Planned
BOM Stock/
Sales Ratio
4X 4X 4X 5X 5X 5X ______
10.Planned
Sales
Percentage
10% 10% 20% 20% 20% 20% 100%
11.Planned
Retail Reduction
10% 10% 10% 10% 10% 10% 10%
Planned Total Sales for the Period $100,000
Planned Total Retail Reduction
Percentage For the Period 10%
Planned Initial Markup Percentage
For the Period 60%
Planned BOM Stock for August $200,000
73
THREE-MONTH PROBLEM
Three-Month
Merchandise
Budget
Date: June 16
Season: Fall
Spring Seasonal
Fall August September October Total
1.Planned BOM
Stock
2.Planned Sales
3.Planned Retail
Reductions
4.Planned EOM
Stock
5.Planned
Purchases
@ Retail
6.Planned
Purchases
@ Cost
7.Planned Initial
Markup
8.Planned Gross
Margin
9.Planned BOM
Stock/Sales
Ratio
2.0x 3.0x 2.0x _________
10.Planned Sales
Percentage
40% 30% 30% 100%
11.Planned Retail
Reduction
5% 5% 10% 6.5%
Planned Total Sales for the Period $100,000
Planned Total Retail Reduction
Percentage For the Period 6.5%
Planned Initial Markup Percentage
For the Period 40%
Planned BOM Stock for November $70,000
74
THREE-MONTH PROBLEM SOLUTION
Three-Month
Merchandise
Budget
Date: June 16
Season: Fall
Spring Seasonal
Fall August September October Total
1.Planned BOM Stock
80,000 90,000 60,000 ________
2.Planned Sales
40,000 30,000 30,000 100,000
3.Planned Retail
Reductions
2,000 1,500 3,000 6,500
4.Planned EOM Stock
90,000 60,000 70,000 ________
5.Planned Purchases
@ Retail
52,000 1,500 43,000 96,500
6.Planned Purchases
@ Cost
31,200 900 25,800 57,900
7.Planned Initial
Markup
20,800 600 17,200 38,600
8.Planned Gross
Margin
18,800 (900) 14,200 32,100
9.Planned BOM
Stock/Sales
Ratio
2.0x 3.0x 2.0x _________
10.Planned Sales
Percentage
40% 30% 30% 100%
11.Planned Retail
Reduction
5% 5% 10% 6.5%
Planned Total Sales for the Period $100,000
Planned Total Retail Reduction
Percentage For the Period 6.5%
Planned Initial Markup Percentage
For the Period 40%
Planned BOM Stock for November $70,000
75
Lecture Seven
Topic:
Merchandise Buying and Handling
Dunne: Chapter 9
76
Chapter 9
Merchandise Buying and Handling
Overview:
In this chapter, we explain the planning that retailers must do prior to their merchandise
selection. We also analyze how a retailer controls the merchandise to be inventoried. The
selection of, and negotiations with, vendors is also discussed, as well as the security measures
used when handling and receiving merchandise.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain the differences between the four methods of dollar merchandise planning that
are used to determine the proper inventory levels needed to begin a merchandise
selling period
2. Explain how retailers use dollar merchandise control, and describe how open-to-buy is
used in the retail buying process
3. Describe how a retailer determines the makeup of its inventory
4. Describe how a retailer selects proper merchandise sources
5. Describe what is involved in the vendor-buyer negotiation process, and what terms of
the contract can be negotiated
6. Discuss the various methods of handling the merchandise once it is received in the
store in order to control for shrinkage, including vendor collusion and theft.
Outline:
IV. Dollar Merchandise Planning - Merchandise management is the analysis, planning,
acquisition, handling, and control of the merchandise investments of a retail operation.
C. Buyers, working with upper management, are responsible for the dollar
planning of merchandise requirements.
3. Inventory is the largest investment that retailers make.
4. Gross margin return on inventory (GMROI) incorporates into a
single measure both inventory turnover and (gross) profit. Its formula
is:
(Gross margin/Net sales) x (Net sales/Average inventory at
cost) = (Gross margin/Average inventory at cost)
D. Once planned sales for the period have been determined, the merchandise
manager can then use one of four methods for planning dollars invested in
stock:
1. Basic Stock Method (BSM) is a technique for planning dollar
inventory investment that allows for a base stock level plus a variable
amount of inventory that will increase or decrease at the beginning of
each sales period in the same dollar amount as the period’s expected
sales.
a. BSM can be calculated as follows:
(1). Average monthly sales = Total planned sales for
season/Number of months in season
77
(2). Average stock for season = Total planned sales
for season/Estimated inventory turnover rate for season
(3). Basic Stock = Average stock for the season -
average monthly sales for the season
(4). Beginning-of-the-Month (BOM) Stock =
Planned monthly sales + Basic stock
b. The basic stock method works best when a retailer has a
low turnover rate or sales are erratic.
2. Percentage variation method (PVM) is a technique for planning
dollar inventory investments that assumes that the percentage
fluctuations in monthly stock from average stock should be half as
great as the percentage fluctuations in monthly sales from average
sales.
a. It is computed as follows:
BOM Stock = Average Stock for season x
1/2[1+(Planned sales for the month/Average monthly sales)]
b. This method is used when the retailer has a high annual
inventory turnover rate (i.e., six or more times a year).
3. The weeks' supply method (WSM) is a technique for planning dollar
inventory investments that states that the inventory level should be set
equal to a predetermined number of weeks’ supply, which is directly
related to the desired rate of stock turnover.
a. The WSM is calculated as follows:
(1). Number of weeks to be stocked = # weeks in
period/stock turnover rate for period
(2). Average Weekly Sales = estimated total sales for
period/# weeks in period
(3). BOM Stock = average weekly sales x # weeks to
be stocked.
b. This method is used by retailers where inventories are planned
on a weekly, not monthly basis, and where sales do not fluctuate
substantially.
4. Stock-to-Sales Method (SSM) is a technique for planning dollar
inventory investments where the amount of inventory planned for the
beginning of the month is a ratio (obtained from trade associations or
the retailer’s historical records) of stock to sales.
V. Dollar Merchandise Control
A. The dollars planned for merchandise need to be controlled, and this can be
accomplished with a technique called open-to-buy (OTB). OTB refers to the
dollar amount that a buyer can currently spend on merchandise without
exceeding the planned dollar stocks.
B. OTB is calculated as follows:
1. Planned sales for the month
2. Plus planned reductions for the month
3. Plus end-of-month stock
4. Minus beginning-of-month stock
5. Equals planned purchases at retail
6. Minus commitments at retail for current delivery
7. Equals open-to-buy at retail
78
C. The OTB should not be thought of as a fixed quantity that cannot be exceeded
when consumer needs arise. However, changes in OTB should be rare. If there
are frequent changes, then the sales planning process is flawed. Some common
buying errors that cause problems with OTB include:
1. Buying merchandise that is priced too high or too low for the store's
target market
2. Buying the wrong type of merchandise, or buying merchandise that is
too trendy
3. Having too much or too little basic stock on hand
4. Buying from too many vendors
5. Failing to identify the season's hot items early enough in the season
6. Failing to let the vendor assist the buyer by adding new items and/or
new colors to the retailer’s merchandise mix.
D. Merchandise planning is a dynamic process subject to many changes. Consider
the implications that could arise in planning your stock levels as a result of:
1. Sales for the previous month being lower or higher than planned
2. Reductions being either higher or lower than planned
3. Shipments of merchandise being delayed in transit.
Understanding the consequences of each of these situations illustrates the
relationship between merchandising activities and the merchandise budget.
VI. Inventory Planning: The dollar merchandise plan is only the starting point in
merchandise management. Once the retailer has decided how many dollars can be
invested in inventory, the dollar plan needs to be converted into an actual inventory
plan. On the sales floor, items, not dollars, are sold. The assortment of items that will
comprise the merchandise mix must then be planned.
A. An optimal merchandise mix has three dimensions. Each dimension is
describes an aspect of a merchandise line. A merchandise line is a group of
products that are closely related because they are intended for the same end
use; are sold to the same customer group; or fall within a given price range.
1. Today some retailers manage categories, or lines, as a strategic
business unit. When using category management, buyers are no longer
concerned with the GMROI of a single product; instead, they manage
the GMROI for an entire line or category.
2. The three dimensions of the merchandise mix are:
a. Variety, which refers to the number of different lines the
retailer stocks in the store.
b. Breadth, also called assortment, refers to the number of
merchandise brands found in a merchandise line.
(1) Breadth can be a problem for retailers selling private
label brands.
(2) A Battle of the Brands occurs when retailers, in
determining the breath of the product assortment, have
their own products competing with the manufacturer's
products for shelf space and control over display
location.
c. Depth refers to the average number of SKUs (stock-keeping
units) within each brand of the merchandise line.
B. A retailer's merchandise mix can, in addition to satisfying customer wants,
actually shape those wants and impact whether and what customers purchase.
79
Therefore, just as the trading areas for each store in a chain are different, the
optimal mix will be different for every store.
1. There are four constraining factors that influence the design of the
optimal merchandise mix:
a. Dollar merchandise constraint: There seldom will be enough
dollars to emphasize all three dimensions of variety, breadth,
and depth.
b. Space constraint: If depth or breadth is wanted, space is needed.
If variety is to be stressed, enough empty space is needed to
separate the distinct merchandise lines.
c. Merchandise turnover constraint: As the depth of the
merchandise increases, more and more variations of the product
must be stocked to serve smaller segments; thus, average
turnover is likely to decrease.
d. Market constraints: The above three dimensions have a
profound effect on how the market perceives the store and the
customers the store will attract.
2. Constraining factors make it impossible to maximize all dimensions of
the merchandise mix. However, if retailer is going to lose customers, it
should lose the less profitable ones by properly mixing its merchandise
in terms of variety, breadth, and depth within the dollar, space,
turnover, and market constraints.
C. After deciding the relative emphasis to be placed on the three dimensions of
the merchandise mix, the retailer needs to decide when to order and reorder the
desired merchandise line items.
1. Ideally, a retailer would receive the ordered merchandise just as it is
needed.
2. When selling a seasonal item, the retailer would want to be completely
sold out of the item on the planned out-of-stock date.
3. The retailer tries to achieve optimum efficiency on its inventory
dollars by closely monitoring its inventory using UPC or barcode data.
D. Due to conflicts, unit stock planning is an ―exercise in compromise‖ because
everything cannot be stocked. Several conflicts are summarized below:
1. Maintain a strong in-stock position on genuinely new items while
trying to avoid the 90 of percent new products that fail in the
introductory stage.
2. Maintain an adequate stock of the basic popular items while having
sufficient inventory dollars to capitalize on unforeseen opportunities.
3. Maintain high merchandise turnover goals while maintaining high
margin goals.
4. Maintain adequate selection for customers while not confusing them.
5. Maintain space productivity and utilization while not congesting the
store.
VII. Selection of Merchandising Sources - After deciding on the amount and type of
inventory to be purchased, the retailer must determine the best possible vendor to
supply these items and negotiate the best deal possible with that vendor.
A. Unless the retailer owns a manufacturing and/or wholesale operation, the
retailer must consider many criteria when choosing a supplier.
1. When selecting a merchandise source, the retailer should consider:
80
a. Selling history;
b. Consumers' perception of the manufacturer's reputation;
c. Reliability of delivery;
d. Trade terms;
e. Projected markup;
f. After-sale service;
g. Transportation time;
h. Distribution center processing time;
i. Inventory carrying cost;
j. Country of origin;
k. Fashionability; and
l. Net cost.
2. Retailers that use private label brands have found that private branding
a. Increases as the perceived consequences of making a buying
mistake decrease,
b. Increases when the different brands in the category are
perceived to vary more in their quality, and
c. Decreases if the category benefits are deemed to require actual
trial/experience instead of being able to assess through search of
package label information.
B. Retailers should always enter the market with two pieces of information
concerning current vendors:
1. Vendor profitability analysis statement, which lists the retailer’s
purchases within the past year, the discount(s) granted by the vendor,
the transportation charges paid, original mark-up, markdowns, and the
season ending gross margin on each of the vendor’s products.
2. Confidential vendor analysis, which not only lists the same
information as in the vendor profitability analysis statement, but also
provides a three-year financial summary and the names, titles, and
negotiating points of all the vendor's sales staff.
3. Based on the information obtained in these two reports, some retailers
classify vendors into five categories.
a. Class A Vendors. These vendors and the retailer work together
as partners. These are the vendors from which the retailer
purchases large and profitable amounts of merchandise.
b. Class B Vendors. These are the vendors that generate
satisfactory sales and profits for the retailer.
c. Class C Vendors. These are the vendors who carry outstanding
lines but do not currently sell to the retailer.
d. Class D Vendors. These are the vendors from whom the
retailer purchases small quantities of goods on an irregular
basis.
e. Class E Vendors. These are the vendors with whom the retailer
has had an unfavorable experience.
C. After selecting the vendors, the retailer should select the specific merchandise
to be purchased after considering the following key questions:
1. Where does this product fit into the strategic position that I have staked
out for my department within my firm?
2. Will I have an exclusive agreement with this product?
3. What is the estimated demand for this product in my target market?
81
4. What is my anticipated gross margin for the product?
5. Will I be able to get reliable, speedy replacement stock?
6. Can this product stand on its own, or is it a me-too item?
7. What is my expected turnover rate with this product?
8. Does this product complement the rest of my inventory?
VIII. Vendor Negotiations - The climax of a successful buying plan is active negotiation
with suppliers. The effectiveness of the buyer-vendor relationship depends on the
negotiation skills of the buyer and the economic power of the firms involved.
A. The retail buyer must negotiate prices, freight, delivery dates, method of
shipment and shipping costs, exclusivity, guaranteed sales, markdown money,
promotional allowances, return privileges, and discounts. The smart buyer will
discuss everything, leaving nothing to chance.
B. Price is probably the first factor to be negotiated. The retailer should be aware
of the following five types of available discounts:
1. Trade Discounts are a form of compensation which the buyer may
receive from performing certain services for the manufacturer.
2. Quantity Discounts are price reductions offered as an inducement to
purchase large quantities of merchandise. There are three types of
quantity discounts:
a. Non-cumulative (based on single purchase)
b. Cumulative (based on total amount purchased over a period of
time)
c. Free merchandise (merchandise is offered in lieu of price
concessions)
3. Promotional Discounts are given when the retailer performs an
advertising or promotional service for the manufacturer.
4. Seasonal Discounts can be earned by retailers if they purchase and
take delivery of goods in off seasons.
5. Cash Discounts are earned by retailers for prompt payment of their
bills. There are several types including:
a. End-of-month (EOM) dating allows for the cash discount and
full payment period to begin on the first day of the following
month instead of on the invoice date.
b. Middle of month (MOM) dating is similar to EOM except that
the middle of the month is used as the starting date.
c. Receipt of goods (ROG) dating sets the starting date as the
date the goods are received by the retailer.
d. Extra dating (Ex) merely allows the retailer some extra or free
days before the period of payment begins.
e. Anticipation allows a retailer to pay the invoice in advance of
the expiration of the cash discount period and earn an extra
discount.
6. Delivery terms are also important to negotiate because they specify
where title to the merchandise passes to the retailer, whether the vendor
or buyer will pay the freight charges, and who is obligated to file any
damage claims. The three most common shipping terms are:
a. Free on board (FOB) factory. The buyer assumes title at the
factory and pays all transportation costs from the vendor's
factory.
82
b. Free on board (FOB) shipping point. The vendor pays the
transportation to a local shipping point, but the buyer assumes
title there and pays all further transportation costs.
c. Free on board (FOB) destination. The seller pays the freight
and the buyer takes title upon delivery.
IX. In Store Merchandise Handling: Retailers need to have some means of handling
incoming merchandise, including merchandise handling and receiving space. Several
types of theft occur, and most can be controlled.
A. Vendor collusion includes losses that occur when the merchandise is
delivered. Such losses typically involve the delivery of less merchandise than
is charged for, the removal of good merchandise disguised as old or stale
merchandise, and the theft of other merchandise from the stockroom or the
selling floor while making delivery.
B. Employee theft occurs when employees believe that free merchandise is part
of their pay. Although some of the stolen goods come from the selling floor, a
larger percentage is taken from the stockroom to the employee lounge and
lockers, where it is kept until the employees leave with it at quitting time.
1. As many as 30 percent of American workers admit to stealing from
their employers, even if it is only small items like a pen or pencil.
2. Employee theft, which amounts to over $800 per apprehension, is most
prevalent in food stores, department stores, and discount stores.
C. Customer theft is also a problem. In fact over a dozen shoppers are caught for
every case of employee theft, although the average amount of merchandise
recovered is under $50. Stealing merchandise from the stockroom and
receiving area may be easier than taking it from the selling floor for several
reasons:
1. Much of the stockroom merchandise is not ticketed, so it is easier to get
it through electronic anti-shoplifting devices.
2. Once the thief enters the stock area, there is very little antitheft
security. Most security guards watch the exits and fitting rooms.
3. There is usually an exit in the immediate area of the stockroom through
which the thief can carry out the stolen goods.
SOLUTIONS TO SELECTED QUESTIONS AND EXERCISES FROM
CHAPTER NINE: MERCHANDISE BUYING AND HANDLING 2. The Corner Hardware Store is attempting to develop a merchandise budget for the next
12 months. To assist in this process, the following data have been developed. The target
inventory turnover is 4.8 and forecast sales are:
Month Forecast Sales
1 $27,000
2 26,000
3 20,000
4 34,000
5 41,000
6 40,000
7 28,000
8 27,000
9 38,000
10 39,000
11 26,000
12 28,000
Develop a monthly merchandise budget using the basic stock method (BSM) and the percentage
variation method (PVM).
SOLUTION: (288-290) Using the basic stock method we should plan the following
inventory levels:
Month Planned Inventory
1 $27,000 + [(374,000/4.8)-(374,000/12)]
$27,000 + 46,750 = $73,750
2 $26,000 + 46,750 = $72,750
3 $20,000 + 46,750 = $66,750
4 $34,000 + 46,750 = $80,750
5 $41,000 + 46,750 = $128,750
6 $40,000 + 46,750 = $88,750
7 $28,000 + 46,750 = $74,750
8 $27,000 + 46,750 = $73,750
9 $38,000 + 46,750 = $84,750
10 $39,000 + 46,750 = $85,750
11 $26,000 + 46,750 = $72,750
12 $28,000 + 46,750 = $74,750
174
Using the percentage variation method we should plan the following inventory levels:
Month Inventory Planned
1 1/2 (374,000/4.8)(1+27,000/(374,000/12))
.5(77,916.67)(1+.87) = $72,708
2 .5(77,916.67)(1+.83) = $71,458
3 .5(77,916.67)(1+.64) = $63,958
4 .5(77,916.67)(1+1.09) = $81,458
5 .5(77,916.67)(1+1.32) = $90,208
6 .5(77,916.67)(1+1.28) = $88,958
7 .5(77,916.67)(1+.90) = $73,958
8 .5(77,916.67)(1+.87) = $72,708
9 .5(77,916.67)(1+1.22) = $86,458
10 .5(77,916.67)(1+1.25) = $87,708
11 .5(77,916.67)(1+.83) = $71,458
12 .5(77,916.67)(1+.90) = $73,958
5. A buyer is going to market and needs to compute the open-to-buy. The relevant data are
as follows: planned stock at the end of March, $319,999 (at retail prices); planned March sales,
$149,999; current stock-on-hand (March 1), $274,000; merchandise on order for delivery,
$17,000; planned reductions, $11,000. What is the buyer’s open-to-buy?
SOLUTION: (291-292) Open-to-Buy = $319,999 (planned stock at the end of March at
retail) + $149,999 (planned March sales) + $11,000 (planned reductions) - $274,000 (current
merchandise on hand) - $17,000 (merchandise already on order) = $189,998 (OTB).
12. A retailer purchases goods that have a list price of $7,500. The manufacturer allows a
trade discount of 40-25-10 and a cash discount of 2/10, net 30. If the retailer takes both
discounts, how much is paid to the vendor?
SOLUTION: (309-310)
$7,500.00
Less 40% ($7,500 x .40 = $3,000) -3,000.00
$4,500.00
Less the cash discount (2%) - 150.00
$4,350.00
Remember the retailer is only entitled to the 40% discount. The other discounts go to the
wholesalers for performing their duties.
175
Planning Your Own Retail Business:
Alexia White is in the process of developing the merchandise budget for the gift shop she is
opening next year. She has decided to use the basic stock method of merchandise budgeting.
Planned sales for the first half of next year are $200,000, and this is divided as follows: February
= 9 percent, March = 10 percent, April = 15 percent, May = 21 percent, June = 22 percent, and
July = 23 percent. Planned total retail reductions are 9 percent for February and March, 4 percent
for April and May, and 12 percent for June and July. The planned initial markup percentage is 48
percent. Alexia desires the rate of inventory turnover for the season to be two times. Also, she
wants to begin the second half of the year with $90,000 in inventory at retail prices.
Develop a six-month merchandise budget for Alexia.
Suggested Answer: After determining planned sales for each month, the BOM inventory level
for each month using the basic stock method is computed as follows:
Average monthly sales = Total planned sales/Number
for the season of months
= $200,000/6 = $33,333
Average stock for the = Total planned sales/Inventory
season turnover
= $200,000/2 = $100,000
Basic stock = Average stock - Average monthly sale
= $100,000 - $33,333 = $66,667
BOM @ retail (Feb.) = Basic stock + Planned monthly sales
= $66,667 + $18,000 = $84,667
BOM @ retail (Mar.) = $66,667 + $20,000 = $86,667
BOM @ retail (Apr.) = $66,667 + $30,000 = $96,667
BOM @ retail (May) = $66,667 + $42,000 = $108,667
BOM @ retail (Jun.) = $66,667 + $44,000 = $110,667
BOM @ retail (Jul.) = $66,667 + $46,000 = $112,667
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SIX-MONTH PROBLEM
Six-Month
Merchandise
Budget
Date: December 14
Season: Summer
Spring/Summer Feb March April May June July Seasonal
Total
1.Planned
BOM Stock
84,667 86,667 96,667 108,667 110,667 112,667 ______
2.Planned
Sales
18,000 20,000 30,000 42,000 44,000 46,000 200,000
3.Planned
Retail
Reductions
1,620 1,800 1,200 1,680 5,280 5,520 17,100
4.Planned
EOM Stock
86,667 96,667 108,667 110,667 112,667 90,000 ______
5.Planned
Purchases
@ Retail
21,620 31,800 43,200 45,680 51,280 28,853 222,433
6.Planned
Purchases
@ Cost
11,242 16,536 22,264 23,754 26,666 15,004 115,666
7.Planned
Initial
Markup
10,378 15,264 20,736 21,926 24,614 13,849 106767
8.Planned
Gross
Margin
8,758 13,464 19,536 20,246 19,334 8,329 89,667
9.Planned
BOM Stock
/Sales Ratio
n/a n/a n/a n/a n/a n/a ______
10.Planned
Sales
Percentage
9% 10% 15% 21% 22% 23% 100%
11.Planned
Retail
Reduction
9% 9% 4% 4% 12% 12% 8.55%
Planned Total Sales for the Period $200,000
Planned Total Retail Reduction
Percentage For the Period 8.55%
Planned Initial Markup Percentage
For the Period 48%
Planned BOM Stock for August $90,000
177
Lecture Eight
Topic:
Merchandise Pricing
Dunne: Chapter 10
178
Chapter 10
Merchandise Pricing
Overview:
In this chapter, we examine the retailer's need to make pricing decisions. We begin with a
discussion of the impact of a firm's objectives on its pricing policies and strategies. After
reviewing several strategies, we look at why initial markups and maintained markups are seldom
the same. We also discuss how a retailer establishes an initial markup. We conclude this chapter
with a discussion of why and how a retailer takes markdowns during the normal course of
business.
Learning Objectives:
After reading this chapter, you should be able to:
1. Discuss the factors a retailer should consider when establishing pricing objectives and
policies
2. Describe the differences between the various pricing strategies available to the retailer
3. Describe how retailers calculate the various markups
4. Discuss why markdown management is so important in retailing, and describe some of
the errors that cause markdowns
Outline:
X. Pricing Objectives and Policies – Determining the right price for a product or service
should not be a difficult decision if the retailer has analyzed its market position correctly.
D. Interactive Price Decisions - The decision to price an item at a certain level
should incorporate the retailer's past decisions in the following seven retail areas:
4. Merchandise attributes, which depends on the market the retailer is
serving.
5. Location, specifically the store's distance from competitors and
customers.
6. Promotion, which is crucial in generating demand, is not independent of
price.
7. Credit and/or Check Cashing availability can also generate demand and
affect pricing levels.
8. Customer Service levels affect expenses, which in turn affect price.
9. Store Image is affected by the way a retailer chooses to price its products.
10. Legal Constraints, both state and federal, must be considered when
determining prices.
E. Pricing Objectives - A retailer's pricing objectives should be in agreement with its
mission statement and merchandising policies. Typical pricing objectives include:
1. Profit-Oriented Objectives
a. Target Return - Sets a specific level of profit as an objective,
often stated as a percentage of sales or of the retailer's capital
investment.
b. Profit Maximization - Seeks to get as much profit as possible.
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(1) Skimming - Tries to sell at the highest price possible
before settling on a more competitive level.
(2) Penetration Pricing - Seeks to establish a loyal customer
base before eventually raising its prices.
2. Sales-Oriented Objectives - Seek some level of unit sales, dollar sales, or
market share. The achievement of such objectives does not necessarily
guarantee that profits will also increase.
3. Status Quo Objectives - Seek to maintain the retailer's current market
share position or level of profits or to compete on grounds other than
price.
F. Pricing Policies - Pricing policies are rules of action that ensure uniformity of
pricing decisions within a retail operation. A retailer's pricing policies should
reflect the expectations of its target market.
1. Pricing Below the Market – Retailers with such a policy rely on a
high volume, generated by low prices, to produce satisfactory profits.
1. Pricing at Market Levels - Most merchants want to be competitive with
one another. Competitive pricing is based on
a. Pricing zones, a range of prices for a certain merchandise line that
appeals to customers in a particular demographic group.
b. The size of a retail store affects its ability to
compete on a price basis.
3. Pricing Above the Market - Certain market sectors are receptive to high
prices because non-price factors are more important to them than price.
c. Merchandise Offerings - Some consumers are willing to pay
higher prices for specialty items, an exclusive line, or unusual
merchandise.
d. Services Provided - Service-oriented merchants may be able to
develop a loyal group of customers by providing anything from
wardrobe counseling to delivery.
e. Convenient Locations - The convenient location of some retailers
allows them to charge higher prices since consumers’ value time.
f. Extended Hours of Operation - By remaining open while
competitors are closed, some merchants are able to charge above-
average prices.
XI. Specific Pricing Strategies - A retailer's specific pricing strategies should be in
accordance with the other components of the store's retail mix.
A. Customary Pricing - A retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
B. Variable Pricing - Used when differences in demand and cost force the retailer
to charge prices in a fairly predictable manner.
C. Flexible Pricing - Offering the same products and quantities to different
customers at different prices; this is often used in situations calling for personal
selling.
D. One-Price Policy - Charging the same price for an item to all customers and may
be used in conjunction with customary or variable pricing.
E. Price Lining - Establishing a certain number of price points for each
merchandise classification and then purchasing goods that fit into each line. The
difference between the price points should be large enough to reflect a value
difference to consumers.
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1. Trading Up - Occurs when a salesperson moves a customer from a
lower-priced line to a higher one.
2. Trading Down - Occurs when a customer is initially exposed to high-
priced lines, but expresses the desire to buy a lower-priced one.
F. Odd Pricing - The practice of setting retail prices that end in the digits 5, 8, or 9.
Retailers believe that consumers perceive these odd prices as substantially lower.
G. Multiple-Unit Pricing – This is used by retailers to encourage additional sales
and to increase profits. Here multiple-unit pricing is based on the idea that the
price of each unit in a multiple-unit package is less than the price of each unit if
they were sold individually.
H. Bundle Pricing - This generally involves selling distinct multiple items offered
together at a "special price." Here the perceived savings in cost and/or time for
the bundle justifies the purchase.
I. Leader Pricing - The practice of setting a low price for a high-demand item and
advertising heavily as a means of attracting consumers into a store; items selected
should be widely known and bought frequently.
1. A loss leader is an extreme form of leader pricing which occurs when an
item that is sold below a retailer's cost
2. High-low pricing involves the use of high everyday prices and low
leader "specials" on featured items for their weekly ads.
J. Bait and Switch Pricing - The practice of advertising a low-priced model of a
shopping good to lure shoppers into a store and then attempting to convince them
to purchase a higher-priced model. Illegal when the low-priced model is
unavailable to shoppers.
K. Private-Brand Pricing - Retailers develop private brands because they can be
purchased at a cheaper price, have a larger gross margin, and still be priced lower
than a comparable national brand. This makes it difficult for the consumer to
make exact comparisons with private brands.
XII. Using Markups - A retail buyer should be able to rapidly calculate whether a proposed
purchase will provide an adequate markup or gross margin. In addition, there are times
when a retail buyer needs to compute the markdown, which is a reduction in the selling
price of the good.
A. Calculating Markup: Markup is the difference between the cost of merchandise
and the selling price, calculated by the following basic equation:
SP = C + M
B. Markup Methods: Markup may be expressed as either a dollar amount or as a
percentage.
1. Markup on selling price
Dollar markup = Selling price - cost (per unit figures)
Percentage markup on selling price = (SP-C)/SP = M/SP
2. Markup on cost: While percent markup on cost is not widely used by
retailers, it is calculated as:
Percentage markup on cost = (SP-C)/C = M/C
and can be used to find percent markup on selling price as follows:
Percentage markup on selling price = Percentage markup on cost/(100%
+ percentage markup on cost)
It can also be calculated from percent markup on selling price as follows:
Percentage markup on cost = Percentage markup on selling price/(100% -
Percentage markup on selling price)
181
C. Using Markup Formulas When Purchasing Merchandise
1. Meeting a profit objective once the retail price is known:
Percentage Markup on selling price = (SP-C)/SP
For example, if SP = $8 and we need a 40% markup on selling price to
meet profit objectives, what can we pay for the item?
40%= ($8-C)/$8
C= $4.80
2. Finding selling price of an item given cost and markup %.
For example, if C = $12 and we need a 40% markup on selling price to
meet profit objectives, what is selling price?
Use the original equation SP = C + M
SP = C + .40 SP; since markup = 40% of SP
.60 SP = $12.
SP = $12/.6 = $20
D. Initial Versus Maintained Markup - It is not always possible for retailers to sell
all their merchandise at the price initially set by the retailer.
1. Initial Markup - The markup placed on the merchandise when the store
received it. Initial markup = (Original selling price - Cost)/Original
selling price.
2. Maintained markup = (Actual retail price - Cost)/Actual retail price.
Maintained markup, or achieved markup, is usually lower than the initial
markup by the amount of reductions realized.
3. Reasons for the Differences Between Initial and Maintained Markup
g. The need to balance demand with supply; consumer demand may
change, forcing the retailer to take markdowns to make its
merchandise more attractive.
h. Stock shortages, due to thefts by employees or customers, or by
mis-marking the price when merchandise is received.
i. Employee and customer discounts.
j. The cost of alterations is usually not covered by price charged to
the customer.
k. Cash discounts, offered by suppliers to retailers to encourage
prompt payment of bills, decrease the cost of merchandise sold
and cause the maintained markup to be higher than the initial
markup.
E. Planning Initial Markups - Markups must be set at a level high enough to cover
all operating expenses while still providing a reasonable profit. They must also
account for potential markdowns; shortages; employee discounts; alteration
expenses; and cash discounts received.
1. Initial Markup Equation:
Initial markup percentage = (Operating expenses + Net profit +
Markdowns + Stock shortages + Employee and Customer discounts +
Alteration costs - Cash discounts)/(Net sales + Markdowns + Stock
Shortages + Employee and Customer discounts)
a. This equation can be simplified if we remember that markdowns,
stock shortages, and employee and customer discounts are all
retail reductions from stock levels. Likewise gross margin is the
sum of operating expenses and net profit. This produces a simpler
formula.
182
Initial markup percentage = (Gross margin + Alteration costs -
Cash Discounts + Reductions)/(Net sales + Reductions)
b. Since many retailers record cash discounts as other income and
not as a cost reduction when determining initial markup, the
formula can be further simplified.
Initial markup percentage = (Gross margin +
Alteration costs + Reductions)/(Net sales + Reductions)
2. Markup Determinants - Some general rules of markup determination are:
a. As goods are sold through more retail outlets, the markup
percentage decreases.
b. The higher the handling and storage costs of the goods, the higher
the markup should be.
c. The greater the risk of a price reduction due to the seasonality of
the goods, the greater the magnitude of the markup percentage
early in the season.
d. The higher the demand inelasticity of price for the goods, the
greater the markup percentage.
XIII. Markdown Management – Given that pricing decisions are subject to considerable error,
retailers must actively plan for future markdowns in order to remain effective.
A. A markdown is a reduction in the price of an item taken in order to stimulate
sales.
B. The markdown percentage is the amount of the reduction divided by the original
selling price.
C. Markdowns are often the result of four basic errors:
1. Buying errors, which include buying the wrong merchandise, quantities,
sizes, styles, colors, patterns, or price ranges.
2. Pricing errors occur when the price of the item is too high to move the
product at the speed and quantity desired.
3. Merchandising errors include failure on the buyer's part to: relate new
merchandise to old or tie it to the store's image; inform the sales staff on
how the new merchandise meets the store's target market needs; excite the
sales force about new merchandise; or improper handling of merchandise
by the sales staff.
4. Promotion errors occur when the consumer has not been properly
informed or prompted to purchase the merchandise.
D. Markdown Policy - Retailers will find it advantageous to develop a markdown
timing policy to guide two crucial decisions: when and how much of a markdown
to take. In theory, there are two extremes to a markdown timing policy:
1. Early markdown policy is used to speed the movement of merchandise
and enable the retailer to take less of a markdown per unit.
2. Late markdown policy is used to avoid disrupting the sale of regular
merchandise by too frequently marking goods down.
3. Amount of markdown: Another issue to be considered is the amount of
the markdown, which is tied to the timing.
a. Early markdowns should be smaller - just enough to stimulate
sales.
b. Late markdowns should be larger to move the remaining
merchandise.
183
One rule of thumb for markdowns is that "prices should be
marked down at least 25% in order for the consumer to notice."
However, the markdown percentage should vary with the type of
good, time of season, and competition.
c. Determining a retailer’s maintained markup percentage:
Maintained markup percentage = Initial markup percentage -
[(Reduction percentage)(100% - Initial markup percentage)]
Where Reduction percentage = Amount of reductions/Net sales
184
SOLUTIONS TO EXERCISES ON MERHCANDISE PRICING (CHAPTER
10) 8. Compute the markup on selling price for an item that retails for $59.95 and costs $36.20.
SOLUTION: (339) Percentage of markup on selling price = (SP - C)/SP = ($59.95-
36.20)/$59.95 = $23.75/$59.95 = 39.6%
9. Complete the following:
Dress Shirt Sport Shirt Belt
Selling Price $45.00 $49.99 $25.00
Cost $24.00 $27.35 $13.50
Markup in Dollars
Markup Percentage
on Cost
Markup Percentage on
Selling Price
SOLUTION: (339-341)
Dress Shirt Sport Shirt Belt
Selling Price $45.00 $49.99 $25.00
Cost $24.00 $27.35 $13.50
Markup in Dollars $21.00 $22.64 $11.50
Markup Percentage
on Cost 87.5% 82.8% 85.2%
Markup Percentage on
Selling Price 46.7% 45.3% 46.0%
10. A buyer tells you that he realized a markup of $60 on a set of tires. You know that his
markup is 25 percent based on the retail price. What did he pay for that set of tires?
SOLUTION: (341) First, solve for the selling price. % Markup on Selling Price =
(Selling Price – Cost) / Selling Price = 25% = 60/ Selling Price. Selling Price = $240. Second,
solve for the cost. 25% = ($240 – Cost)/$240. Cost = $180. The set of tires cost the buyer $180.
11. Markup on cost is 83 percent, what is markup on selling price?
SOLUTION: (341)
% Markup on Selling Price = (% Markup on Cost)/(100% + % Markup on Cost) =
83%/(100% + 83%) = 83%/183% = 45.4%
14. Intimate Apparel wants to produce a 9 percent operating profit this year on sales of
$1,200,000. Based on past experiences the owner made the following estimates:
Net Alteration Expenses $ 8,100 Employee Discounts $ 15,400
Markdowns $141,000 Operating Expense $375,000
Stock Shortages $43,200 Cash Discounts Earned $ 4,500
Given these estimates, what average initial markup should be asked for the upcoming year?
SOLUTION: (342-344) Profit in dollars = .09($1,200,000) = $108,000
Initial Markup Percentage = (Operating Expense + Profit + Markdowns +
Employee Discounts Alteration Expense + Stock Shortages-Cash Discounts)
(Sales + Markdowns + Stock Shortages + Employee Discounts) +
185
= ($375,000 + $108,000 + $141,000 + $15,400 + $8,100 + $43,200-$4,500)/($1,200,000 +
$141,000 + $43,200 + $15,400)
= $686,200/$1,399,600 = 49.03 percent
Case:
PART A The buyer for the women’s sweater department has purchased wool sweaters for
$47.69. She uses an odd pricing policy and wants to sell them at 47 percent markup on selling
price. At what price should each sweater be sold?
Suggested Answer: Sales Price = Cost/(1 - % Markup) = $47.69/(1-.47) = $89.98
[Sales Price = $89.98]
PART B The buyer for men’s shirts has a price point of $45 and requires a markup of 40 percent.
What would be the highest price he should pay for a shirt to sell at this price point?
Suggested Answer: % Markup = (Sales price – Cost)/ Sales Price
.40 = (45 – C)/ 45; [Cost = $27.00]
PART C The Men’s Department buyer hopes to achieve net sales of $1,500,000 for the
upcoming season. Operating expenses are expected to be $560,000 and retail reductions are
$180,000. Management has set a profit goal of $110,000. What should the initial markup
percentage be?
Suggested Answer: Initial Markup Percentage = (Operating Expenses + Net Profit +
Retail Reductions)/(Net Sales + Retail Reductions)
($560,000 + $180,000 + $110,000)/ ($1,500,000 + $180,000)
= $850,000/ $1,680,000 = 50.6%; [Initial Markup Percentage = 50.6%]
PART D A buyer submits the following plans to his general merchandise managers: Planned
sales = $85,000; planned initial markup = 40%; planned reductions = $31,000. Based on these
projections, what is the planned maintained markup percentage?
Suggested Answer: Maintained markup percentage = Initial markup percentage –
[(Reduction percentage)(100% - Initial markup percentage)]
.40 – [($31,000/$85,000)(1-.40)] = .181; [Maintained markup percentage = 18.1%]
Planning Your Own Retail Business:
The online retail operation you recently opened is doing well but you are uncertain of your
pricing strategy. Currently the typical customer purchases four items at an average price of
$11.71 for an average transaction size of $46.84. The cost of goods is 60 percent of sales, which
yields a gross margin percent of 40 percent. You are considering lowering prices by 10 percent
across the board so you can better compete with other music e-tailers. If you lower prices by 10
percent, you believe that the average items purchased per customer would rise by 25 percent.
Assuming your assumptions are correct should you lower prices by 10 percent across the board?
If not, do you have an alternative pricing strategy to propose?
186
Suggested Answer:
Let's begin by considering what an average item costs the retailer.
If the average item retails for $11.71 and the retailer has a 40% gross margin, that means
the average item costs the retailer $7.03 ($11.71 * 60%) and the retailer's gross margin per unit is
$4.68 ($11.71 * 40%).
Currently the retailer is selling four items to each customer, which produces a gross
margin per transaction of $18.72 ($4.68 * 4).
If the retailer were to reduce prices by 10%, the number of items purchased in each
transaction would increase by 25% to 5 items. Under this condition, the average transaction
would be $52.70 ($11.71 *.9 * 5). The cost of goods sold would be $35.15 ($7.03 * 5).
Subtracting the $35.15 from $52.70, we can see that the gross margin per transaction under the
price reduction plan would be $17.55. Thus, unless the 10% price reduction were to increase the
number of customers or the average number of transactions per customer, the retailer should
continue with its current pricing strategy.
187
Lecture Nine
Topic:
Advertising & Promotion
Dunne: Chapter 11
188
Chapter 11
Advertising and Promotion
Overview:
Promotion is a major generator of demand in retailing. In this chapter, we will focus on the role
of advertising, sales promotion, and publicity in the operation of a retail business. Retail selling,
another important element of promotion, will be discussed in Chapter 12. Our discussion here is
directed at describing how retailers should manage their firm's promotional resources.
Learning Objectives:
After reading this chapter, you should be able to:
1. Name the four basic components of the retailer's promotion mix, and discuss their
relationship with other decisions
2. Describe the differences between a retailer's long-term and short-term promotional
objectives
3. List the six steps involved in developing a retailer's advertising campaign
4. Explain how retailers manage their sales promotion and publicity
Outline:
I. The Retail Promotion Mix - Retailers need promotion to bring traffic into their stores,
move this traffic to the various selling areas, and to entice the traffic into purchasing
merchandise.
A. Types of Retail Promotion - There are four types of promotion:
1. Advertising is paid, nonpersonal communication through various
media by business firms, nonprofit organizations, and individuals who
are in some way identified in the advertising message and who hope to
inform and/or persuade members of a particular audience (includes
communication of products, services, institutions, and ideas).
2. Sales promotions involve the use of media and non-media marketing
pressure applied for a pre-determined, limited period of time at the
level of consumer, retailer, or wholesaler in order to stimulate trial,
increase consumer demand, or improve product availability.
3. Publicity is non-paid-for communications of information about the
company or product, generally in some media form.
4. Personal selling is selling that involves a face-to-face interaction with
the consumer.
B. Total Systems Approach - A retailer's promotional efforts must be planned and
implemented in the context of the retailer's overall strategy.
1. Promotion decisions relate to, and must be integrated with, the other
management decisions, such as:
a. There is a maximum distance consumers will travel to visit a
retail store.
b. Retailers need high levels of store traffic to keep their
merchandise turning over.
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c. A retailer's credit customers are more store loyal and purchase
in larger quantities.
d. A retailer confronted with a temporary cash flow problem can
use promotion to increase short-term cash flow.
e. A retailer's promotion strategy must be reinforced by its
building and fixture decisions.
f. Promotion provides customers with more information.
2. The retailer that systematically integrates its promotional programs
with other retail decision areas will be better able to achieve high
performance results. Some guidelines are:
a. Try to utilize promotions that are consistent with or will
enhance your store image.
b. Review the success or failure of each promotion to aid in
developing future promotions.
c. Whenever possible, test new promotions before making major
investments or implementing them on the entire marketplace.
d. Use appeals that are of interest to your target market and that
are realistic to obtain.
e. Make sure your objectives are measurable.
f. Make sure your objectives are obtainable.
g. Develop total promotional campaigns, not just ads.
h. The lower the rent, the higher the promotional expenses
generally needed.
i. New stores need higher promotional budgets than established
stores.
j. Stores in out-of-the-way locations require higher promotional
budgets than stores with heavy traffic.
C. Promotion in the Supply Chain - The retailer is not the only member of the
supply chain that uses promotion.
1. Manufacturers also invest in promotion for many of the same reasons
retailers do; they do so in order to move merchandise more quickly, to
speed up cash flow, and to enhance/retain customer loyalty. There are
three major differences in the way retailers and manufacturers use
promotion:
a. Product image versus availability - The manufacturer's primary
goal is to create a positive image for the product itself and
differentiate it from competing products. Retailers are primarily
interested in announcing to their customers that they have the
product available for purchase at a convenient location(s).
b. Specific product benefits versus price - Manufacturers generally
don't care where customers make their purchases as long as they
buy their product. Retailers don't care which brand the customer
purchases; they just want the customer to make the purchase in
their store. Thus, in addition to availability, retailers feature the
product's price in their ads.
c. Focused image versus cluttered ads - In comparison to
manufacturers, most retailers carry a larger variety and breath of
products, while manufacturers focus on depth. Thus, retail ads,
which are usually geared towards short-term results, tend to be
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more cluttered with many different products as opposed to the
manufacturer's ad, which focuses on a single product theme.
2. The promotional activities of the retailer's supply chain partners may
conflict with the retailer's goals and create a lack of promotional
harmony:
a. Differing perceptions as to the future of the economy, projected
market activities, and other pertinent concerns may lead to
supplier-retailer conflict and conflicting promotional activities.
b. Supply chain members may feel that the retailer's promotional
campaign is a mistake.
c. Suppliers and retailers may experience conflict over the desire
to project differing images (i.e. high-quality, high-price status
symbol image vs. price leader).
II. Promotional Objectives - should be a natural outgrowth of the retailer's operations
management plans (i.e., Chapter 2). As such, all promotion objectives should
ultimately seek to improve the retailer's financial performance.
A. Long-Term Objectives - Institutional advertising is an attempt by the retailer
to gain long-term benefits by selling the store itself rather than the merchandise
in it. Retailers using institutional ads generally seek to establish two long-term
promotion objectives:
1. Create a Positive Store Image - Establish or reinforce the store’s image
the retailer wants to convey.
2. Public Service Promotion - Persuade the consumer to perceive the
retailer as a good citizen in the community.
B. Short-Term Objectives - Promotional advertising attempts to bolster short-
term performance by using product availability or price as a selling point. The
two most common promotional objectives are:
1. Increased Patronage from Existing Customers - promotional efforts
directed at current customers as a means of encouraging them to make
more purchases at the given retailer.
2. Attraction of New Customers - increase the number of customers that
are attracted to the store.
(1) Attract new customers from existing trading area.
(2) Attract customers from outside the existing trading area.
(3) Attract customers just moving into the retailer's market.
C. Interdependence - Short- and long-term promotion objectives are not mutually
exclusive; steps taken to achieve either objective will have an effect on the
immediate, as well as the distant, financial future of the retailer.
III. Planning a Retail Advertising Campaign – development of a retailer's advertising
campaign is a six-step process:
A. Selecting advertising objectives - The advertising objectives should flow from
the retailer's promotional objectives, but should be more specific because
advertising itself is a specific element of the promotion mix.
1. The objectives should be chosen after the retailer considers several
unique factors:
a. Age of store
b. Store location
c. Types of goods sold
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d. Level of competition
e. Market area size
f. Supplier support
2. The specific objectives that advertising can accomplish are many and
varied, and the objective(s) employed depend on the target market the
retailer is seeking to reach. Examples of common objectives used by
retailers include:
a. Make consumers aware that you offer low prices
b. Make newcomers aware of your existence
c. Make customers aware of your large stock selection
d. Inform a specific target market of your product offering
e. Increase traffic during slow sales periods
f. Move old merchandise at the end of a selling season
g. Strengthen your store's image or reputation
h. Make consumers think of you first when a need for your
products arise, especially if they are not commonly purchased
i. Retain your present customers
3. Regardless of the objective chosen, advertising must be aimed at a
specific market segment and outcomes must be measurable over a
given time period.
B. Budgeting for the campaign - When developing a budget, the retailer should
first determine who is going to pay for the campaign (i.e., will the retailer be
the sole sponsor or will it get co-op support from other retailers and/or the
manufacturer).
1. Retailer-Only Campaigns - A retailer generally uses one of the
following methods to determine the amount of money to be spent on an
advertising campaign:
a. Affordable Method - Allocating all the money that the retailer
can afford
(1) This may lead to an inadequate appropriation or to a
budget that is not related to actual needs.
(2) The logic of this approach suggests that advertising does
not stimulate sales or profits, but rather is supported by
sales and profits.
(3) Most small retailers have little choice but to use this
approach.
b. Percentage-of-Sales - Targeting a specific percentage of
forecasted sales to be used for advertising.
(1) The percentage of sales is frequently determined by
industry data or the retailer's past experience, and it
provides a controlled, generally affordable amount to be
spent on advertising.
(2) Some limitations of the percentage-of-sales method are:
(a) It bases advertising on sales, ignoring the fact
that sales are derived from advertising
(b) It doesn't reflect the retailer's advertising goals
(c) It gives money to successful departments and not
to areas where a little extra money could do
some good
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c. Task and Objective Method - Here the retailer establishes its
advertising objectives and then determines the advertising tasks
that need to be performed to achieve those objectives.
Associated with each task is an estimate of the cost of
performing the task. When all of these costs are totaled, the
retailer has its advertising budget. While the task and objective
method for developing an advertising budget is the best of the
three methods from a theoretical and managerial control
perspective, many retailers choose not to adopt this method.
2. Co-Op Campaigns - Sometimes manufacturers and other retailers may
pay part or all of the costs for the retailer's advertising campaign.
a. Vertical Cooperative Advertising - The retailer and other
channel members, such as a manufacturer, share the expense of
advertising. This is not always a good deal for retailers,
especially if the retailer could get a better rate of return by
spending the money on a different product.
b. Horizontal Cooperative Advertising - Two or more retailers
collaborate to divide advertising costs. Provides more
bargaining power to smaller retailers when purchasing
advertising and can generate increased store traffic.
C. Designing the message - Since creative messages can't be developed without
knowing which media will be used to carry the message, the next step in
developing an advertising campaign is to design a creative message and select
the media that will enable the retailer to reach its objectives.
1. Creative decisions are especially important for retailers since their
advertising messages usually seek an immediate reaction by the
consumer and have a short life span.
2. Creative retail ads should seek to accomplish three goals:
a. Attract attention and retain attention
b. Achieve the objective of the advertising strategy
c. Avoid having any errors, especially legal ones
3. Some of the common approaches that retailers use to gain repeated
viewing include:
a. Lifestyle - Shows how the retailer's products fit in with the
consumer's lifestyle.
b. Fantasy - Creates a fantasy for the consumer that is built around
the retailer's products.
c. Humorous - Here the ad campaign is built around humor that
relates to using the retailer's products.
d. Slice-of-life - Here the retailer depicts the consumer in everyday
settings using the retailer's products.
e. Mood/Image - Builds a mood around using the retailer's
products.
4. Finally, the ad should be pre-tested by consumer groups and legal
experts for errors.
D. Selecting The Correct Media Alternatives - The retailer has many media
alternatives from which to select.
1. Types of media available - Retailers, in the past, have generally
categorized media as either print, which included newspaper,
magazines, and direct mail, and broadcast, which lumped radio and
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television together. However, retailers are now beginning to classify
media from a managerial perspective, which recognizes that
newspapers and television are mass media alternatives aimed at a total
market, while radio, magazines, direct mail, and the Internet can be
more easily targeted towards specific markets.
a. Newspaper Advertising - Most frequently used medium in
retailing. Many of the large retailers, such as Target and
Mervyn's, use newspapers to deliver their own centrally
produced inserts.
(1) Advantages
(a) Most newspapers are local; most retailers appeal
to a local trading area.
(b) Low technical skill is needed to create
newspaper advertisements.
(c) Lead time needed for placing newspaper ads is
short.
(2) Disadvantages
(a) Consumer does not necessarily see or read a
retailer's ad in the newspaper.
(b) Life of any single issue of a newspaper is short.
(c) Consumer spends relatively little time with each
issue and each item within an issue of the
newspaper.
(d) Newspapers have poor reproduction quality.
(e) Newspapers have broad appeal; retailers with
small target markets may be wasting advertising
dollars by placing newspaper ads.
b. Television Advertising - With the widespread development of
cable television, television has become attractive to small, local
retailers.
(1) Advantages
(a) Very effective in creating an image
(b) Pictures retain have greater effects on consumer
memory and evaluations as compared to verbal
messages.
(2) Disadvantages
(a) The television ads are very expensive.
(b) Television stations often reach well beyond the
trading area of small or medium size retailers,
leading to wasted advertising dollars.
(c) Competition is high for the television viewer's
attention.
c. Radio Advertising -
(1) Advantages
(a) Can target messages to select groups.
(b) Can develop distinctive and appealing messages
through the use of volume sound variations.
(c) Endorsement of a retailer by a radio announcer
who has developed a loyal audience can
strengthen the impact.
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(2) Disadvantages
(a) Radio commercials are very fleeting.
(b) It is frequently listened to during work hours or
while driving to and from work (a period called
drive time) and tends, over time, to become part
of the background environment.
(c) Impossible to demonstrate or show the
advertised merchandise.
(d) Radio signals usually cover an area much larger
than the retailer's target market and may lead to
the ineffective use of some of the retailer's
advertising dollars.
d. Magazine Advertising - While not used by local retailers, many
national chains are now allocating part of their budgets to
magazines.
(1) Advantages
(a) Better reproduction quality.
(b) Longer life span per issue.
(c) Consumers spend more time, per issue, with a
magazine than with a newspaper.
(d) Featured articles can put consumers in the mood
for a particular product class.
(2) The major disadvantage is long lead-time requirements
prevent price appeal advertising.
e. Direct Mail - With direct mail, the retailer can precisely target
its message as long as a good mailing list of the target
population is available.
(1) Advantages
(a) Retailers can specifically target their messages at
a particular group.
(b) It provides a means of personal contact.
(c) Results are easily measured.
(2) Disadvantages
(a) Cost is relatively expensive per contact or
message delivered.
(b) Contact with the target market is completely
dependent upon the quality of the mailing list.
(c) Targeted consumer may receive direct mail piece
but leave it unopened or unexamined.
f. Internet - With current estimates of over 100 million unique
users, projections indicate that there will be over 200 million
users in the next few years.
(1) Advantages - In essence, the Internet provides a
platform for a retailer to employ a relatively low cost,
integrated marketing communications mix thus
increasing shareholder value by enhancing the retailer's
image by providing customers with a variety of highly
specialized information.
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(2) Disadvantages - Currently, a little over a third of
American households have a PC with the modem and
software to shop the Internet.
g. Miscellaneous Media - Additional forms of advertising --
outdoor, transit, electronic information terminals, specialty
firms, shopping guides and the yellow pages -- most effective
when used as reinforcement for the other forms of media
previously mentioned.
2. Media Selection - Before selecting the advertising medium(s) to be
used, the retailer must first determine the following for each medium:
a. Coverage - The theoretical percentage of a retailer's target
market that can be reached by a medium.
b. Reach - Actual total number of target customers that come into
contact with a given advertising message.
c. Cumulative Reach - Actual coverage that is accumulated over
time.
d. Frequency - Average number of times each person who is
reached is exposed to an advertisement during a given time
period.
e. Cost Per Thousand Method (CPM) - Dividing the cost for an
ad or series of ads in a medium by the reach or cumulative
reach.
f. Cost per Thousand - Target Market (CPM-TM) - Dividing
the cost for an ad or series of ads in a medium by the total
number of people in the retailer's target market viewing the ad.
g. Impact - The strength of the impression an advertisement
makes and the extent to which it ultimately leads to a purchase.
A greater degree of impact may make a more costly advertising
medium a better buy.
E. Scheduling of Advertising - Retailers should consider the following points
when planning the timing of advertisements:
1. Ads should appear on, or slightly proceed, the days when customers are
most likely to purchase.
2. Advertising should be concentrated around the times when people
receive their payroll checks.
3. If the retailer has limited advertising funds, it should concentrate its
advertising during periods of highest seasonal demand.
4. Schedule ads to appear during the time of day/week when the lowest
CPM will be obtained.
5. If a product class has a high level of habitual purchasing, a greater
amount of time should be allowed between the advertisement and the
purchase time.
F. Advertising Results
1. Advertising Effectiveness - the extent to which the advertising has
produced the desired result.
2. Advertising Efficiency - the extent to which the advertising result was
achieved with the minimum effort or dollars expended.
3. Ineffective Advertising - Often due to one of the following errors:
a. Retailer may be bombarding the consumer with too many
messages and sales.
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b. The advertising may not be creative or appealing.
c. The advertisement may not give the customers all the
information they need.
d. The advertising dollars may have been spread too thin over too
many departments or merchandise lines.
e. Poor internal communication among salesclerks, cashiers, stock
clerks, and management.
f. The advertisement may not have been directed at the proper
target market.
g. Retailer did not consider all media options.
h. Retailer made too many last minute corrections in the
advertising copy, increasing the cost of the ad.
i. Retailer took co-op dollars just because they were "free".
j. Retailer used a medium that reached too many people not in the
target market.
IV. Management of Sales Promotion and Publicity - The role of sales promotions and
publicity in the retail organization should be consistent with and reinforce the retailer's
overall promotion objectives.
A. Sales Promotion - Consumers will change their shopping habits and brand
preferences to take advantage of sales promotions, especially those that offer
something special, different, or exciting.
1. Role of Sales Promotions
a. Sales promotions can benefit the retailer by being used on short
notice to differentiate itself from the competition.
b. Sales promotion expenditures are often quite substantial, but not
well tracked by retailers.
c. Sales promotion activities should be consistent and reinforce the
retailer's overall promotion objectives; sales promotions are
often employed as a means of improving the retailer's short-
term performance.
2. Types of Sales Promotion - Retailers generally break sales promotions
into two categories:
a. Sole-Sponsored sales promotions - Here the retailer has
complete control over the promotion, but is also completely
responsible for the costs. While there may be some overlap in
the sponsorship of these promotions, retailers generally consider
these sales promotions to be sole sponsored:
(1) Premiums are extra items offered to the customer when
purchasing a promoted product.
(2) Contests and sweepstakes are designed to create an
interest in the retailer's product and encourage both
repeat purchases and brand switching.
(3) Loyalty programs enable the retailer to combine a
promotion with their database system to solidify their
relationship with the customer.
b. Jointly Sponsored Sales Promotions - Jointly sponsored sales
promotions offer retailers the advantage of using OPM - "Other
People's Money." Retailers generally consider these promotions
to be jointly sponsored:
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(1) Coupons offer the retail customer a discount on the
price of a specific item.
(2) In-store displays are promotional fixtures of displays
that seek to generate traffic, highlight individual items,
and encourage impulse buying.
(3) Demonstrations and sampling, which are in-store
presentations, are intended to reduce the consumer's
perceived risk of purchasing a product.
3. Evaluating Sales Promotions - Sales promotions should be evaluated in
terms of their sales and profit-generating capability. A simple method is
to use is: monitor and compare weekly unit volume before, during, and
after the promotion.
B. Publicity Management - Theoretically, publicity is defined as non-paid-for
communications of information about the company or products. However,
there are real costs associated with having a good publicity department that
plants the commercially significant news.
1. The advantages of publicity are that it is objective and credible, while
appealing to a mass audience.
2. The disadvantage is that publicity is difficult to control and time.
3. Retailers can experience bad publicity in the form of events, such as
rumors, which are beyond its control. Thus, they should be prepared for
such events.
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Computational Question on Advertising and Promotion
Dunne Chapter 11
Planning Your Own Retail Business:
Your Uncle Nick has agreed to sell you his supermarket where you have worked for seven years,
since graduating from college. Uncle Nick is 72 years old and is ready to step down from day-to-
day management.
After operating the Crest Supermarket on your own for six months, you begin to analyze
how you can increase store traffic and, consequently, annual sales and profitability. During a
recent trip to the Food Marketing Institute convention you ran across several successful grocers.
Some of them competed largely on price, while others competed more on promotion and
advertising.
You decide to pursue a heavy promotion-oriented strategy. Consequently, you budget to
increase advertising by $20,000 monthly or $240,000 annually and to also have a weekly contest
where you give away $100 in groceries to twenty-five families. This will cost you $130,000 (52
x $100 x 25) annually.
Currently Crest Supermarket serves a trade area with a 2-mile radius and a household
density of 171 per square mile. Seventy percent of these households shop at Crest an average of
45 times per year. Of those that visit Crest, 98 percent make a purchase that averages $24.45.
Crest operates on a 25 percent gross margin.
You estimate that with your new promotion program, the radius of Crest's trade area will
increase to 2.5 miles. Assuming that all other relevant factors remain constant (171 households
per square mile, 70 percent of households shop Crest, 98 percent closure rate, $24.45 average
transaction size, 25 percent gross margin percent), is the planned promotion program and
investment of an additional $370,000 annually a profitable strategy?
HINT: Assume the trade area is circular and thus its size in square miles can be
computed as pi or (22/7) times the radius of the circle squared. The total square miles of the
trade area can be multiplied by the number of households per square mile to obtain total
households in the trade area. This in turn can be multiplied by the percentage that shop at Crest,
which in turn can be multiplied by the average number of trips annually to Crest, which will
yield total traffic. This traffic statistic can be multiplied by the percent of visitors that make a
purchase, which will yield total transactions. You should be able to figure out on your own the
rest of the computations that are needed to determine if the promotional strategy is profitable.
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Suggested Approach
First, lay out the spreadsheet.
CREST SUPERMARKET
Currently New Strategy Formulas
Trade Radius 2 miles 2.5 miles given
Population Density 171 171 given
Market Coverage 2150 3359 (22/7)*(2.5)2*
(171
)
Penetration Level 70% 70% given
Avg. Shopping Frequency 45/year 45/year given
Traffic 67,716 105,809 (3359)*(.7)* (45)
Closure Rate 98% 98% given
Total Transactions 66,362 103,692 (105,809)* (.98)
Average Transaction Size $24.45 $24.45 given
Net Sales $1,622,551 $2,535,269 (103,692)*
($24.45)
Cost of Goods Sold $1,216,913 $1,901,452 ($2,535,269)*
(100%-25%)
Gross Margin $ 405,638 $ 633,817 ($2,535,269)*
(25%)
Gross Margin Return on Sales 25% 25% given
As you can see from the spreadsheet, by spending an additional $370,000 and changing the
promotional strategy, Crest Supermarket was only able to increase its gross margin by
$228,179 ($633,817 - $405,638). Thus, this would not be a profitable strategy to pursue.
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Lecture Ten
Topic:
Customer Service and Retail Selling
Dunne: Chapter 12
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Chapter 12
Customer Services and Retail Selling
Overview:
In this chapter, we demonstrate how customer services, including retail selling, generate
additional demand for the retailer's merchandise. We also examine the determination of an
optimal customer service level. We conclude the chapter by looking at the unique managerial
problems that retailers must address.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain why customer service is so important in retailing
2. Describe the various customer services that a retailer can offer
3. Explain how a retailer should determine which services to offer
4. Describe the various management problems involved in retail selling, salesperson
selection, and training and evaluation
5. Describe the retail selling process
6. Understand the importance of a customer service audit.
Outline:
V. Customer Service – All retailers must give consideration to level of service they offer
their customers.
A. High-quality service is defined as delivering service that meets or exceeds
customers' expectations. In this definition there is no absolute level of quality
service; rather, service is perceived as high quality when it meets and exceeds the
expectations of customers.
B. In an attempt to offer the high-quality service expected, retailers are now
engaging in relationship retailing programs.
4. Relationship retailing includes all the activities designed to attract,
retain, and enhance customer relationships.
5. Retailers can develop these relationships with their customers by offering
two benefits:
a. Financial benefits – increase the customer's satisfaction through
financial reward (e.g., frequent purchaser discounts and product
upgrades offered by some supermarkets, airlines, and hotels).
b. Social benefits – increase the retailer's interaction with the
customer.
C. There are three basic tasks of retailing:
1. Getting consumers into your store,
2. Converting these consumers into customers,
3. Operate as efficiently as possible.
D. Retailers must differentiate themselves by meeting the needs of their customers
better than the competition by offering customer service and products that meet
or exceed the customer's expectations.
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1. Customer service consists of all the activities performed by the retailer
that influence:
a. The ease with which a potential customer can shop or learn about
the store's offering
b. The ease with which a transaction can be completed once the
customer attempts to make a purchase
c. The customer's satisfaction with the transaction
2. New customers can be created and the loyalty of present customers can
be strengthened by serving the customer before, during, and after the
transaction.
3. A customer who visits a store and finds the service level below
expectations or the product ―out-of-stock‖ is likely to become a transient
customer. This transient customer will seek to find a retailer with the
level of customer service he or she feels is appropriate. Retailers seek to
convert these transient customers into loyal customers.
E. Customer service cannot occur by itself; instead, it must be integrated into all
aspects of retailing. That is why profitable retailers of the future will know that
the demand for their merchandise is not only just price elastic, but also service
elastic. Retailers can achieve high customer service through:
1. Merchandise Management - One of the best ways a retailer can serve a
customer is by having the goods the customer wants available for
purchase.
2. Building and Fixture Management - Customer service considerations are
affected by the way the building and its fixtures are set-up.
3. Promotion Management - Promotion provides customers with the
information they need to make purchase decisions. A retailer should
assess whether its advertisements, salespeople, and stock of sales
promotion items are serving the customer’s information needs.
4. Price Management - The way the retailer determines and indicates price
effects customer service.
5. Credit Management - Credit can help to generate and facilitate a
customer's purchase transactions.
VI. Common Customer Services – There are three general categories of customer service:
A. Pretransaction Services – Services provided to the customer prior to entering
the store, include:
1. Convenient Hours - The more convenient the retailer’s operating hours
are to the customer, the easier it is for the customer to visit the retailer. A
store's hours of operation depend on customers' demand, profitability,
competitors’ hours of operation, and legislation.
2. Information Aids – The retailer’s promotional efforts help to inform the
customer. Many retailers offer customers other information aids that help
them enter into intelligent transactions.
B. Transaction Services – Offering the conveniences customers need and then
helping them get out of the store as fast as possible with their purchases, include:
1. Credit - Allows the customer to shop without carrying large amounts of
money or to buy now and pay later.
2. Layaway - The retailer retains possession of an item of a desired item
until the customer fulfills his/her payment obligations.
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3. Gift Wrapping and Packaging - A retailer must match its wrapping
service to the types of merchandise it carries and the desired store image.
4. Check Cashing - Most retailers allow customers to cash checks for the
amount of a purchase, while others also provide check cashing cards
and/or allow customers to cash checks for amounts in excess of the
purchase price.
5. Gift Cards – A year-round service sold by retailers that have a ―stored
value‖ available for the customer to spend with automatic balance
updates.
6. Personal Shopping - The activity of assembling an assortment of goods
for the customer to later evaluate.
7. Merchandise Availability - A retailer can minimize out-of-stock
conditions through strong merchandise management or increase a
customer's ability to locate an item through effective in-store signing,
layout, displays, and helpful and informative employees. There are three
reasons why a customer may be unable to find an item:
a. The item can be out of stock
b. It isn't located where the customer looks for it
c. The customer doesn't know what is really needed.
8. Personal Selling - Retailers can offer customers a strong, customer-
oriented retail sales force.
9. Sales Transaction - Retailers should take actions that help to facilitate the
purchasing process for customers. Probably the two most overlooked
problems regarding transactions services are having clean restrooms and
minimizing the dwell time, which refers to the amount of time a
consumer must spend waiting to complete a purchase.
C. Posttransaction Services – Services provided to customers after they have
purchased merchandise or services.
1. Complaint Handling - Customer dissatisfaction occurs when the
customer's experience with a retailer or a product fails to live up to
expectations; can lead to a poor public image for the retailer.
a. Central Complaint Department - All customer complaints are
heard by a staff that is specially trained for this task.
b. Individual Salesperson - Some retailers believe that the friendly,
sympathetic attitude of a salesperson will have a positive effect on
future sales. Salespersons may not have the authority to settle the
problem and/or will not be able to serve present customers.
c. Guidelines - The customer deserves:
(1) Courteous treatment
(2) A fair settlement
(3) Prompt action
2. Merchandise Returns - A return policy can range from "no returns, no
exchanges" to the "customer is always right". A store's return policy
should be consistent with its image.
3. Servicing and Repair - Retailers who offer merchandise servicing and
repair to their customers tend to generate a higher sales volume and
greater repeat business.
4. Delivery - The expense involved in delivering merchandise can be
worthwhile if the store, merchandise, and customer characteristics
warrant it.
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5. Post-Sale Follow Up – Due to the fact that it costs a retailer five times as
much to attract a first-time customer as it does to get a former customer to
return, it is important that retailer make the effort to care for its customers
by following up with them after the sale.
VII. Determining Customer Service Levels - A retailer must determine the optimal number
and level of customer services to offer. There are six factors to be considered when
determining the appropriate level of services to offer:
A. Retailer Characteristics - Store location, store size, and store type. It is especially
important to look at these three characteristics when considering adding a service.
B. Competition - A retailer should offer the same services as competitors, suitable
substitutes, or offer lower prices.
C. Type of Merchandise - Particular merchandise lines benefit from complimentary
services (e.g., items that require assembly or apparel that regularly requires
alterations).
D. Price Image - Customers will generally expect more services from a store with a
high price image than from a discounter.
E. Target Market Income - Higher income segments can afford higher prices, but
they also expect more services. The retailer, however, must avoid the temptation
to offer more services than it can afford.
F. Cost of Services - It is important for a retailer to know the cost of providing a
service. This enables the retailer to have an idea of how much additional sales
are needed in order to pay for the service.
VIII. Retail Sales Management - salespeople and the service they provide are a major factor in
consumer purchase decisions.
A. Types of Retail Selling
1. Order takers - employees who assist in completing a transaction after the
customer decides what to purchase instead of actively selling the
merchandise to the customer.
2. Order getters - employees who are involved in conversing with
prospective purchasers for the purpose of making a sale; they inform,
guide, and persuade the customer. Retailers with high margins and high
levels of customer service should emphasize the role of the order getter.
B. Salesperson Selection
1. Criteria - A retailer must determine what characteristics it wants in an
employee. Retailers should design the sales job so that it involves high
levels of variety, autonomy, task identity, and feedback from supervisors
and customers.
2. Predictors
a. Demographics - Retailers can use demographic variables, such as
age and socioeconomic status, to help screen applicants for sales
positions.
b. Personality - A retailer would most likely prefer salespeople who
are friendly, confident, consistent, and understanding of others.
c. Knowledge and Intelligence - Individuals who can become
knowledgeable about technically complex products or can
appropriately respond to inquiries about fashion will be better able
to sell.
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d. Experience - One of the most reliable predictors of success as a
salesperson is prior selling experience.
C. Salesperson Training - New salespeople need to be informed about the following
factors of a retailer's operation:
1. Retailer's Policies - Salespeople should be knowledgeable about policies
relating to the establishment's operation, as well as those that affect their
employment status.
2. Merchandise - Salespeople should be familiar with the strengths and
weaknesses of the retailer’s and its competitors' merchandise, warranty
terms, and the reputation of manufacturers.
3. Customer Types - Retail salespeople can be taught how to appropriately
identify and respond to certain customer types in order to increase sales.
4. Customer Choice Criteria
a. No Active Product Choice Criteria - The salesperson should
educate the customer on the best choice criteria and, possibly,
how to weigh them.
b. Inadequate or Vague Choice Criteria - The salesperson should
help the customer define his/her problem as a means of
determining the criteria of a good product.
c. Choice Criteria In Conflict
(1) Customer wants a product to possess two or more
attributes that are mutually exclusive; salespeople should
play down one of the attributes and de-emphasize the
other.
(2) A single attribute of a product may possess both positive
and negative aspects; the salesperson should enhance the
positive aspects and depreciate the negative aspects.
d. Explicit Choice Criteria - The salesperson should illustrate how a
certain product fits the criteria that a customer has already
defined.
D. Evaluation of Salespeople – The retailer should develop a systematic method for
evaluating both individual salespeople and the total sales staff. Rather than
subjectively evaluating performance, the manager should develop explicit
performance standards.
1. Some performance standards apply only to individual effort, whereas
others assess both the individual and the total sales force.
a. Conversion Rate - The percentage of all shoppers who make a
purchase. Poor conversion rates result from:
(1) Too few salespeople.
(2) Poor selling by salespeople.
(3) Poor training of salespeople.
(4) Inadequate merchandise levels.
b. Sales per Hour - total dollar sales divided by total salesperson or
sales force hours.
c. Use of Time - Standards can be developed regarding how a
salesperson's time should be allocated. A salesperson's time can
be spent in the following ways:
(1) Selling Time – Any time spent assisting customers with
their needs.
(2) Non-selling Time – Any time spent on non-selling tasks.
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(3) Idle Time – time the salesperson is on the sales floor but
is not involved in any productive work.
(4) Absent Time – occurs when the salespeople are not on
the sales floor.
2. Data Requirements - Data used in establishing performance standards can
be obtained from retail trade associations, consulting firms, and from a
retailer's past experiences. Actual performance should be compared to the
established standards.
IX. The Retail Sales Process - The length of time a salesperson spends in each of the
following steps depends upon the product type, the customer, and the selling situation.
A. Prospecting - The search process of locating or identifying potential customers
who have the ability and willingness to purchase your product.
B. Approach - The first 15 to 30 seconds of a salesperson-customer interaction sets
the mood for the sale.
1. Greet/acknowledge the customer.
2. Listen to the customer's needs.
3. Ask (a few) questions to clarify the needs.
C. Sales Presentation - The goal is to make the customer want to buy your product
or service. The salesperson should:
1. Determine the right price range of products.
2. Select what he/she believes is the appropriate product or service to satisfy
the customer's needs.
3. Inform the customer about the merchandise in an appealing manner.
4. Help the customer to decide on the product or service that best fulfills the
customer's needs.
D. Closing The Sale – the action used to bring a potential sale to its natural
conclusion. This is often the most difficult step for salespeople. The key is to
determine what is going on in the customer's mind. The salesperson has several
options:
1. Make the decision for the customer.
2. Assume that the decision has been made and ask if it will be cash or
charge.
3. Ask the customer to choose which product or service they want.
4. Reverse an objection by emphasizing the fact that the product's longer life
will compensate for its higher initial cost.
E. Suggestion Selling - A salesperson should attempt to determine if a customer has
any other needs; there is always the possibility of an additional sale.
VI. The Customer Service and Sales Enhancement Audit – provides management with a
detailed analysis of current sales activity by location and selling area.
A. The objectives of a customer service audit include:
1. Identify the service, salesmanship, and sales enhancement methods that
will
produce more sales from the existing shopping traffic.
2. Identify methods that will offer the greatest improvements based
upon the individual store or selling area.
3. Determine the added sales that can be generated by improving the current
service level, salesmanship, and sales enhancement programs.
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B. The audit measures, analyzes, and reports on specific factors, which are reported
by selling area within each company store. This enables management to apply
targeted training programs:
1. Basic Service
a. Customer contact
b. Salesperson-initiated contact
c. Customer acknowledgment
2. Salesmanship
a. Merchandise knowledge
b. Needs clarification
c. Active selling
d. Suggestion selling
3. Sales Enhancement
a. Impulse purchasing
b. Walkouts
C. Exception reports – To provide management with an action program, the
customer service and sales enhancement audit includes a series of exception
reports showing specifically what improvement is necessary within each selling
area at each company store.
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Lecture Eleven
Topic:
Managing People
Dunne: Chapter 14
209
Chapter 14
Managing People
Overview:
In this chapter we examine the role that the human factor plays in retail firms. In retailing the
human factor is composed of employees and customers. Both are critical to carry out a
successful retail strategy. Retailers therefore must recruit the right employees and customers and
then manage these relationships if they are to achieve profitable results. Both outstanding
employees and desirable customers have many options; thus, employees must be competitively
compensated and customers must be offered more compelling value than they can obtain from
competing retailers.
Learning Objectives:
After reading this chapter you should be able to:
1. Explain why intangible people resources can provide a more competitive advantage than
tangible resources
2. Describe how to recruit both the right employees and the right customers to be the store’s
partners
3. Explain how to manage employees and customers to develop long-term profitable
relationships
4. Discuss how to compensate employees and offer customers a compelling value
proposition
Outline:
X. Intangible People Resources Make the Difference – A retailer’s people resources are
more important than its tangible resources. ―People‖ refers to both customers and
employees, as retailers should give equal significance to customers and employees.
A. High-performance retailers of the future will be those that devote the maximum
effort to hiring good employees now.
1. Investments in tangible assets (land, building, technology, equipment
and
fixtures, and merchandise) will not produce a profitable return unless the
retailer is willing to invest in recruiting, motivating, and retaining the
right
people.
2. Retailers must view labor costs, as well as the costs of attracting and
retaining customers, not as costs, but as investments in obtaining a
sustainable competitive advantage.
B. Similarities Between Employees and Customers – While everyone can make the
distinction between a retail employee and a retail customer, few choose to focus
on their similarities. These similarities far outweigh the differences, and a failure
to realize this can mean retail failure.
1. Just like employees, customers need to be recruited, motivated, and compensated for
their efforts.
2. All employees are part of the service delivery chain where each, in turn,
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performs some task in the economic exchange process.
3. High-performance retailers have ―empowered‖ their employees to take
care of the customer. An empowered retail employee has the ―power to
make things right for the customer‖ by:
a. Seeking to understand the customer’s problem,
b. Desiring to develop a relationship with the customer,
c. Understanding the value of customer loyalty, and
d. By being allowed and encouraged by management to solve the
customer’s problem.
4. Customers and employees both perform retail tasks and they both service
each other.
a. Employees must not only serve customers, but also other employees (internal
customers)
b. With servant leadership, employees recognize that their primary
responsibility is to be of service to others.
C. Employees and Customers Are Profit Drivers – There is no single correct answer
to the question, ―How much should a retailer be willing to invest in recruiting an
employee and/or customer?‖
1. If a retailer takes an investment versus an expense or cost perspective, then that retailer is
addressing this issue from a long-term perspective.
2. The gross profit generated by an employee or customer must exceed the
cost of servicing these employees and customers.
3. Customers should be thought of as employees and employees should be
treated like customers.
4. Good customer and employee relationships have a synergistic effect on a
retailer’s performance.
XI. Obtaining The Right People – Human resources are acquired in a competitive
marketplace, that is, retailers must aggressively seek out and recruit valuable
customers and employees.
A. Customer Relationship Management is an increasingly popular
technology for cultivating and maintaining the right customers. CRM is
comprised of an integrated information system where the fundamental unit of
data collection is the customer, supplemented by other relevant information
about the customer.
1. CRM systems can answer many fundamental questions
from, ―How many unique customers patronize the store over a given
time frame?‖ to ―Was the recent direct mail promotion cost effective?‖
2. The goal of CRM is to provide the retailer with a tool to develop a
long-term, profitable relationship with a customer that is mutually
beneficial.
3. On the leading edge of CRM are those retailers that expand and
integrate their CRM system with their suppliers, advertising agencies,
and other members of the supply chain.
B. Employee sources include:
1. Competitors
2. Walk-ins
3. Employment agencies
4. Schools and colleges
5. Former employees
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6. Advertisements
7. Recommendations of current employees and vendors
8. Customer referrals.
C. Customer sources include:
1. Competitors
2. Walk-ins
3. Advertisements
4. Employees
5. Customer referrals
6. Affinity programs – membership programs that offer participants
special discounts
7. Customer agency – similar to an employment agency, these are used
for some products and services where the typical customer may not
have the knowledge and information to make an informed decision.
D. Screening and Selection of Employees – All applicants should be subject to a
formal screening process to sort out the potentially good from the potentially
bad employees. There are four basic screens every applicant should be put
through:
1. Application form - as a matter of procedure, all applicants should be
asked to fill out an application form. The application blank should
capture conveniently and compactly the individual's identity, training,
and work history that will relate to his or her performance of the job
tasks.
2. Personal interview - allows retailer to assess how qualified the
applicant is for the job.
3. Testing - sometimes formal tests are administered which test
intelligence, interests, leadership potential, personality traits, honesty,
or office skills.
4. References - these should not be checked until the applicant has passed
through the preceding stages since this stage is costly and time-
consuming.
E. Screening and Selecting Customers. While retailers compete aggressively for
customers, the screening and selection of customers is common. When
retailers screen or select customers they must be sure not to violate any equal
opportunity or discrimination laws. The most common reasons for screening
and selecting customers include:
1. The inability to adequately service certain customers.
2. The deterioration of a retailer’s atmosphere if customers of a certain
type are admitted.
3. The inability to profitably service customers.
XII. Managing People – Employees and customers need to be managed. Many retailers
have policies for managing their employees, but seldom think of managing their
customers. The retailer must prepare programs for training employees to meet current
or future job requirements, evaluating employees, and motivating them. Turnover is a
problem and a major cost in the realm of retail employees; a similar problem exists
regarding customers.
A. Training and Developing Employees – Retailers wanting the best return on
their human resource investment should provide training and development for
both new and existing employees.
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B. Training and Developing Customers – Retailers can also make training and
educating customers a core part of their value proposition. These retailers
provide short courses that instruct customers how to use their products and/or
engage in do-it-yourself projects.
C. Evaluating Employees – Performance appraisal and review is the formal,
systematic assessment of how well employees are performing their jobs in
relation to established standards, and the communication of that assessment to
employees.
1. Retailers of all sizes should try to use objective criteria for the appraisal
and review process whenever possible.
2. Some keys to performing equitable performance appraisals are:
a. Evaluation should be an ongoing process
b. Feedback to employees should be timely and relevant
c. The reviewer should know the job and the performance
standards of the job under review.
d. Since different supervisors are likely to rate personnel with
different degrees of leniency or severity, the person conducting
the review must understand the performance standards. In
addition, at least two people should contribute to the review.
e. Retailers have found success with various types of measures
such as the rating scale, checklist, free-form essay, and
rankings.
D. Evaluating Customers – It is important for employers not only to evaluate
employees on their performance, but also customers for their contributions to the
retailer’s financial objectives. A variety of retailers have detailed profiles on their most
profitable customers. Increasingly CRM is allowing the retailer to evaluate the
profitability of each of its customers.
E. Motivating Employees – A successful retailer must constantly motivate all
employees to strive for higher sales figures, to decrease expenses, to
communicate company policies to the public, and to solve problems as they
arise. This is achieved through the proper use of motivation. Theories on
motivation, which is the drive within a person to excel, can be divided into two
general types: content theories and process theories.
1. Content Theories: These ask, "What motivates an individual to
behave?"
a. Maslow's hierarchy of needs suggests that people have
different types of needs and that they satisfy lower-level needs
before moving to higher levels. This hierarchy provides retailers
with ideas that can appeal to the basic needs of their employees.
b. Theory X assumes that employees must be closely supervised
and controlled and that economic inducements will provide the
means of influencing employees to perform; Theory Y assumes
that employees are self-reliant, enjoy work, and can be
delegated authority and responsibility.
2. Process Theories: These ask "How can I motivate an individual."
a. Expectancy Theory addresses the relationship between effort,
performance, and organizational outcomes. It assumes that
employees know this relationship and that this knowledge
influences them to behave in one way or another.
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b. Goal Setting is a way to obtain the firm's objectives that
depend on inducing a person to behave in the desired manner.
F. Motivating Customers – Retailers use a variety of demand stimulation tools to motivate
customers to purchase or purchase greater quantities. Most of these programs are based
on the assumption that customers are motivated primarily by economic incentives.
However, innovative retailers are recognizing that other factors can motivate success.
Some non-price elements that can motivate customers include:
1. Merchandise – including quality, style and fashion, assortment, and
national versus private labels.
2. Physical characteristics – including decor, layout, and floor space.
3. Sales promotions
4. Advertising
5. Convenience – including hours, location, ease of entrance and parking,
and ease of finding items.
6. Services – including credit, delivery, return policy, and guarantees.
7. Store personnel including helpfulness, friendliness, and courtesy.
XIII. Compensation – Compensation programs, which include direct dollar payments
(wages, commissions, and bonuses) and indirect payments (insurance, vacation time,
retirement plans), are essential for attracting, motivating, and retaining a salesforce.
A. Compensation plans in retailing can have up to three basic components:
1. A fixed component which is composed of some base wage per hour,
week, month, or year.
2. A variable component which is composed of some bonus that is
received if performance warrants it.
3. A fringe benefit package which may include such things as health
insurance, disability benefits, life insurance, retirement plans, the use of
automobiles, and financial counseling.
B. Common types of compensation programs for the salesforce:
1. Straight Salary programs pay the salesperson a fixed salary per time
period regardless of the level of sales generated or orders taken. This
plan offers income security to employees, but gives little incentive for
extra effort and performance.
2. Salary Plus Commission plans pay the salesperson a fixed salary per
time period plus a percentage commission on all sales, or on all sales
over an established quota. This plan offers a stable base income but
also encourages and rewards superior efforts.
3. Straight Commission programs pay salespeople a limited percentage
(usually 2 to 10 percent) commission on each sale generated. This plan
provides substantial incentive to generate sales, but in an overall poor
business climate may not provide enough income to allow sales-people
to meet their fixed payment obligations.
C. Supplemental Benefits – Retail salespeople can also receive four types of
supplementary benefits in addition to regular wages:
1. Employee discounts,
2. Insurance and retirement benefits,
3. Child care,
4. Push money, prize money, premium merchandising, PM, or spiffs.
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D. Compensation Plan Requirements – Regardless of what method a retailer uses
to compensate its employees, the method should meet the following general
requirements:
1. Fairness: The plan does not favor one group or division over any other
group or division or enable such a group to gather disproportionate
rewards in relation to their contributions. It must also keep wage costs
under control so that they do not put the store at a competitive
disadvantage.
2. Adequacy: The level of compensation should enable the employee to
maintain a standard of living, commensurate with job position, and
capable of maintaining job satisfaction.
3. Prompt and regular payments: Payments should be made on time and in
accordance with the agreement between employer and employee. In
incentive plans, greater stimulation is provided when reward closely
follows the accomplishment.
4. Customer interest: The plan should not reward any actions by an
employee that could result in customer ill-will.
5. Simplicity: The plan must be easy to understand so as to prevent any
misunderstandings with the resultant ill-will. This should also enable
management to minimize the man-hours needed to determine
compensation levels.
6. Balance: Pay, supplemental benefits, and other rewards must provide a
reasonable total reward package.
7. Security: The plan must fulfill the employee's security needs.
8. Cost effective: The plan must not result in excessive payments, given
the retailer's financial condition.
E. Job Enrichment – A process of enhancing the core job characteristics of
employees to improve their motivation, productivity, and job satisfaction.
There are 5 core job characteristics that should be increased. These are:
1. Skill variety: The degree to which an employee can use different skills
and talents.
2. Task identity: The degree to which a job requires the completion of a
whole assignment that has a visible outcome.
3. Task significance: The degree to which the job affects other employees.
4. Autonomy: The degree to which the employee has freedom,
independence, and discretion in achieving the outcome.
5. Job feedback: The degree to which the employee receives information
about the effectiveness of his or her performance.
F. Customer Compensation – The best way to think of customer
compensation is in terms of the concept of value proposition. A value proposition is the
promised benefits a retailer offers in relation to the cost the consumer incurs. If the
consumer is expected to do more work, then that customer will want to be compensated
with a lower price.
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Lecture Nine
Topic:
Advertising & Promotion
Dunne: Chapter 11
216
Chapter 11
Advertising and Promotion
Overview:
Promotion is a major generator of demand in retailing. In this chapter, we will focus on the role
of advertising, sales promotion, and publicity in the operation of a retail business. Retail selling,
another important element of promotion, will be discussed in Chapter 12. Our discussion here is
directed at describing how retailers should manage their firm's promotional resources.
Learning Objectives:
After reading this chapter, you should be able to:
1. Name the four basic components of the retailer's promotion mix, and discuss their
relationship with other decisions
2. Describe the differences between a retailer's long-term and short-term promotional
objectives
3. List the six steps involved in developing a retailer's advertising campaign
4. Explain how retailers manage their sales promotion and publicity
Outline:
I. The Retail Promotion Mix - Retailers need promotion to bring traffic into their stores,
move this traffic to the various selling areas, and to entice the traffic into purchasing
merchandise.
A. Types of Retail Promotion - There are four types of promotion:
1. Advertising is paid, nonpersonal communication through various
media by business firms, nonprofit organizations, and individuals who
are in some way identified in the advertising message and who hope to
inform and/or persuade members of a particular audience (includes
communication of products, services, institutions, and ideas).
2. Sales promotions involve the use of media and non-media marketing
pressure applied for a pre-determined, limited period of time at the
level of consumer, retailer, or wholesaler in order to stimulate trial,
increase consumer demand, or improve product availability.
3. Publicity is non-paid-for communications of information about the
company or product, generally in some media form.
4. Personal selling is selling that involves a face-to-face interaction with
the consumer.
B. Total Systems Approach - A retailer's promotional efforts must be planned and
implemented in the context of the retailer's overall strategy.
1. Promotion decisions relate to, and must be integrated with, the other
management decisions, such as:
a. There is a maximum distance consumers will travel to visit a
retail store.
b. Retailers need high levels of store traffic to keep their
merchandise turning over.
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c. A retailer's credit customers are more store loyal and purchase
in larger quantities.
d. A retailer confronted with a temporary cash flow problem can
use promotion to increase short-term cash flow.
e. A retailer's promotion strategy must be reinforced by its
building and fixture decisions.
f. Promotion provides customers with more information.
2. The retailer that systematically integrates its promotional programs
with other retail decision areas will be better able to achieve high
performance results. Some guidelines are:
a. Try to utilize promotions that are consistent with or will
enhance your store image.
b. Review the success or failure of each promotion to aid in
developing future promotions.
c. Whenever possible, test new promotions before making major
investments or implementing them on the entire marketplace.
d. Use appeals that are of interest to your target market and that
are realistic to obtain.
e. Make sure your objectives are measurable.
f. Make sure your objectives are obtainable.
g. Develop total promotional campaigns, not just ads.
h. The lower the rent, the higher the promotional expenses
generally needed.
i. New stores need higher promotional budgets than established
stores.
j. Stores in out-of-the-way locations require higher promotional
budgets than stores with heavy traffic.
C. Promotion in the Supply Chain - The retailer is not the only member of the
supply chain that uses promotion.
1. Manufacturers also invest in promotion for many of the same reasons
retailers do; they do so in order to move merchandise more quickly, to
speed up cash flow, and to enhance/retain customer loyalty. There are
three major differences in the way retailers and manufacturers use
promotion:
a. Product image versus availability - The manufacturer's primary
goal is to create a positive image for the product itself and
differentiate it from competing products. Retailers are primarily
interested in announcing to their customers that they have the
product available for purchase at a convenient location(s).
b. Specific product benefits versus price - Manufacturers generally
don't care where customers make their purchases as long as they
buy their product. Retailers don't care which brand the customer
purchases; they just want the customer to make the purchase in
their store. Thus, in addition to availability, retailers feature the
product's price in their ads.
c. Focused image versus cluttered ads - In comparison to
manufacturers, most retailers carry a larger variety and breath of
products, while manufacturers focus on depth. Thus, retail ads,
which are usually geared towards short-term results, tend to be
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more cluttered with many different products as opposed to the
manufacturer's ad, which focuses on a single product theme.
2. The promotional activities of the retailer's supply chain partners may
conflict with the retailer's goals and create a lack of promotional
harmony:
a. Differing perceptions as to the future of the economy, projected
market activities, and other pertinent concerns may lead to
supplier-retailer conflict and conflicting promotional activities.
b. Supply chain members may feel that the retailer's promotional
campaign is a mistake.
c. Suppliers and retailers may experience conflict over the desire
to project differing images (i.e. high-quality, high-price status
symbol image vs. price leader).
II. Promotional Objectives - should be a natural outgrowth of the retailer's operations
management plans (i.e., Chapter 2). As such, all promotion objectives should
ultimately seek to improve the retailer's financial performance.
A. Long-Term Objectives - Institutional advertising is an attempt by the retailer
to gain long-term benefits by selling the store itself rather than the merchandise
in it. Retailers using institutional ads generally seek to establish two long-term
promotion objectives:
1. Create a Positive Store Image - Establish or reinforce the store’s image
the retailer wants to convey.
2. Public Service Promotion - Persuade the consumer to perceive the
retailer as a good citizen in the community.
B. Short-Term Objectives - Promotional advertising attempts to bolster short-
term performance by using product availability or price as a selling point. The
two most common promotional objectives are:
1. Increased Patronage from Existing Customers - promotional efforts
directed at current customers as a means of encouraging them to make
more purchases at the given retailer.
2. Attraction of New Customers - increase the number of customers that
are attracted to the store.
(1) Attract new customers from existing trading area.
(2) Attract customers from outside the existing trading area.
(3) Attract customers just moving into the retailer's market.
C. Interdependence - Short- and long-term promotion objectives are not mutually
exclusive; steps taken to achieve either objective will have an effect on the
immediate, as well as the distant, financial future of the retailer.
III. Planning a Retail Advertising Campaign – development of a retailer's advertising
campaign is a six-step process:
A. Selecting advertising objectives - The advertising objectives should flow from
the retailer's promotional objectives, but should be more specific because
advertising itself is a specific element of the promotion mix.
1. The objectives should be chosen after the retailer considers several
unique factors:
a. Age of store
b. Store location
c. Types of goods sold
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d. Level of competition
e. Market area size
f. Supplier support
2. The specific objectives that advertising can accomplish are many and
varied, and the objective(s) employed depend on the target market the
retailer is seeking to reach. Examples of common objectives used by
retailers include:
a. Make consumers aware that you offer low prices
b. Make newcomers aware of your existence
c. Make customers aware of your large stock selection
d. Inform a specific target market of your product offering
e. Increase traffic during slow sales periods
f. Move old merchandise at the end of a selling season
g. Strengthen your store's image or reputation
h. Make consumers think of you first when a need for your
products arise, especially if they are not commonly purchased
i. Retain your present customers
3. Regardless of the objective chosen, advertising must be aimed at a
specific market segment and outcomes must be measurable over a
given time period.
B. Budgeting for the campaign - When developing a budget, the retailer should
first determine who is going to pay for the campaign (i.e., will the retailer be
the sole sponsor or will it get co-op support from other retailers and/or the
manufacturer).
1. Retailer-Only Campaigns - A retailer generally uses one of the
following methods to determine the amount of money to be spent on an
advertising campaign:
a. Affordable Method - Allocating all the money that the retailer
can afford
(1) This may lead to an inadequate appropriation or to a
budget that is not related to actual needs.
(2) The logic of this approach suggests that advertising does
not stimulate sales or profits, but rather is supported by
sales and profits.
(3) Most small retailers have little choice but to use this
approach.
b. Percentage-of-Sales - Targeting a specific percentage of
forecasted sales to be used for advertising.
(1) The percentage of sales is frequently determined by
industry data or the retailer's past experience, and it
provides a controlled, generally affordable amount to be
spent on advertising.
(2) Some limitations of the percentage-of-sales method are:
(a) It bases advertising on sales, ignoring the fact
that sales are derived from advertising
(b) It doesn't reflect the retailer's advertising goals
(c) It gives money to successful departments and not
to areas where a little extra money could do
some good
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c. Task and Objective Method - Here the retailer establishes its
advertising objectives and then determines the advertising tasks
that need to be performed to achieve those objectives.
Associated with each task is an estimate of the cost of
performing the task. When all of these costs are totaled, the
retailer has its advertising budget. While the task and objective
method for developing an advertising budget is the best of the
three methods from a theoretical and managerial control
perspective, many retailers choose not to adopt this method.
2. Co-Op Campaigns - Sometimes manufacturers and other retailers may
pay part or all of the costs for the retailer's advertising campaign.
a. Vertical Cooperative Advertising - The retailer and other
channel members, such as a manufacturer, share the expense of
advertising. This is not always a good deal for retailers,
especially if the retailer could get a better rate of return by
spending the money on a different product.
b. Horizontal Cooperative Advertising - Two or more retailers
collaborate to divide advertising costs. Provides more
bargaining power to smaller retailers when purchasing
advertising and can generate increased store traffic.
C. Designing the message - Since creative messages can't be developed without
knowing which media will be used to carry the message, the next step in
developing an advertising campaign is to design a creative message and select
the media that will enable the retailer to reach its objectives.
1. Creative decisions are especially important for retailers since their
advertising messages usually seek an immediate reaction by the
consumer and have a short life span.
2. Creative retail ads should seek to accomplish three goals:
a. Attract attention and retain attention
b. Achieve the objective of the advertising strategy
c. Avoid having any errors, especially legal ones
3. Some of the common approaches that retailers use to gain repeated
viewing include:
a. Lifestyle - Shows how the retailer's products fit in with the
consumer's lifestyle.
b. Fantasy - Creates a fantasy for the consumer that is built around
the retailer's products.
c. Humorous - Here the ad campaign is built around humor that
relates to using the retailer's products.
d. Slice-of-life - Here the retailer depicts the consumer in everyday
settings using the retailer's products.
e. Mood/Image - Builds a mood around using the retailer's
products.
4. Finally, the ad should be pre-tested by consumer groups and legal
experts for errors.
D. Selecting The Correct Media Alternatives - The retailer has many media
alternatives from which to select.
1. Types of media available - Retailers, in the past, have generally
categorized media as either print, which included newspaper,
magazines, and direct mail, and broadcast, which lumped radio and
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television together. However, retailers are now beginning to classify
media from a managerial perspective, which recognizes that
newspapers and television are mass media alternatives aimed at a total
market, while radio, magazines, direct mail, and the Internet can be
more easily targeted towards specific markets.
a. Newspaper Advertising - Most frequently used medium in
retailing. Many of the large retailers, such as Target and
Mervyn's, use newspapers to deliver their own centrally
produced inserts.
(1) Advantages
(a) Most newspapers are local; most retailers appeal
to a local trading area.
(b) Low technical skill is needed to create
newspaper advertisements.
(c) Lead time needed for placing newspaper ads is
short.
(2) Disadvantages
(a) Consumer does not necessarily see or read a
retailer's ad in the newspaper.
(b) Life of any single issue of a newspaper is short.
(c) Consumer spends relatively little time with each
issue and each item within an issue of the
newspaper.
(d) Newspapers have poor reproduction quality.
(e) Newspapers have broad appeal; retailers with
small target markets may be wasting advertising
dollars by placing newspaper ads.
b. Television Advertising - With the widespread development of
cable television, television has become attractive to small, local
retailers.
(1) Advantages
(a) Very effective in creating an image
(b) Pictures retain have greater effects on consumer
memory and evaluations as compared to verbal
messages.
(2) Disadvantages
(a) The television ads are very expensive.
(b) Television stations often reach well beyond the
trading area of small or medium size retailers,
leading to wasted advertising dollars.
(c) Competition is high for the television viewer's
attention.
c. Radio Advertising -
(1) Advantages
(a) Can target messages to select groups.
(b) Can develop distinctive and appealing messages
through the use of volume sound variations.
(c) Endorsement of a retailer by a radio announcer
who has developed a loyal audience can
strengthen the impact.
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(2) Disadvantages
(a) Radio commercials are very fleeting.
(b) It is frequently listened to during work hours or
while driving to and from work (a period called
drive time) and tends, over time, to become part
of the background environment.
(c) Impossible to demonstrate or show the
advertised merchandise.
(d) Radio signals usually cover an area much larger
than the retailer's target market and may lead to
the ineffective use of some of the retailer's
advertising dollars.
d. Magazine Advertising - While not used by local retailers, many
national chains are now allocating part of their budgets to
magazines.
(1) Advantages
(a) Better reproduction quality.
(b) Longer life span per issue.
(c) Consumers spend more time, per issue, with a
magazine than with a newspaper.
(d) Featured articles can put consumers in the mood
for a particular product class.
(2) The major disadvantage is long lead-time requirements
prevent price appeal advertising.
e. Direct Mail - With direct mail, the retailer can precisely target
its message as long as a good mailing list of the target
population is available.
(1) Advantages
(a) Retailers can specifically target their messages at
a particular group.
(b) It provides a means of personal contact.
(c) Results are easily measured.
(2) Disadvantages
(a) Cost is relatively expensive per contact or
message delivered.
(b) Contact with the target market is completely
dependent upon the quality of the mailing list.
(c) Targeted consumer may receive direct mail piece
but leave it unopened or unexamined.
f. Internet - With current estimates of over 100 million unique
users, projections indicate that there will be over 200 million
users in the next few years.
(1) Advantages - In essence, the Internet provides a
platform for a retailer to employ a relatively low cost,
integrated marketing communications mix thus
increasing shareholder value by enhancing the retailer's
image by providing customers with a variety of highly
specialized information.
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(2) Disadvantages - Currently, a little over a third of
American households have a PC with the modem and
software to shop the Internet.
g. Miscellaneous Media - Additional forms of advertising --
outdoor, transit, electronic information terminals, specialty
firms, shopping guides and the yellow pages -- most effective
when used as reinforcement for the other forms of media
previously mentioned.
2. Media Selection - Before selecting the advertising medium(s) to be
used, the retailer must first determine the following for each medium:
a. Coverage - The theoretical percentage of a retailer's target
market that can be reached by a medium.
b. Reach - Actual total number of target customers that come into
contact with a given advertising message.
c. Cumulative Reach - Actual coverage that is accumulated over
time.
d. Frequency - Average number of times each person who is
reached is exposed to an advertisement during a given time
period.
e. Cost Per Thousand Method (CPM) - Dividing the cost for an
ad or series of ads in a medium by the reach or cumulative
reach.
f. Cost per Thousand - Target Market (CPM-TM) - Dividing
the cost for an ad or series of ads in a medium by the total
number of people in the retailer's target market viewing the ad.
g. Impact - The strength of the impression an advertisement
makes and the extent to which it ultimately leads to a purchase.
A greater degree of impact may make a more costly advertising
medium a better buy.
E. Scheduling of Advertising - Retailers should consider the following points
when planning the timing of advertisements:
1. Ads should appear on, or slightly proceed, the days when customers are
most likely to purchase.
2. Advertising should be concentrated around the times when people
receive their payroll checks.
3. If the retailer has limited advertising funds, it should concentrate its
advertising during periods of highest seasonal demand.
4. Schedule ads to appear during the time of day/week when the lowest
CPM will be obtained.
5. If a product class has a high level of habitual purchasing, a greater
amount of time should be allowed between the advertisement and the
purchase time.
F. Advertising Results
1. Advertising Effectiveness - the extent to which the advertising has
produced the desired result.
2. Advertising Efficiency - the extent to which the advertising result was
achieved with the minimum effort or dollars expended.
3. Ineffective Advertising - Often due to one of the following errors:
a. Retailer may be bombarding the consumer with too many
messages and sales.
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b. The advertising may not be creative or appealing.
c. The advertisement may not give the customers all the
information they need.
d. The advertising dollars may have been spread too thin over too
many departments or merchandise lines.
e. Poor internal communication among salesclerks, cashiers, stock
clerks, and management.
f. The advertisement may not have been directed at the proper
target market.
g. Retailer did not consider all media options.
h. Retailer made too many last minute corrections in the
advertising copy, increasing the cost of the ad.
i. Retailer took co-op dollars just because they were "free".
j. Retailer used a medium that reached too many people not in the
target market.
IV. Management of Sales Promotion and Publicity - The role of sales promotions and
publicity in the retail organization should be consistent with and reinforce the retailer's
overall promotion objectives.
A. Sales Promotion - Consumers will change their shopping habits and brand
preferences to take advantage of sales promotions, especially those that offer
something special, different, or exciting.
1. Role of Sales Promotions
a. Sales promotions can benefit the retailer by being used on short
notice to differentiate itself from the competition.
b. Sales promotion expenditures are often quite substantial, but not
well tracked by retailers.
c. Sales promotion activities should be consistent and reinforce the
retailer's overall promotion objectives; sales promotions are
often employed as a means of improving the retailer's short-
term performance.
2. Types of Sales Promotion - Retailers generally break sales promotions
into two categories:
a. Sole-Sponsored sales promotions - Here the retailer has
complete control over the promotion, but is also completely
responsible for the costs. While there may be some overlap in
the sponsorship of these promotions, retailers generally consider
these sales promotions to be sole sponsored:
(1) Premiums are extra items offered to the customer when
purchasing a promoted product.
(2) Contests and sweepstakes are designed to create an
interest in the retailer's product and encourage both
repeat purchases and brand switching.
(3) Loyalty programs enable the retailer to combine a
promotion with their database system to solidify their
relationship with the customer.
b. Jointly Sponsored Sales Promotions - Jointly sponsored sales
promotions offer retailers the advantage of using OPM - "Other
People's Money." Retailers generally consider these promotions
to be jointly sponsored:
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(1) Coupons offer the retail customer a discount on the
price of a specific item.
(2) In-store displays are promotional fixtures of displays
that seek to generate traffic, highlight individual items,
and encourage impulse buying.
(3) Demonstrations and sampling, which are in-store
presentations, are intended to reduce the consumer's
perceived risk of purchasing a product.
3. Evaluating Sales Promotions - Sales promotions should be evaluated in
terms of their sales and profit-generating capability. A simple method is
to use is: monitor and compare weekly unit volume before, during, and
after the promotion.
B. Publicity Management - Theoretically, publicity is defined as non-paid-for
communications of information about the company or products. However,
there are real costs associated with having a good publicity department that
plants the commercially significant news.
1. The advantages of publicity are that it is objective and credible, while
appealing to a mass audience.
2. The disadvantage is that publicity is difficult to control and time.
3. Retailers can experience bad publicity in the form of events, such as
rumors, which are beyond its control. Thus, they should be prepared for
such events.
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Computational Question on Advertising and Promotion
Dunne Chapter 11
Planning Your Own Retail Business:
Your Uncle Nick has agreed to sell you his supermarket where you have worked for seven years,
since graduating from college. Uncle Nick is 72 years old and is ready to step down from day-to-
day management.
After operating the Crest Supermarket on your own for six months, you begin to analyze
how you can increase store traffic and, consequently, annual sales and profitability. During a
recent trip to the Food Marketing Institute convention you ran across several successful grocers.
Some of them competed largely on price, while others competed more on promotion and
advertising.
You decide to pursue a heavy promotion-oriented strategy. Consequently, you budget to
increase advertising by $20,000 monthly or $240,000 annually and to also have a weekly contest
where you give away $100 in groceries to twenty-five families. This will cost you $130,000 (52
x $100 x 25) annually.
Currently Crest Supermarket serves a trade area with a 2-mile radius and a household
density of 171 per square mile. Seventy percent of these households shop at Crest an average of
45 times per year. Of those that visit Crest, 98 percent make a purchase that averages $24.45.
Crest operates on a 25 percent gross margin.
You estimate that with your new promotion program, the radius of Crest's trade area will
increase to 2.5 miles. Assuming that all other relevant factors remain constant (171 households
per square mile, 70 percent of households shop Crest, 98 percent closure rate, $24.45 average
transaction size, 25 percent gross margin percent), is the planned promotion program and
investment of an additional $370,000 annually a profitable strategy?
HINT: Assume the trade area is circular and thus its size in square miles can be
computed as pi or (22/7) times the radius of the circle squared. The total square miles of the
trade area can be multiplied by the number of households per square mile to obtain total
households in the trade area. This in turn can be multiplied by the percentage that shop at Crest,
which in turn can be multiplied by the average number of trips annually to Crest, which will
yield total traffic. This traffic statistic can be multiplied by the percent of visitors that make a
purchase, which will yield total transactions. You should be able to figure out on your own the
rest of the computations that are needed to determine if the promotional strategy is profitable.
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Suggested Approach
First, lay out the spreadsheet.
CREST SUPERMARKET
Currently New Strategy Formulas
Trade Radius 2 miles 2.5 miles given
Population Density 171 171 given
Market Coverage 2150 3359 (22/7)*(2.5)2*
(171
)
Penetration Level 70% 70% given
Avg. Shopping Frequency 45/year 45/year given
Traffic 67,716 105,809 (3359)*(.7)* (45)
Closure Rate 98% 98% given
Total Transactions 66,362 103,692 (105,809)* (.98)
Average Transaction Size $24.45 $24.45 given
Net Sales $1,622,551 $2,535,269 (103,692)*
($24.45)
Cost of Goods Sold $1,216,913 $1,901,452 ($2,535,269)*
(100%-25%)
Gross Margin $ 405,638 $ 633,817 ($2,535,269)*
(25%)
Gross Margin Return on Sales 25% 25% given
As you can see from the spreadsheet, by spending an additional $370,000 and changing the
promotional strategy, Crest Supermarket was only able to increase its gross margin by
$228,179 ($633,817 - $405,638). Thus, this would not be a profitable strategy to pursue.
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Lecture Ten
Topic:
Customer Service and Retail Selling
Dunne: Chapter 12
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Chapter 12
Customer Services and Retail Selling
Overview:
In this chapter, we demonstrate how customer services, including retail selling, generate
additional demand for the retailer's merchandise. We also examine the determination of an
optimal customer service level. We conclude the chapter by looking at the unique managerial
problems that retailers must address.
Learning Objectives:
After reading this chapter, you should be able to:
1. Explain why customer service is so important in retailing
2. Describe the various customer services that a retailer can offer
3. Explain how a retailer should determine which services to offer
4. Describe the various management problems involved in retail selling, salesperson
selection, and training and evaluation
5. Describe the retail selling process
6. Understand the importance of a customer service audit.
Outline:
V. Customer Service – All retailers must give consideration to level of service they offer
their customers.
A. High-quality service is defined as delivering service that meets or exceeds
customers' expectations. In this definition there is no absolute level of quality
service; rather, service is perceived as high quality when it meets and exceeds the
expectations of customers.
B. In an attempt to offer the high-quality service expected, retailers are now
engaging in relationship retailing programs.
4. Relationship retailing includes all the activities designed to attract,
retain, and enhance customer relationships.
5. Retailers can develop these relationships with their customers by offering
two benefits:
a. Financial benefits – increase the customer's satisfaction through
financial reward (e.g., frequent purchaser discounts and product
upgrades offered by some supermarkets, airlines, and hotels).
b. Social benefits – increase the retailer's interaction with the
customer.
C. There are three basic tasks of retailing:
1. Getting consumers into your store,
2. Converting these consumers into customers,
3. Operate as efficiently as possible.
D. Retailers must differentiate themselves by meeting the needs of their customers
better than the competition by offering customer service and products that meet
or exceed the customer's expectations.
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1. Customer service consists of all the activities performed by the retailer
that influence:
a. The ease with which a potential customer can shop or learn about
the store's offering
b. The ease with which a transaction can be completed once the
customer attempts to make a purchase
c. The customer's satisfaction with the transaction
2. New customers can be created and the loyalty of present customers can
be strengthened by serving the customer before, during, and after the
transaction.
3. A customer who visits a store and finds the service level below
expectations or the product ―out-of-stock‖ is likely to become a transient
customer. This transient customer will seek to find a retailer with the
level of customer service he or she feels is appropriate. Retailers seek to
convert these transient customers into loyal customers.
E. Customer service cannot occur by itself; instead, it must be integrated into all
aspects of retailing. That is why profitable retailers of the future will know that
the demand for their merchandise is not only just price elastic, but also service
elastic. Retailers can achieve high customer service through:
1. Merchandise Management - One of the best ways a retailer can serve a
customer is by having the goods the customer wants available for
purchase.
2. Building and Fixture Management - Customer service considerations are
affected by the way the building and its fixtures are set-up.
3. Promotion Management - Promotion provides customers with the
information they need to make purchase decisions. A retailer should
assess whether its advertisements, salespeople, and stock of sales
promotion items are serving the customer’s information needs.
4. Price Management - The way the retailer determines and indicates price
effects customer service.
5. Credit Management - Credit can help to generate and facilitate a
customer's purchase transactions.
VI. Common Customer Services – There are three general categories of customer service:
A. Pretransaction Services – Services provided to the customer prior to entering
the store, include:
1. Convenient Hours - The more convenient the retailer’s operating hours
are to the customer, the easier it is for the customer to visit the retailer. A
store's hours of operation depend on customers' demand, profitability,
competitors’ hours of operation, and legislation.
2. Information Aids – The retailer’s promotional efforts help to inform the
customer. Many retailers offer customers other information aids that help
them enter into intelligent transactions.
B. Transaction Services – Offering the conveniences customers need and then
helping them get out of the store as fast as possible with their purchases, include:
1. Credit - Allows the customer to shop without carrying large amounts of
money or to buy now and pay later.
2. Layaway - The retailer retains possession of an item of a desired item
until the customer fulfills his/her payment obligations.
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3. Gift Wrapping and Packaging - A retailer must match its wrapping
service to the types of merchandise it carries and the desired store image.
4. Check Cashing - Most retailers allow customers to cash checks for the
amount of a purchase, while others also provide check cashing cards
and/or allow customers to cash checks for amounts in excess of the
purchase price.
5. Gift Cards – A year-round service sold by retailers that have a ―stored
value‖ available for the customer to spend with automatic balance
updates.
6. Personal Shopping - The activity of assembling an assortment of goods
for the customer to later evaluate.
7. Merchandise Availability - A retailer can minimize out-of-stock
conditions through strong merchandise management or increase a
customer's ability to locate an item through effective in-store signing,
layout, displays, and helpful and informative employees. There are three
reasons why a customer may be unable to find an item:
a. The item can be out of stock
b. It isn't located where the customer looks for it
c. The customer doesn't know what is really needed.
8. Personal Selling - Retailers can offer customers a strong, customer-
oriented retail sales force.
9. Sales Transaction - Retailers should take actions that help to facilitate the
purchasing process for customers. Probably the two most overlooked
problems regarding transactions services are having clean restrooms and
minimizing the dwell time, which refers to the amount of time a
consumer must spend waiting to complete a purchase.
C. Posttransaction Services – Services provided to customers after they have
purchased merchandise or services.
1. Complaint Handling - Customer dissatisfaction occurs when the
customer's experience with a retailer or a product fails to live up to
expectations; can lead to a poor public image for the retailer.
a. Central Complaint Department - All customer complaints are
heard by a staff that is specially trained for this task.
b. Individual Salesperson - Some retailers believe that the friendly,
sympathetic attitude of a salesperson will have a positive effect on
future sales. Salespersons may not have the authority to settle the
problem and/or will not be able to serve present customers.
c. Guidelines - The customer deserves:
(1) Courteous treatment
(2) A fair settlement
(3) Prompt action
2. Merchandise Returns - A return policy can range from "no returns, no
exchanges" to the "customer is always right". A store's return policy
should be consistent with its image.
3. Servicing and Repair - Retailers who offer merchandise servicing and
repair to their customers tend to generate a higher sales volume and
greater repeat business.
4. Delivery - The expense involved in delivering merchandise can be
worthwhile if the store, merchandise, and customer characteristics
warrant it.
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5. Post-Sale Follow Up – Due to the fact that it costs a retailer five times as
much to attract a first-time customer as it does to get a former customer to
return, it is important that retailer make the effort to care for its customers
by following up with them after the sale.
VII. Determining Customer Service Levels - A retailer must determine the optimal number
and level of customer services to offer. There are six factors to be considered when
determining the appropriate level of services to offer:
A. Retailer Characteristics - Store location, store size, and store type. It is especially
important to look at these three characteristics when considering adding a service.
B. Competition - A retailer should offer the same services as competitors, suitable
substitutes, or offer lower prices.
C. Type of Merchandise - Particular merchandise lines benefit from complimentary
services (e.g., items that require assembly or apparel that regularly requires
alterations).
D. Price Image - Customers will generally expect more services from a store with a
high price image than from a discounter.
E. Target Market Income - Higher income segments can afford higher prices, but
they also expect more services. The retailer, however, must avoid the temptation
to offer more services than it can afford.
F. Cost of Services - It is important for a retailer to know the cost of providing a
service. This enables the retailer to have an idea of how much additional sales
are needed in order to pay for the service.
VIII. Retail Sales Management - salespeople and the service they provide are a major factor in
consumer purchase decisions.
A. Types of Retail Selling
1. Order takers - employees who assist in completing a transaction after the
customer decides what to purchase instead of actively selling the
merchandise to the customer.
2. Order getters - employees who are involved in conversing with
prospective purchasers for the purpose of making a sale; they inform,
guide, and persuade the customer. Retailers with high margins and high
levels of customer service should emphasize the role of the order getter.
B. Salesperson Selection
1. Criteria - A retailer must determine what characteristics it wants in an
employee. Retailers should design the sales job so that it involves high
levels of variety, autonomy, task identity, and feedback from supervisors
and customers.
2. Predictors
a. Demographics - Retailers can use demographic variables, such as
age and socioeconomic status, to help screen applicants for sales
positions.
b. Personality - A retailer would most likely prefer salespeople who
are friendly, confident, consistent, and understanding of others.
c. Knowledge and Intelligence - Individuals who can become
knowledgeable about technically complex products or can
appropriately respond to inquiries about fashion will be better able
to sell.
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d. Experience - One of the most reliable predictors of success as a
salesperson is prior selling experience.
C. Salesperson Training - New salespeople need to be informed about the following
factors of a retailer's operation:
1. Retailer's Policies - Salespeople should be knowledgeable about policies
relating to the establishment's operation, as well as those that affect their
employment status.
2. Merchandise - Salespeople should be familiar with the strengths and
weaknesses of the retailer’s and its competitors' merchandise, warranty
terms, and the reputation of manufacturers.
3. Customer Types - Retail salespeople can be taught how to appropriately
identify and respond to certain customer types in order to increase sales.
4. Customer Choice Criteria
a. No Active Product Choice Criteria - The salesperson should
educate the customer on the best choice criteria and, possibly,
how to weigh them.
b. Inadequate or Vague Choice Criteria - The salesperson should
help the customer define his/her problem as a means of
determining the criteria of a good product.
c. Choice Criteria In Conflict
(1) Customer wants a product to possess two or more
attributes that are mutually exclusive; salespeople should
play down one of the attributes and de-emphasize the
other.
(2) A single attribute of a product may possess both positive
and negative aspects; the salesperson should enhance the
positive aspects and depreciate the negative aspects.
d. Explicit Choice Criteria - The salesperson should illustrate how a
certain product fits the criteria that a customer has already
defined.
D. Evaluation of Salespeople – The retailer should develop a systematic method for
evaluating both individual salespeople and the total sales staff. Rather than
subjectively evaluating performance, the manager should develop explicit
performance standards.
1. Some performance standards apply only to individual effort, whereas
others assess both the individual and the total sales force.
a. Conversion Rate - The percentage of all shoppers who make a
purchase. Poor conversion rates result from:
(1) Too few salespeople.
(2) Poor selling by salespeople.
(3) Poor training of salespeople.
(4) Inadequate merchandise levels.
b. Sales per Hour - total dollar sales divided by total salesperson or
sales force hours.
c. Use of Time - Standards can be developed regarding how a
salesperson's time should be allocated. A salesperson's time can
be spent in the following ways:
(1) Selling Time – Any time spent assisting customers with
their needs.
(2) Non-selling Time – Any time spent on non-selling tasks.
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(3) Idle Time – time the salesperson is on the sales floor but
is not involved in any productive work.
(4) Absent Time – occurs when the salespeople are not on
the sales floor.
2. Data Requirements - Data used in establishing performance standards can
be obtained from retail trade associations, consulting firms, and from a
retailer's past experiences. Actual performance should be compared to the
established standards.
IX. The Retail Sales Process - The length of time a salesperson spends in each of the
following steps depends upon the product type, the customer, and the selling situation.
A. Prospecting - The search process of locating or identifying potential customers
who have the ability and willingness to purchase your product.
B. Approach - The first 15 to 30 seconds of a salesperson-customer interaction sets
the mood for the sale.
1. Greet/acknowledge the customer.
2. Listen to the customer's needs.
3. Ask (a few) questions to clarify the needs.
C. Sales Presentation - The goal is to make the customer want to buy your product
or service. The salesperson should:
1. Determine the right price range of products.
2. Select what he/she believes is the appropriate product or service to satisfy
the customer's needs.
3. Inform the customer about the merchandise in an appealing manner.
4. Help the customer to decide on the product or service that best fulfills the
customer's needs.
D. Closing The Sale – the action used to bring a potential sale to its natural
conclusion. This is often the most difficult step for salespeople. The key is to
determine what is going on in the customer's mind. The salesperson has several
options:
1. Make the decision for the customer.
2. Assume that the decision has been made and ask if it will be cash or
charge.
3. Ask the customer to choose which product or service they want.
4. Reverse an objection by emphasizing the fact that the product's longer life
will compensate for its higher initial cost.
E. Suggestion Selling - A salesperson should attempt to determine if a customer has
any other needs; there is always the possibility of an additional sale.
VI. The Customer Service and Sales Enhancement Audit – provides management with a
detailed analysis of current sales activity by location and selling area.
A. The objectives of a customer service audit include:
1. Identify the service, salesmanship, and sales enhancement methods that
will
produce more sales from the existing shopping traffic.
2. Identify methods that will offer the greatest improvements based
upon the individual store or selling area.
3. Determine the added sales that can be generated by improving the current
service level, salesmanship, and sales enhancement programs.
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B. The audit measures, analyzes, and reports on specific factors, which are reported
by selling area within each company store. This enables management to apply
targeted training programs:
1. Basic Service
a. Customer contact
b. Salesperson-initiated contact
c. Customer acknowledgment
2. Salesmanship
a. Merchandise knowledge
b. Needs clarification
c. Active selling
d. Suggestion selling
3. Sales Enhancement
a. Impulse purchasing
b. Walkouts
C. Exception reports – To provide management with an action program, the
customer service and sales enhancement audit includes a series of exception
reports showing specifically what improvement is necessary within each selling
area at each company store.
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Lecture Eleven
Topic:
Managing People
Dunne: Chapter 14
237
Chapter 14
Managing People
Overview:
In this chapter we examine the role that the human factor plays in retail firms. In retailing the
human factor is composed of employees and customers. Both are critical to carry out a
successful retail strategy. Retailers therefore must recruit the right employees and customers and
then manage these relationships if they are to achieve profitable results. Both outstanding
employees and desirable customers have many options; thus, employees must be competitively
compensated and customers must be offered more compelling value than they can obtain from
competing retailers.
Learning Objectives:
After reading this chapter you should be able to:
1. Explain why intangible people resources can provide a more competitive advantage than
tangible resources
2. Describe how to recruit both the right employees and the right customers to be the store’s
partners
3. Explain how to manage employees and customers to develop long-term profitable
relationships
4. Discuss how to compensate employees and offer customers a compelling value
proposition
Outline:
X. Intangible People Resources Make the Difference – A retailer’s people resources are
more important than its tangible resources. ―People‖ refers to both customers and
employees, as retailers should give equal significance to customers and employees.
A. High-performance retailers of the future will be those that devote the maximum
effort to hiring good employees now.
1. Investments in tangible assets (land, building, technology, equipment
and
fixtures, and merchandise) will not produce a profitable return unless the
retailer is willing to invest in recruiting, motivating, and retaining the
right
people.
3. Retailers must view labor costs, as well as the costs of attracting and
retaining customers, not as costs, but as investments in obtaining a
sustainable competitive advantage.
D. Similarities Between Employees and Customers – While everyone can make the
distinction between a retail employee and a retail customer, few choose to focus
on their similarities. These similarities far outweigh the differences, and a failure
to realize this can mean retail failure.
1. Just like employees, customers need to be recruited, motivated, and compensated for
their efforts.
5. All employees are part of the service delivery chain where each, in turn,
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performs some task in the economic exchange process.
6. High-performance retailers have ―empowered‖ their employees to take
care of the customer. An empowered retail employee has the ―power to
make things right for the customer‖ by:
a. Seeking to understand the customer’s problem,
b. Desiring to develop a relationship with the customer,
e. Understanding the value of customer loyalty, and
f. By being allowed and encouraged by management to solve the
customer’s problem.
7. Customers and employees both perform retail tasks and they both service
each other.
a. Employees must not only serve customers, but also other employees (internal
customers)
c. With servant leadership, employees recognize that their primary
responsibility is to be of service to others.
E. Employees and Customers Are Profit Drivers – There is no single correct answer
to the question, ―How much should a retailer be willing to invest in recruiting an
employee and/or customer?‖
1. If a retailer takes an investment versus an expense or cost perspective, then that retailer is
addressing this issue from a long-term perspective.
5. The gross profit generated by an employee or customer must exceed the
cost of servicing these employees and customers.
6. Customers should be thought of as employees and employees should be
treated like customers.
7. Good customer and employee relationships have a synergistic effect on a
retailer’s performance.
XI. Obtaining The Right People – Human resources are acquired in a competitive
marketplace, that is, retailers must aggressively seek out and recruit valuable
customers and employees.
A. Customer Relationship Management is an increasingly popular
technology for cultivating and maintaining the right customers. CRM is
comprised of an integrated information system where the fundamental unit of
data collection is the customer, supplemented by other relevant information
about the customer.
1. CRM systems can answer many fundamental questions
from, ―How many unique customers patronize the store over a given
time frame?‖ to ―Was the recent direct mail promotion cost effective?‖
4. The goal of CRM is to provide the retailer with a tool to develop a
long-term, profitable relationship with a customer that is mutually
beneficial.
5. On the leading edge of CRM are those retailers that expand and
integrate their CRM system with their suppliers, advertising agencies,
and other members of the supply chain.
B. Employee sources include:
1. Competitors
2. Walk-ins
3. Employment agencies
4. Schools and colleges
5. Former employees
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6. Advertisements
7. Recommendations of current employees and vendors
8. Customer referrals.
C. Customer sources include:
1. Competitors
8. Walk-ins
9. Advertisements
10. Employees
11. Customer referrals
12. Affinity programs – membership programs that offer participants
special discounts
13. Customer agency – similar to an employment agency, these are used
for some products and services where the typical customer may not
have the knowledge and information to make an informed decision.
D. Screening and Selection of Employees – All applicants should be subject to a
formal screening process to sort out the potentially good from the potentially
bad employees. There are four basic screens every applicant should be put
through:
1. Application form - as a matter of procedure, all applicants should be
asked to fill out an application form. The application blank should
capture conveniently and compactly the individual's identity, training,
and work history that will relate to his or her performance of the job
tasks.
2. Personal interview - allows retailer to assess how qualified the
applicant is for the job.
3. Testing - sometimes formal tests are administered which test
intelligence, interests, leadership potential, personality traits, honesty,
or office skills.
4. References - these should not be checked until the applicant has passed
through the preceding stages since this stage is costly and time-
consuming.
E. Screening and Selecting Customers. While retailers compete aggressively for
customers, the screening and selection of customers is common. When
retailers screen or select customers they must be sure not to violate any equal
opportunity or discrimination laws. The most common reasons for screening
and selecting customers include:
1. The inability to adequately service certain customers.
4. The deterioration of a retailer’s atmosphere if customers of a certain
type are admitted.
5. The inability to profitably service customers.
XII. Managing People – Employees and customers need to be managed. Many retailers
have policies for managing their employees, but seldom think of managing their
customers. The retailer must prepare programs for training employees to meet current
or future job requirements, evaluating employees, and motivating them. Turnover is a
problem and a major cost in the realm of retail employees; a similar problem exists
regarding customers.
A. Training and Developing Employees – Retailers wanting the best return on
their human resource investment should provide training and development for
both new and existing employees.
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B. Training and Developing Customers – Retailers can also make training and
educating customers a core part of their value proposition. These retailers
provide short courses that instruct customers how to use their products and/or
engage in do-it-yourself projects.
C. Evaluating Employees – Performance appraisal and review is the formal,
systematic assessment of how well employees are performing their jobs in
relation to established standards, and the communication of that assessment to
employees.
1. Retailers of all sizes should try to use objective criteria for the appraisal
and review process whenever possible.
2. Some keys to performing equitable performance appraisals are:
a. Evaluation should be an ongoing process
b. Feedback to employees should be timely and relevant
c. The reviewer should know the job and the performance
standards of the job under review.
d. Since different supervisors are likely to rate personnel with
different degrees of leniency or severity, the person conducting
the review must understand the performance standards. In
addition, at least two people should contribute to the review.
e. Retailers have found success with various types of measures
such as the rating scale, checklist, free-form essay, and
rankings.
D. Evaluating Customers – It is important for employers not only to evaluate
employees on their performance, but also customers for their contributions to the
retailer’s financial objectives. A variety of retailers have detailed profiles on their most
profitable customers. Increasingly CRM is allowing the retailer to evaluate the
profitability of each of its customers.
E. Motivating Employees – A successful retailer must constantly motivate all
employees to strive for higher sales figures, to decrease expenses, to
communicate company policies to the public, and to solve problems as they
arise. This is achieved through the proper use of motivation. Theories on
motivation, which is the drive within a person to excel, can be divided into two
general types: content theories and process theories.
1. Content Theories: These ask, "What motivates an individual to
behave?"
a. Maslow's hierarchy of needs suggests that people have
different types of needs and that they satisfy lower-level needs
before moving to higher levels. This hierarchy provides retailers
with ideas that can appeal to the basic needs of their employees.
b. Theory X assumes that employees must be closely supervised
and controlled and that economic inducements will provide the
means of influencing employees to perform; Theory Y assumes
that employees are self-reliant, enjoy work, and can be
delegated authority and responsibility.
2. Process Theories: These ask "How can I motivate an individual."
a. Expectancy Theory addresses the relationship between effort,
performance, and organizational outcomes. It assumes that
employees know this relationship and that this knowledge
influences them to behave in one way or another.
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b. Goal Setting is a way to obtain the firm's objectives that
depend on inducing a person to behave in the desired manner.
F. Motivating Customers – Retailers use a variety of demand stimulation tools to motivate
customers to purchase or purchase greater quantities. Most of these programs are based
on the assumption that customers are motivated primarily by economic incentives.
However, innovative retailers are recognizing that other factors can motivate success.
Some non-price elements that can motivate customers include:
1. Merchandise – including quality, style and fashion, assortment, and
national versus private labels.
8. Physical characteristics – including decor, layout, and floor space.
9. Sales promotions
10. Advertising
11. Convenience – including hours, location, ease of entrance and parking,
and ease of finding items.
12. Services – including credit, delivery, return policy, and guarantees.
13. Store personnel including helpfulness, friendliness, and courtesy.
XIII. Compensation – Compensation programs, which include direct dollar payments
(wages, commissions, and bonuses) and indirect payments (insurance, vacation time,
retirement plans), are essential for attracting, motivating, and retaining a salesforce.
A. Compensation plans in retailing can have up to three basic components:
1. A fixed component which is composed of some base wage per hour,
week, month, or year.
2. A variable component which is composed of some bonus that is
received if performance warrants it.
3. A fringe benefit package which may include such things as health
insurance, disability benefits, life insurance, retirement plans, the use of
automobiles, and financial counseling.
B. Common types of compensation programs for the salesforce:
1. Straight Salary programs pay the salesperson a fixed salary per time
period regardless of the level of sales generated or orders taken. This
plan offers income security to employees, but gives little incentive for
extra effort and performance.
2. Salary Plus Commission plans pay the salesperson a fixed salary per
time period plus a percentage commission on all sales, or on all sales
over an established quota. This plan offers a stable base income but
also encourages and rewards superior efforts.
3. Straight Commission programs pay salespeople a limited percentage
(usually 2 to 10 percent) commission on each sale generated. This plan
provides substantial incentive to generate sales, but in an overall poor
business climate may not provide enough income to allow sales-people
to meet their fixed payment obligations.
C. Supplemental Benefits – Retail salespeople can also receive four types of
supplementary benefits in addition to regular wages:
1. Employee discounts,
2. Insurance and retirement benefits,
3. Child care,
4. Push money, prize money, premium merchandising, PM, or spiffs.
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D. Compensation Plan Requirements – Regardless of what method a retailer uses
to compensate its employees, the method should meet the following general
requirements:
1. Fairness: The plan does not favor one group or division over any other
group or division or enable such a group to gather disproportionate
rewards in relation to their contributions. It must also keep wage costs
under control so that they do not put the store at a competitive
disadvantage.
2. Adequacy: The level of compensation should enable the employee to
maintain a standard of living, commensurate with job position, and
capable of maintaining job satisfaction.
3. Prompt and regular payments: Payments should be made on time and in
accordance with the agreement between employer and employee. In
incentive plans, greater stimulation is provided when reward closely
follows the accomplishment.
4. Customer interest: The plan should not reward any actions by an
employee that could result in customer ill-will.
5. Simplicity: The plan must be easy to understand so as to prevent any
misunderstandings with the resultant ill-will. This should also enable
management to minimize the man-hours needed to determine
compensation levels.
6. Balance: Pay, supplemental benefits, and other rewards must provide a
reasonable total reward package.
7. Security: The plan must fulfill the employee's security needs.
8. Cost effective: The plan must not result in excessive payments, given
the retailer's financial condition.
E. Job Enrichment – A process of enhancing the core job characteristics of
employees to improve their motivation, productivity, and job satisfaction.
There are 5 core job characteristics that should be increased. These are:
1. Skill variety: The degree to which an employee can use different skills
and talents.
2. Task identity: The degree to which a job requires the completion of a
whole assignment that has a visible outcome.
3. Task significance: The degree to which the job affects other employees.
4. Autonomy: The degree to which the employee has freedom,
independence, and discretion in achieving the outcome.
5. Job feedback: The degree to which the employee receives information
about the effectiveness of his or her performance.
F. Customer Compensation – The best way to think of customer
compensation is in terms of the concept of value proposition. A value proposition is the
promised benefits a retailer offers in relation to the cost the consumer incurs. If the
consumer is expected to do more work, then that customer will want to be compensated
with a lower price.